What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-11-03 · 148 added, 262 removed, 239 unchanged (63% of the section changed)

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• changes in federal, state, or local tax laws and tax rates;

• general economic conditions, either nationally or in our market areas, that are different than expected;

• general economic conditions, either nationally or in our market areas, that are different than expected, including inflationary or recessionary pressures;

• adverse changes in the securities and credit markets;

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• the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, and the significant impact that any such outbreaks may have on our growth, operations and earnings;

• the effects of natural disasters and extreme weather events;

• changes in our ability to continue to pay dividends, either at current rates or at all;

• our ability to retain key employees;

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Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2023 Annual Report on Form 10-K.

Recently Issued Accounting Standards

The following Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board ("FASB") have

not yet been adopted.

In October 2023, the FASB issued ASU No.

2023-06, "Disclosure Improvements." This ASU includes amendments on several subtopics in the FASB Accounting Standards Codification ("Codification") to incorporate certain disclosures and presentation requirements currently residing in SEC Regulations S-X and S-K.

The adoption of this ASU may lead to certain disclosure being relocated into the financial statements.

The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited.

These amendments are to be applied prospectively.

If the SEC has not removed the applicable requirements from Regulation S-X or Regulation S-K by June 30, 2027, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity.

We do not believe this guidance will have a material impact on the Company's financial statements.

In December 2023, the FASB issued ASU No.

2023-09, "Improvements to Income Tax Disclosures." This ASU requires additional disaggregated disclosures on entity's effective tax rate reconciliation and additional details on income taxes paid.

This guidance is effective for annual periods beginning after December 15, 2025, with early adoption permitted.

This ASU is applied prospectively with the option to apply the ASU retrospectively.

We do not believe this guidance will have a material impact on the Company's financial statements.

Comparison of Financial Condition

Total assets at September 30, 2023 were $14.362 billion, an increase of $248.9 million, or 1.8%, from $14.113 billion at December 31, 2022.

This increase in assets was primarily driven by an increase in loans receivable, partially offset by a decrease in marketable securities.

Total assets at March 31, 2024 were $14.5 billion, an increase of $91 million, or 1%, from $14.4 billion at December 31, 2023.

This increase in assets was primarily driven by increases in loans receivable and marketable securities.

A discussion of significant changes follows.

Total marketable securities decreased by $259.2 million, or 12.3%, to $1.840 billion at September 30, 2023 from $2.099 billion at December 31, 2022.

Available-for-sale securities decreased $208.0 million, and held-to-maturity securities decreased $51.1 million.

These decreases were driven by the maturity and regular monthly cash flows, in addition to the sale of approximately $110.0 million of available-for-sale securities during the year in order to reallocate these funds into higher interest-earning products.

Gross loans receivable increased by $389.8 million, or 3.6%, to $11.310 billion at September 30, 2023, from $10.920 billion at December 31, 2022.

Total marketable securities remained consistent at $1.9 billion at March 31, 2024, an increase of $37 million, or 2%, from December 31, 2023.

Available-for-sale securities increased by $51 million, driven by securities purchases during the current period, while held-to-maturity securities decreased $14 million, driven by maturity and regular monthly cash flows.

Gross loans receivable increased by $86 million, or 1%, to $11.5 billion at March 31, 2024, from $11.4 billion at December 31, 2023.

This increase was attributable to organic loan growth.

Our commercial loan portfolio increased by $368.6 million, or 32.6%, to $1.501 billion at September 30, 2023, from $1.132 billion at December 31, 2022, primarily as a result of the new lending verticals that we recently implemented.

Our commercial real estate loan portfolio increased by $99.5 million, or 3.5%, to $2.923 billion at September 30, 2023, from $2.824 billion at December 31, 2022.

These increases in our total business banking loans were slightly offset by a decrease in our personal banking loans of $78.3 million, or 1.1%, to $6.887 billion at September 30, 2023 compared to $6.965 billion at December 31, 2022.

This included a $38.9 million, or 3.0%, decrease in our home equity portfolio and a $25.8 million, or 0.7%, decrease in our mortgage portfolio as demand for these products has been impacted by the higher market interest rates.

Total deposits increased by $325.3 million, or 2.8%, to $11.790 billion at September 30, 2023 from $11.465 billion at December 31, 2022.

This increase was driven by a $1.206 billion, or 114.6%, increase in time deposits due to customer preferences for this fixed maturity product.

