BRIDGEWATER BANCSHARES, INC. General
The following discussion explains the Company's financial condition and results of operations as of and for the three months endedMarch 31, 2023 . Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 , filed with theSecurities and Exchange Commission , or theSEC , onMarch 7, 2023 .
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the safe harbor provisions of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of the Company. These statements are often, but not always, identified by words such as "may", "might", "should", "could", "predict", "potential", "believe", "expect", "continue", "will", "anticipate", "seek", "estimate", "intend", "plan", "projection", "would", "annualized", "target" and "outlook", or the negative version of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
? interest rate risk, including the effects of recent and anticipated rate
increases by the
fluctuations in the values of the securities held in our securities portfolio,
? including as the result of rising interest rates, which has resulted in
unrealized losses in our securities portfolio;
business and economic conditions generally and in the financial services
? industry, nationally and within our market area, including rising rates of
inflation;
? loan concentrations in our loan portfolio;
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the effects of recent developments and events in the financial services
? industry, including the large-scale deposit withdrawals over a short period of
time at
resulted in the failure of those institutions;
? the overall health of the local and national real estate market;
? the ability to successfully manage credit risk;
? the ability to maintain an adequate level of allowance for credit losses;
? new or revised accounting standards, including as a result of the
implementation of the new Current Expected Credit Loss standard;
? the concentration of large loans to certain borrowers;
the concentration of large deposits from certain clients, who have balances
? above current
and may withdraw deposits to diversify their exposure;
the ability to successfully manage liquidity risk, which may increase the
? dependence on non-core funding sources such as brokered deposits, and
negatively impact our cost of funds;
? the ability to raise additional capital to implement our business plan;
? the ability to implement our growth strategy and manage costs effectively;
developments and uncertainty related to the future use and availability of some
? reference rates, such as the expected discontinuation of the London Interbank
Offered Rate, as well as other alternative reference rates;
? the composition of the Company's senior leadership team and the ability to
attract and retain key personnel;
? talent and labor shortages and high rates of employee turnover;
? the occurrence of fraudulent activity, breaches or failures of our information
security controls or cybersecurity-related incidents;
? interruptions involving our information technology and telecommunications
systems or third-party servicers;
? competition in the financial services industry, including from nonbank
competitors such as credit unions and "fintech" companies;
? the effectiveness of the risk management framework;
? the commencement and outcome of litigation and other legal proceedings and
regulatory actions against us;
the impact of recent and future legislative and regulatory changes, in response
? to the recent failures of
? risks related to climate change and the negative impact it may have on our
customers and their businesses;
? the imposition of tariffs or other governmental policies impacting the value of
products produced by our commercial borrowers;
severe weather, natural disasters, wide spread disease or pandemics (including
? the COVID-19 pandemic), acts of war or terrorism, or other adverse external
events including the Russian invasion of
? potential impairment to the goodwill the Company recorded in connection with a
past acquisition;
? changes to
1% excise tax on stock buybacks by publicly traded companies;
? success at managing the risks involved in the foregoing items; and
any other risks described in the "Risk Factors" section of this report and in
? other reports filed byBridgewater Bancshares, Inc. with theSecurities and Exchange Commission . 38 Table of Contents The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. In addition, past results of operations are not necessarily indicative of future results. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
The Company is a financial holding company headquartered inSt. Louis Park, Minnesota . The principal sources of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company's principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company's principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. The Company's simple, efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives the Company's profitable growth.
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in "Note 1 - Description of the Business and Summary of Significant Accounting Policies" of the notes to the consolidated financial statements included as a part of the Company's most recent Annual Report on Form 10-K, filed with theSEC onMarch 7, 2023 . Certain policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of operations. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company's Audit Committee. The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that require the Company to make complex and subjective judgements.
Allowance for Credit Losses
In accordance with ASC 326, Financial Instruments - Credit Losses, the allowance
for credit losses on loans is a valuation account that is deducted from the
amortized cost basis of loans to present the net amount expected to be collected
on the loans. Loans are charged against the allowance for credit losses when
management determines all or a portion of the loan balance is
uncollectible. Subsequent recoveries, if any, are credited to the allowance. The
allowance is increased (decreased) by provisions (or reversals of) reported in
the income statement as a component of provisions for credit loss. Under the new
guidance, the allowance for credit losses on off-balance sheet credit exposures
is a liability account representing expected credit losses over the contractual
period for which the Company is exposed to credit risk resulting from an
off-balance sheet exposure.