Partially offsetting this increase were decreases in savings and money market deposits totaling $573.4 million, or 12.1%, due to customers choosing higher yielding product alternatives.

In addition, demand deposit accounts decreased by $307.3 million, or 5.4%, as we believe customers used funds during this period of higher inflationary costs.

Total shareholders’ equity at September 30, 2023 was $1.498 billion, or $11.79 per share, an increase of $6.9 million, or 0.5%, from $1.491 billion, or $11.74 per share, at December 31, 2022.

This increase was the result of year-to-date earnings of $105.9 million, partially offset by $76.2 million of cash dividend payments for the nine months ended September 30, 2023 as well as a change in accumulated other comprehensive loss of $26.4 million, or 15.4%, primarily due to an increase in unrealized loss on our available-for-sale investment portfolio as a result of higher market interest rates.

Our commercial banking portfolio increased by $170 million, or 4%, to $4.8 billion at March 31, 2024, from $4.6 billion at December 31, 2023, primarily as a result of the new commercial lending verticals that we implemented during the prior year.

Specifically, our commercial and industrial (C&I) loan portfolio increased by $116 million, or 7%.

The increase in our total commercial banking was partially offset by a decrease in our personal banking loan portfolio by $84 million, or 1%, to $6.7 billion at March 31, 2024 from $6.8 billion at December 31, 2023.

Cash flows from our personal banking portfolio were redirected to partially fund commercial banking growth.

The following table provides the various loan sectors in our commercial real estate portfolio at March 31, 2024:

Property type Percent of portfolio

5 or more unit dwelling 15.2 %

Nursing home 12.8

Retail building 11.8

Commercial office building - non-owner occupied 9.1

Manufacturing & industrial building 5.0

Residential acquisition & development - 1-4 family, townhouses and apartments 4.3

Multi-use building - commercial, retail and residential 4.1

Warehouse/storage building 3.9

Multi-use building - office and warehouse 3.3

Commercial office building - owner occupied 3.3

Other medical facility 3.1

Single family dwelling 2.7

Student housing 2.2

Hotel/motel 2.1

Agricultural real estate 2.0

2-4 family 2.0

All other 13.1

Total 100.0 %

The following table describes the collateral of our commercial real estate portfolio by state at March 31, 2024:

State Percent of portfolio

New York 33.0 %

Pennsylvania 30.2

All other 8.4

Total 100.0 %

Total deposits increased by $92 million, or 1%, to $12.1 billion at March 31, 2024 from $12.0 billion at December 31, 2023.

This increase was driven by a $184 million, or 7%, increase in time deposits as we continued competitively positioning our deposit products, and a $51 million, or 2%, increase in savings deposits.

Partially offsetting this increase was a decrease in demand deposit accounts by $127 million, or 2%, as customers shifted balances into higher yielding time deposit accounts.

As of March 31, 2024, we had $449 million of brokered deposits, which made up 16% of our time deposits and 4.0% of our total deposit balance at year end.

The balance carried an average all-in cost of 5.43% and an average original term of 12 months.

These deposits were purchased through a registered broker, as part of an Asset/Liability Committee (“ALCO”) strategy to increase and diversify funding sources.

In addition, at quarter end we had $527 million of deposits through our participation in the Intrafi Network Deposits and FIS Insured Deposit programs.

These deposits are part of a reciprocal program that allows our depositors to receive expanded FDIC coverage by placing multiple interest-bearing demand accounts at other member banks and Northwest receives an equal amount of deposits from other member banks.

The balance carried an average cost of 3.88%.

At March 31, 2024 and December 31, 2023, we had total deposits in excess of $250,000 (the limit for FDIC insurance) of $1.8 billion.

At those dates, we had no deposits that were uninsured for any other reason.

The following table presents details regarding the Company's uninsured deposits portfolio:

As of March 31, 2024

Balance Percent of

total deposits Number of relationships

Uninsured deposits per the Call Report (1) $2,806,650 23.25 % 4,965

Less intercompany deposit accounts 1,019,792 8.45 % 12

Less collateralized deposit accounts 408,083 3.38 % 255

Uninsured deposits excluding intercompany and collateralized accounts $1,378,775 11.42 % 4,698

(1) Uninsured deposits presented may be different from actual amounts due to titling of accounts.

Our largest uninsured depositor, excluding intercompany and collateralized deposit accounts, had an aggregate uninsured deposit balance of $19 million, or 0.16% of total deposits, as of March 31, 2024.

Our top ten largest uninsured depositors, excluding intercompany and collateralized deposit accounts, had an aggregate uninsured deposit balance of $103 million, or 0.85% of total deposits, as of March 31, 2024.

The average uninsured deposit account balance, excluding intercompany and collateralized accounts, was $293,000 as of March 31, 2024.

Total shareholders’ equity remained steady at $1.6 billion, or $12.20 per share, at both March 31, 2024 and December 31, 2023, increasing by $1 million in the current quarter.

This increase was the result of year-to-date earnings of $29 million, partially offset by $25 million of cash dividend payments for the quarter ended March 31, 2024, as well as a change in accumulated other comprehensive loss of $4 million, or 3%, primarily due to an increase in unrealized loss on our available-for-sale investment portfolio as a result of higher market interest rates.

Regulatory Capital

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Capital requirements are presented in the tables below (dollars in thousands).

At September 30, 2023

At March 31, 2024

Actual Minimum capital requirements (1) Well capitalized requirements

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Northwest frequently monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings (“liquidity ratio”).

Northwest Bank’s liquidity ratio at September 30, 2023 was 9.66%.

Northwest Bank’s liquidity ratio at March 31, 2024 was 9.77%.

We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments.

At September 30, 2023, Northwest had $3.119 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit, which had a drawn balance of $119.0 million at September 30, 2023, as well as $302.4 million of borrowing capacity available with the Federal Reserve Bank and $105.0 million with two correspondent banks.

We paid $25.4 million in cash dividends during the quarters ended September 30, 2023 and 2022.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) for September 30, 2023 and 2022 was 64.5% and 69.0% on dividends of $0.20 per share.

On October 18, 2023, the Board of Directors declared a cash dividend of $0.20 per share payable on November 14, 2023 to shareholders of record as of November 2, 2023.

At March 31, 2024, Northwest had $3.3 billion of additional borrowing capacity available with the FHLB, including $250 million on an overnight line of credit, which had a drawn balance of $56 million at March 31, 2024, as well as $264 million of borrowing capacity available with the Federal Reserve Bank and $105 million with two correspondent banks.

We paid $25 million in cash dividends during the quarters ended March 31, 2024 and 2023.

The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) for March 31, 2024 and 2023 was 87.0% and 76.9% on dividends of $0.20 per share.

On April 17, 2024, the Board of Directors declared a cash dividend of $0.20 per share payable on May 15, 2024 to shareholders of record as of May 2, 2024.

This represents the 118 th consecutive quarter we have paid a cash dividend.

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Foreclosed property is carried at the lower of its fair value less estimated costs to sell or the principal balance of the related loan.

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

(in thousands)

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Allowance for Credit Losses

On an ongoing basis, the Credit Administration department, as well as loan officers, branch managers and department heads, review and monitor the loan portfolio for problem loans.

On an ongoing basis, the Credit Administration department, as well as loan officers and department heads, review and monitor the loan portfolio for problem loans.

This portfolio monitoring includes a review of the monthly delinquency reports as well as historical comparisons and trend analysis.

Personal and small business commercial loans are classified primarily by delinquency status.

In addition, a meeting is held every quarter with each region to monitor the performance and status of commercial loans on an internal watch list.

In addition, a meeting is held every quarter with each vertical to monitor the performance and status of commercial loans on an internal watch list.

On an on-going basis, the loan officer, in conjunction with a portfolio manager, grades or classifies problem commercial loans or potential problem commercial loans based upon their knowledge of the lending relationship and other information previously accumulated.

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If it is determined that a loan needs to be individually assessed, the Credit Administration department determines the proper measure of fair value for each loan based on one of three methods:

(1) the present value of expected future cash flows discounted at the loan’s effective interest rate;

(1) the present value of expected future cash flows discounted at

the loan’s effective interest rate;

(2) the loan’s observable market price;

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We utilize a structured methodology each period when analyzing the adequacy of the allowance for credit losses and the related provision for credit losses, which the ACL Committee assesses regularly for appropriateness.

As part of the analysis as of September 30, 2023, we considered the most recent economic conditions and forecasts available which incorporated the impact of material recent economic events.

As part of the analysis as of March 31, 2024, we considered the most recent economic conditions and forecasts available which incorporated the impact of material recent economic events.

In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations.

The ACL increased by $6.8 million, or 5.8%, to $124.8 million, or 1.10% of total loans at September 30, 2023 from $118.0 million, or 1.08% of total loans, at December 31, 2022.