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The amount of each allowance account represents management's best estimate of current expected credit losses on such financial instruments using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses for loans is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. For determining the appropriate allowance for credit losses on a collective basis, the loan portfolio is segmented into pools based upon similar risk characteristics and a lifetime loss-rate model is utilized. Management qualitatively adjusts model results for reasonable and supportable forecasts and risk factors that are not considered within the modeling processes but are relevant in assessing the expected credit losses within the loan segment. These qualitative factor adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. Due to the subjective nature of these estimates the various components of the calculation require significant management judgement and certain assumptions are highly subjective. Volatility in certain credit metrics and variations between expected and actual outcomes are likely.
Investment Securities Impairment
In accordance with ASC 326, Financial Instruments - Credit Losses, available for sale securities in unrealized loss positions are evaluated for impairment related to credit losses. For any securities classified as available for sale that are in an unrealized loss position, the Company assesses whether or not it intends to sell the security, or if it is more likely than not it will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through income with the establishment of an allowance. For securities that do not meet the aforementioned criteria, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. In making this assessment, management considers the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security, among other factors. If the assessment indicates that a credit loss exists, an allowance for credit losses is recorded for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income. The fair values of investment securities are generally determined by various pricing models. The Company evaluates the methodologies used to develop the resulting fair values. The Company performs an annual analysis on the pricing of investment securities to ensure that the prices represent reasonable estimates of fair value. The procedures include initial and ongoing reviews of pricing methodologies and trends. The Company seeks to ensure prices represent reasonable estimates of fair value through the use of broker quotes, current sales transactions from the portfolio and pricing techniques, which are based on the net present value of future expected cash flows discounted at a rate of return market participants would require. As a result of this analysis, if the Company determines there is a more appropriate fair value, the price is adjusted accordingly.
Fair Value of Financial Instruments
The fair value of a financial instrument is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts business. A framework has been established for measuring the
fair value of financial instruments that considers the attributes specific to
particular assets or liabilities and includes a three-level hierarchy for
determining fair value based on the transparency of inputs to each valuation as
of the measurement date. The Company estimates the fair value of financial
instruments using a variety of valuation methods. When financial instruments are
actively traded and have quoted market prices, quoted market prices are used for
fair value and are classified as Level 1. When financial instruments, such as
investment securities and derivatives, are not actively traded, the Company
determines fair value based on various sources and may apply matrix pricing with
observable prices for similar instruments where a price for the identical
instrument is not observable. The fair values of these financial instruments,
which are classified as Level 2, are determined by pricing models that consider
observable market data such as interest rate volatilities, yield curve, credit
spreads, prices from external market data providers and/or nonbinding
broker-dealer quotations. When observable inputs do not exist, the Company
estimates fair value based on available market data, and these values are
classified as
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Level 3. Imprecision in estimating fair values can impact the carrying value of assets and liabilities and the amount of revenue or loss recorded.
Deferred Tax Asset
The Company uses the asset and liability method of accounting for income taxes
as prescribed by GAAP. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. If currently available information
indicates it is "more likely than not" that the deferred tax asset will not be
realized, a valuation allowance is established. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Accounting for deferred income taxes is a critical
accounting estimate because the Company exercises significant judgment in
evaluating the amount and timing of recognition of the resulting tax liabilities
and assets. Management's determination of the realization of deferred tax assets
is based upon management's judgment of various future events and uncertainties,
including the timing and amount of future income, reversing temporary
differences which may offset, and the implementation of various tax plans to
maximize realization of the deferred tax asset. These judgments and estimates
are inherently subjective and reviewed on a continual basis as regulatory and
business factors change. Any reduction in estimated future taxable income may
require the Company to record a valuation allowance against the deferred tax
assets. A valuation allowance would result in additional income tax expense in
such period, which would negatively affect earnings.