This increase was primarily the result of growth within our commercial loan portfolio during the year, as well as forecasted economic deterioration in our allowance for credit loss models.

Total classified loans decreased $27.6 million, or 11.7%, to $208.6 million at September 30, 2023 from $236.2 million at December 31, 2022.

This decrease was primarily driven by upgrades and payoffs of loans in our commercial real estate portfolio during the current year.

The ACL decreased by $346,000 to $125 million, or 1.09% of total loans at March 31, 2024 from $125 million, or 1.10% of total loans, at December 31, 2023.

This decrease was primarily attributable to changes within our personal banking loan portfolio driven by improvements in economic forecasts, which was offset by growth within our commercial loan portfolio during the year.

Total classified loans remain low with a slight increase to $229 million at March 31, 2024 from $218 million at December 31, 2023.

This increase was primarily within our commercial portfolio.

We also consider how the levels of nonaccrual loans and historical charge-offs have influenced the required amount of allowance for credit losses.

Nonaccrual loans of $76.7 million, or 0.68% of total loans receivable at September 30, 2023, decreased by $4.6 million, or 5.6%, from $81.2 million, or 0.74% of total loans receivable at December 31, 2022.

This decrease primarily related to classification upgrades of loans within our commercial real estate portfolio.

As a percentage of average loans, annualized net charge-offs increased to 0.13% for the quarter ended September 30, 2023 compared to 0.02% for the year ended December 31, 2022 due to several large recoveries during 2022.

Comparison of Operating Results for the Quarters Ended September 30, 2023 and 2022

Net income for the quarter ended September 30, 2023 was $39.2 million, or $0.31 per diluted share, an increase of $1.9 million, or 5.1%, from net income of $37.3 million, or $0.29 per diluted share, for the quarter ended September 30, 2022.

The increase in net income resulted primarily from a decrease in provision for credit losses and an increase in noninterest income.

The provision for credit losses decreased $10.3 million, or 91.1%, and noninterest income increased $4.1 million, or 15.2%.

These changes were partially offset by an increase in noninterest expense of $8.6 million, or 10.9% and a decrease in net interest income of $4.4 million, or 3.9%.

Net income for the quarter ended September 30, 2023 represents annualized returns on average equity and average assets of 10.27% and 1.08%, respectively, compared to 9.84% and 1.05% for the same quarter last year.

A further discussion of notable changes follows.

Interest Income

Total interest income increased by $33.0 million, or 27.8%, to $151.6 million for the quarter ended September 30, 2023 from $118.6 million for the quarter ended September 30, 2022.

This increase is attributable to increases in both the average yield and average balance of interest-earning assets.

The average yield earned on interest-earning assets increased to 4.49% for the quarter ended September 30, 2023 from 3.58% for the quarter ended September 30, 2022 due to the continued rising interest rate environment.

The average balance of interest-earning assets increased $249.0 million, or 1.9%, to $13.405 billion for the quarter ended September 30, 2023 from $13.156 billion for the quarter ended September 30, 2022, primarily driven by a $710.4 million increase in the average balance of loans receivable, offset partially by a $238.7 million decrease in the average balance of mortgage-backed securities and a $193.8 million decrease in the average balance of other interest-earning deposits.

These changes are described further below.

Interest income on loans receivable increased by $33.7 million, or 31.5%, to $140.7 million for the quarter ended September 30, 2023 compared to $106.9 million for the quarter ended September 30, 2022.

This increase in interest income was the result of increases in both the average yield and the average balance on loans receivable.

The average yield on loans receivable increased to 4.99% for the quarter ended September 30, 2023 from 4.05% for the quarter ended September 30, 2022, due to the increase in market interest rates as well as a change in mix to higher yielding loan products.

The average balance of loans receivable increased $710.4 million, or 6.8%, to $11.191 billion for the quarter ended September 30, 2023 from $10.481 billion for the quarter ended September 30, 2022, due to organic loan growth in our commercial, residential mortgage, consumer, and commercial real estate portfolios.

Additionally contributing to loan growth were purchases of loan pools during 2022, including $182.8 million in small business equipment finance loans and $188.3 million of one- to four-family jumbo mortgage loans.

Interest income on mortgage-backed securities decreased by $611,000, or 7.0%, to $8.1 million for the quarter ended September 30, 2023 compared to $8.7 million for the quarter ended September 30, 2022.

This decrease was driven by a $238.7 million, or 11.8%, decrease in the average balance of mortgage-backed securities to $1.781 billion for the quarter ended September 30, 2023 from $2.020 billion for the quarter ended September 30, 2022 due to the sale of lower yielding available-for-sale securities during the current year along with scheduled payments and maturities.

Slightly offsetting this decrease was an increase in the average yield on mortgage-backed securities to 1.81% for the quarter ended September 30, 2023 from 1.72% for the quarter ended September 30, 2022 due to the purchase of higher yielding mortgage-backed securities in the prior year.

Interest income on investment securities decreased by $270,000, or 17.5%, to $1.3 million for the quarter ended September 30, 2023 from $1.5 million for the quarter ended September 30, 2022.

This decrease was attributable to decreases in both the average yield and the average balance of investment securities.

The average yield decreased to 1.52% for the quarter ended September 30, 2023 from 1.59% for the quarter ended September 30, 2022, and the average balance of investment securities decreased by $52.6 million, or 13.5%, to $336.1 million for the quarter ended September 30, 2023 from $388.8 million for the quarter ended September 30, 2022 as cash flows have been redirected to the higher yield loan portfolio.

Dividends on FHLB stock increased by $520,000, or 351.4%, to $668,000 for the quarter ended September 30, 2023 from $148,000 for the quarter ended September 30, 2022.

This increase was due to increases in both the average balance and the average yield on FHLB stock.

The average balance of FHLB stock increased by $23.7 million, or 168.9%, to $37.7 million for the quarter ended September 30, 2023 from $14.0 million for the quarter ended September 30, 2022.

Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

In addition, the average yield increased to 7.03% for the quarter ended September 30, 2023 from 4.19% for the quarter ended September 30, 2022 due to increases in market interest rates.

Interest income on interest-earning deposits decreased by $381,000, or 29.4%, to $914,000 for the quarter ended September 30, 2023 from $1.3 million for the quarter ended September 30, 2022, driven by a decrease in the average balance of interest-earning deposits of $193.8 million, or 76.5%, to $59.4 million for the quarter ended September 30, 2023 from $253.2 million for the quarter ended September 30, 2022 as the Bank redeployed these funds into higher yielding loans and investments.

Offsetting this decrease in average balance was an increase in the average yield on interest-earning deposits to 6.11% for the quarter ended September 30, 2023 from 2.00% for the quarter ended September 30, 2022, due to the aggressive campaign by the Federal Reserve Board over the last year to raise targeted short-term interest rates to combat inflation.

Interest Expense

Interest expense increased by $37.4 million, or 636.8%, to $43.2 million for the quarter ended September 30, 2023 from $5.9 million for the quarter ended September 30, 2022 due to increases in both the average balance and average cost of interest-bearing liabilities.

The average balance of interest-bearing liabilities increased $603.5 million, or 6.53%, to $9.850 billion for the quarter ended September 30, 2023 from $9.246 billion for the quarter ended September 30, 2022 while the average balance of noninterest-bearing demand deposits decreased by $336.4 million, or 10.9%, to $2.757 billion at September 30, 2023 from $3.093 billion at September 30, 2022.

We believe customers utilized funds in their demand deposit accounts for both higher yielding products as well as higher inflationary cost of goods.

The increase in average balance of interest-bearing liabilities was driven by an increase in average borrowed funds of $516.4 million, or 406.4%, which were used to fund loan growth.

Additionally, the average balance of interest-bearing deposits increased by $86.4 million, or 1.0%, specifically driven by an increase in time deposits due to customer preferences for this fixed maturity product type.

The average cost of interest-bearing liabilities increased to 1.74% for the quarter ended September 30, 2023 from 0.25% for the quarter ended September 30, 2022, primarily attributable to increases in the interest rates paid on deposit accounts and borrowed funds in response to increases in market interest rates, as well as a change in mix to higher cost products.

Net Interest Income

Net interest income decreased by $4.4 million, or 3.9%, to $108.4 million for the quarter ended September 30, 2023 from $112.7 million for the quarter ended September 30, 2022.

This decrease is attributable to the factors discussed above.

Our interest rate spread decreased to 2.75% for the quarter ended September 30, 2023 from 3.33% for the quarter ended September 30, 2022 and our net interest margin decreased to 3.21% for the quarter ended September 30, 2023 from 3.40% for the quarter ended September 30, 2022 due to the increase in our cost of interest bearing liabilities.