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Operating Results Overview
The following table summarizes certain key financial results as of and for the
periods indicated:
As of and for the Three Months Ended
March 31, December 31 September 30, June 30, March 31,
(dollars in thousands, except
per share data) 2023 2022 2022 2022 2022
Per Common Share Data
Basic Earnings Per Share $ 0.38 $ 0.46 $ 0.49 $ 0.43 $ 0.40
Diluted Earnings Per Share 0.37 0.45 0.47 0.41 0.39
Book Value Per Share 12.05 11.80 11.44 11.14 11.12
Tangible Book Value Per Share
(1) 11.95 11.69 11.33 11.03 11.01
Basic Weighted Average Shares
Outstanding 27,726,894 27,558,983 27,520,117 27,839,260 28,123,809
Diluted Weighted Average
Shares Outstanding 28,490,046 28,527,306 28,592,854 28,803,842 29,156,085
Shares Outstanding at Period
End 27,845,244 27,751,950 27,587,978 27,677,372 28,150,389
Selected Performance Ratios
Return on Average Assets
(Annualized) 1.07 % 1.28 % 1.46 % 1.38 % 1.42 %
Pre-Provision Net Revenue
Return on Average Assets
(Annualized) (1) 1.49 1.82 2.15 2.19 2.12
Return on Average
Shareholders' Equity
(Annualized) 11.70 14.06 14.99 13.55 12.98
Return on Average Tangible
Common Equity (Annualized)
(1) 12.90 15.86 17.03 15.26 14.56
Yield on Interest Earning
Assets(2) 4.91 4.67 4.37 4.16 4.13
Yield on Total Loans,
Gross(2) 5.06 4.87 4.59 4.45 4.45
Cost of Interest Bearing
Liabilities 3.03 2.22 1.30 0.86 0.80
Cost of Funds 2.41 1.67 0.93 0.63 0.59
Cost of Total Deposits 2.01 1.31 0.73 0.46 0.43
Net Interest Margin (2) 2.72 3.16 3.53 3.58 3.60
Core Net Interest Margin
(1)(2) 2.62 3.05 3.38 3.34 3.34
Efficiency Ratio (1) 46.2 43.8 39.8 40.2 42.4
Noninterest Expense to
Average Assets (Annualized) 1.31 1.42 1.42 1.47 1.56
Loan to Deposit Ratio 108.0 104.5 102.3 100.7 98.4
Core Deposits to Total
Deposits (3) 72.4 74.6 83.0 82.9 84.3
Tangible Common Equity to
Tangible Assets (1) 7.23 7.48 7.57 7.87 8.60
(1) Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures"
for further details.
(2) Amounts calculated on a tax-equivalent basis using the statutory federal tax
rate of 21%.
(3) Core deposits are defined as total deposits less brokered deposits and
certificates of deposit greater than $250,000 .
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Selected Financial Data
The following tables summarize certain selected financial data as of and for the
periods indicated:
As of and for the Three Months Ended
March 31, December 31, September 30, June 30, March 31,(dollars in thousands) 2023 2022 2022 2022 2022 Selected Balance Sheet Data Total Assets$ 4,602,899 $ 4,345,662 $ 4,128,987 $ 3,883,264 $ 3,607,920 Total Loans, Gross 3,684,360 3,569,446 3,380,082 3,225,885 2,987,967 Allowance for Credit Losses 50,148 47,996 46,491 44,711 41,692 Goodwill and Other Intangibles 2,866 2,914 2,962 3,009 3,057 Deposits 3,411,123 3,416,543 3,305,074 3,201,953 3,035,611 Tangible Common Equity (1) 332,626 324,636 312,531 305,360 309,870 Total Shareholders' Equity 402,006 394,064 382,007 374,883 379,441 Average Total Assets - Quarter-to-Date 4,405,234 4,251,345 3,948,201 3,743,575 3,513,798 Average Shareholders' Equity - Quarter-to-Date 403,533 387,589
384,020 381,448 383,024
(1) Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures"
for further details.
For the Three Months Ended
March 31, December 31, September 30, June 30, March 31,
(dollars in thousands) 2023 2022 2022 2022 2022
Selected Income Statement
Data
Interest Income $ 51,992 $ 48,860 $ 42,359 $ 37,782 $ 34,694
Interest Expense 23,425 15,967 8,264 5,252 4,514
Net Interest Income 28,567 32,893 34,095 32,530 30,180
Provision for Credit
Losses 625 1,500 1,500 3,025 1,675
Net Interest Income after
Provision for Credit
Losses 27,942 31,393 32,595 29,505 28,505
Noninterest Income 1,943 1,738 1,387 1,650 1,557
Noninterest Expense 14,183 15,203 14,157 13,752 13,508
Income Before Income Taxes 15,702 17,928 19,825 17,403 16,554
Provision for Income Taxes 4,060 4,193 5,312 4,521 4,292
Net Income 11,642 13,735 14,513 12,882 12,262
Preferred Stock Dividends (1,013) (1,014) (1,013) (1,014) (1,013)
Net Income Available to
Common Shareholders $ 10,629 $ 12,721 $ 13,500 $ 11,868 $ 11,249
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Discussion and Analysis of Results of Operations
Net Income
Net income was
Net Interest Income
The Company's primary source of revenue is net interest income, which is impacted by the level of interest earning assets and related funding sources, as well as changes in the level of interest rates. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders' equity, also support earning assets. The impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming a 21% federal tax rate. Management's ability to respond to changes in interest rates by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Company's primary source
of
earnings.
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Average Balances and Yields
The following tables present, for the three months endedMarch 31, 2023 and 2022, the average balances of each principal category of assets, liabilities and shareholders' equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable. For the Three Months Ended March 31, 2023 March 31, 2022 Average Interest Yield/ Average Interest Yield/ Balance & Fees Rate Balance & Fees Rate (dollars in thousands) Interest Earning Assets: Cash Investments$ 63,253 $ 447 2.86 %$ 80,497 $ 26 0.13 %Investment Securities :
Taxable Investment Securities 574,242 5,958 4.21 373,021 2,255 2.45 Tax-Exempt Investment Securities (1) 29,803 330 4.49 71,591 779 4.41 Total Investment Securities 604,045 6,288 4.22 444,612 3,034 2.77 Paycheck Protection Program Loans (2) 999 2 1.00 18,140 563 12.58 Loans (1)(2) 3,629,447 45,263 5.06 2,881,845 31,275 4.40 Total Loans 3,630,446 45,265 5.06 2,899,985 31,838 4.45 Federal Home Loan Bank Stock 25,962 372 5.81 5,680 54 3.84 Total Interest Earning Assets 4,323,706 52,372 4.91 % 3,430,774 34,952 4.13 % Noninterest Earning Assets 81,528 83,024 Total Assets$ 4,405,234 $ 3,513,798 Interest Bearing Liabilities: Deposits: Interest Bearing Transaction Deposits$ 461,372 $ 2,780 2.44 %$ 566,279 $ 597 0.43 %
Savings and Money Market Deposits 1,044,794 6,499 2.52
876,580 918 0.42
Time Deposits 248,174 1,069 1.75 288,914 745 1.05
Brokered Deposits 743,465 6,026 3.29 406,648 898 0.90Total Interest Bearing Deposits 2,497,805 16,374 2.66
2,138,421 3,158 0.60
Federal Funds Purchased 415,111 4,944 4.83 10,600 9 0.35
Notes Payable 13,750 263 7.77 - - -
FHLB Advances 128,222 861 2.72 42,500 150 1.43
Subordinated Debentures 78,945 983 5.05 92,286 1,197 5.26Total Interest Bearing Liabilities 3,133,833 23,425 3.03 % 2,283,807 4,514 0.80 % Noninterest Bearing Liabilities: Noninterest Bearing Transaction Deposits 813,598 822,488 Other Noninterest Bearing Liabilities 54,270 24,479 Total Noninterest Bearing Liabilities 867,868 846,967 Shareholders' Equity 403,533 383,024 Total Liabilities and Shareholders' Equity$ 4,405,234 $ 3,513,798 Net Interest Income / Interest Rate Spread 28,947 1.88 % 30,438 3.33 % Net Interest Margin (3) 2.72 % 3.60 % Taxable Equivalent Adjustment:Tax-Exempt Investment Securities and Loans (380) (258) Net Interest Income$ 28,567 $ 30,180
Interest income and average rates for tax-exempt investment securities and (1) loans are presented on a tax-equivalent basis, assuming a federal income tax
rate of 21%.
(2) Average loan balances include nonaccrual loans. Interest income on loans
includes amortization of deferred loan fees, net of deferred loan costs.
Net interest margin includes the tax equivalent adjustment and represents the (3) annualized results of: (i) the difference between interest income on interest
earning assets and the interest expense on interest bearing liabilities,
divided by (ii) average interest earning assets for the period.
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Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period's average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period's volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following table presents the changes in the volume and rate of interest bearing assets and liabilities for the three months endedMarch 31, 2023 , compared to the three months endedMarch 31, 2022 : Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022 Change Due To: Interest (dollars in thousands) Volume Rate Variance Interest Earning Assets: Cash Investments$ (121) $ 542 $ 421 Investment Securities : Taxable Investment Securities 2,088 1,615 3,703
Tax-Exempt Investment Securities (462) 13
(449)
Total Securities 1,626 1,628
3,254
Loans:
Paycheck Protection Program Loans (43) (518)
(561) Loans 9,323 4,665 13,988 Total Loans 9,280 4,147 13,427 Federal Home Loan Bank Stock 290 28 318 Total Interest Earning Assets$ 11,075 $ 6,345 $ 17,420 Interest Bearing Liabilities:
Interest Bearing Transaction Deposits$ (632) $ 2,815 $
2,183
Savings and Money Market Deposits 1,046 4,535
5,581 Time Deposits (175) 499 324 Brokered Deposits 2,730 2,398 5,128 Total Deposits 2,969 10,247 13,216 Federal Funds Purchased 4,818 117 4,935 Notes Payable 263 - 263 FHLB Advances 576 135 711 Subordinated Debentures (167) (47) (214)
Total Interest Bearing Liabilities 8,459 10,452
18,911 Net Interest Income$ 2,616 $ (4,107) $ (1,491)
Comparison of Interest Income, Interest Expense, and Net Interest Margin
Net interest income was$28.6 million for the first quarter of 2023, a decrease of$1.6 million , or 5.3%, compared to$30.2 million for the first quarter of 2022. The decrease in net interest income was primarily due to higher rates paid on deposits and increased borrowings in the rising interest rate environment. Net interest margin (on a fully tax-equivalent basis) for the first quarter of 2023 was 2.72%, an 88 basis point decrease from 3.60% in the first quarter of 2022. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the first quarter of 2023 was 2.62%, a 72 basis point decrease from 3.34% in the first quarter of 2022. The decline in the margin was primarily due to higher funding costs and increased borrowings in the rising interest rate environment, offset partially by higher earning asset yields. 46
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Average interest earning assets for the first quarter of 2023 increased$892.9 million , or 26.0%, to$4.32 billion , from$3.43 billion for the first quarter of 2022. This increase in average interest earning assets was primarily due to continued organic growth in the loan portfolio and purchases of investment securities, offset partially by the forgiveness of PPP loans and the reduction of cash balances. Average interest bearing liabilities increased$850.0 million , or 37.2%, to$3.13 billion for the first quarter of 2023, from$2.28 billion for the first quarter of 2022. The increase in average interest bearing liabilities was primarily due to an increase in savings and money market deposits, brokered deposits and federal funds purchased. Average interest earning assets produced a tax-equivalent yield of 4.91% for the first quarter of 2023, compared to 4.13% for the first quarter of 2022. The increase in the yield on interest earning assets was primarily due to growth and repricing of the loan and securities portfolios in the rising interest rate environment, offset partially by the lower recognition of PPP origination fees. The average rate paid on interest bearing liabilities was 3.03% for the first quarter of 2023, compared to 0.80% for the first quarter of 2022 primarily due to the higher rates paid on deposits, the increased utilization of federal funds purchased and FHLB advances, and drawing on the Company's line of credit in the rising interest rate environment. Interest Income. Total interest income, on a tax-equivalent basis, was$52.4 million for the first quarter of 2023, compared to$35.0 million for the first quarter of 2022. The$17.4 million , or 49.8%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and continued purchases of investment securities. Interest income on loans, on a tax-equivalent basis, was$45.3 million for the first quarter of 2023, compared to$31.8 million for the first quarter of 2022. The$13.4 million , or 42.2%, increase was primarily due to a 25.2% increase in the average balance of loans outstanding from continued organic loan growth. Loan interest income and loan fees remain the primary contributing factors to the changes in the yield on interest earning assets. The aggregate loan yield, excluding PPP loans, increased to 5.06% in the first quarter of 2023, which was 66 basis points higher than 4.40% in the first quarter of 2022. While loan fees have historically maintained a relatively stable contribution to the aggregate loan yield, the recent periods saw fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the decrease in fee recognition, the Company is encouraged that the core loan yield continues to rise as new loan originations and the existing portfolio reprice in the higher rate environment.
The following table presents a summary of interest and fees recognized on loans, excluding PPP loans, for the periods indicated is as follows:
Three Months Ended
March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022
Interest 4.95 % 4.74 % 4.42 % 4.17 % 4.15 %
Fees 0.11 0.12 0.17 0.26 0.25
Yield on Loans,
Excluding PPP
Loans 5.06 % 4.86 % 4.59 % 4.43 % 4.40 %
Interest Expense. Interest expense on interest bearing liabilities increased
$18.9 million , or 418.9%, to $23.4 million for the first quarter of 2023,
compared to $4.5 million for the first quarter of 2022. The cost of interest
bearing liabilities increased 223 basis points from 0.80% in the first quarter
of 2022 to 3.03% in the first quarter of 2023, primarily due to higher rates
paid on deposits and increased utilization of federal funds purchased and FHLB
advances in the rising interest rate environment.
Interest expense on deposits was $16.4 million for the first quarter of 2023, an
increase of $13.2 million , or 418.4%, from $3.2 million for the first quarter of
2022. The cost of total deposits increased 158 basis points from 0.43% in the
first quarter of 2022, to 2.01% in the first quarter of 2023, primarily due to
the upward repricing of the deposit portfolio in the higher interest rate
environment.
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Interest expense on borrowings was $7.1 million for the first quarter of 2023,
an increase of $5.7 million , or 419.9%, from $1.4 million for the first quarter
of 2022. This increase was primarily due to drawing on the Company's line of
credit and higher average balances of federal funds purchased and FHLB advances.
Provision for Credit Losses
OnJanuary 1, 2023 , the Company adopted ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments," more commonly referred to as "CECL." Upon adoption of CECL, the Company's allowance for credit losses on loans increased$650,000 and the allowance on off-balance sheet credit exposures increased$4.9 million . The tax-effected impact of these two items totaled$3.9 million and was recorded as an adjustment to retained earnings as ofJanuary 1, 2023 . The provision for credit losses on loans was$1.5 million for the first quarter of 2023, compared to$1.7 million for the first quarter of 2022. The provision recorded in the first quarter of 2023 was primarily attributable to the more moderated growth of the loan portfolio. The allowance for credit losses on loans to total loans was 1.36% atMarch 31, 2023 , compared to 1.40% atMarch 31, 2022 .
The following table presents a summary of the activity in the allowance for credit losses on loans for the periods indicated:
Three Months Ended
March 31,
(dollars in thousands) 2023 2022
Balance at Beginning of Period $ 47,996 $ 40,020
Impact of Adopting CECL 650 -
Provision for Credit Losses 1,500 1,675
Charge-offs (4) (15)
Recoveries 6 12
Balance at End of Period $ 50,148 $ 41,692 The provision for credit losses on off-balance sheet credit exposures was a negative provision of ($875,000 ) for the first quarter of 2023 and zero for the first quarter of 2022. The negative provision for the first quarter of 2023 was due to a reduction in outstanding unfunded commitments primarily attributable to the migration to funded loans. The allowance for credit losses on off-balance sheet credit exposures was$4.3 million atMarch 31, 2023 , compared to$360,000 atDecember 31, 2022 .
The following table presents a summary of the activity in the provision for credit losses for the periods indicated:
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