Provision for Credit Losses

The provision for credit losses decreased by $10.3 million, or 91.1%, to $1.0 million for the quarter ended September 30, 2023 compared to $11.3 million for the quarter ended September 30, 2022.

The current period provision for credit losses includes $4.0 million for credit losses - loans and a provision release of $3.0 million for credit losses - unfunded commitments.

The prior period provision for credit losses included $7.7 million for credit losses - loans and $3.6 million for credit losses - unfunded commitments.

T he $3.7 million decrease in the provision for credit losses - loans can be attributed to changes in the economic forecasts reflected in our allowance for credit loss models, as well continued decreases in classified loans.

While economic forecasts have continued to deteriorate in the current year, our current allowance reflects such that deterioration was slower during the current period as compared to the same period last year.

Classified assets decreased by $29.1 million, or 12.2%, to $208.6 million, or 1.84% of total loans, at September 30, 2023 from $237.7 million, or 2.21% of total loans, at September 30, 2022.

The $6.6 million decrease in our provision for credit losses - unfunded commitments was related to the timing of the origination of loans with current off-balance sheet exposure.

In determining the amount of the current period provision, we considered current and forecasted economic conditions, including but not limited to improvements in unemployment levels, expected economic growth, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.

We analyze the allowance for credit losses as described in the section entitled “ Allowance for Credit Losses.

” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at September 30, 2023.

Noninterest Income

Noninterest income increased by $4.1 million, or 15.2%, to $30.9 million for the quarter ended September 30, 2023 from $26.8 million for the quarter ended September 30, 2022.

This increase was driven by a $3.1 million, or 209.2%, increase in income from bank-owned life insurance to $4.6 million for the quarter ended September 30, 2023 from $1.5 million for the quarter ended September 30, 2022 due to death benefits received in the current period.

In addition, service charges and fees increased $947,000, or 6.6%, to $15.3 million for the quarter ended September 30, 2023 from $14.3 million for the quarter ended September 30, 2022 driven by deposit related fees based on customer activity in the current quarter.

Noninterest Expense

Noninterest expense increased by $8.6 million, or 10.9%, to $87.6 million for the quarter ended September 30, 2023 from $79.0 million for the quarter ended September 30, 2022.

This increase was primarily attributable to increases in compensation and employee benefits, other expenses, processing expenses, and FDIC insurance premiums.

Compensation and employee benefits expense increased $4.5 million, or 9.7%, to $51.2 million for the quarter ended September 30, 2023, from $46.7 million for the quarter ended September 30, 2022 primarily as a result of additional talent and expertise to propel the organization to higher performance levels, in particular commercial and small business lending as well as risk management and back office support and infrastructure.

Other expenses increased $1.7 million to $2.0 million for the quarter ended September 30, 2023, from $321,000 for the quarter ended September 30, 2022 due to an increase in employee relocation and other expenses.

Processing expenses increased $1.3 million, or 9.4%, to $14.7 million for the quarter ended September 30, 2023, from $13.4 million for the quarter ended September 30, 2022 due to the implementation of additional third-party software programs.

Lastly, FDIC insurance premiums increased $1.1 million, or 95.1%, to $2.3 million for the quarter ended September 30, 2023 from $1.2 million for the quarter ended September 30, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023.

The provision for income taxes decreased by $522,000, or 4.4%, to $11.5 million for the quarter ended September 30, 2023 from $12.0 million for the quarter ended September 30, 2022.

This decrease in income taxes was due primarily to a decrease in our effective tax rate in the current year related to bank-owned life insurance tax benefits.

We anticipate our effective tax rate to be between 22.5% and 24.5% for the year ending December 31, 2023.

Comparison of Operating Results for the Nine Months Ended September 30, 2023 and 2022

Net income for the nine months ended September 30, 2023 was $105.9 million, or $0.83 per diluted share, an increase of $6.9 million, or 7.0%, from $99.0 million, or $0.78 per diluted share, for the nine months ended September 30, 2022.

The increase in net income resulted from an increase in net interest income of $25.7 million, or 8.5%, a decrease in provision for credit losses of $2.5 million, or 14.3%, and an increase in noninterest income of $1.7 million, or 2.0%.

These changes were partially offset by an increase of $20.1 million, or 8.4%, in noninterest expense and an increase in income tax expense of $2.8 million, or 9.6%.

Net income for the nine months ended September 30, 2023 represents annualized returns on average equity and average assets of 9.37% and 0.99%, respectively, compared to 8.61% and 0.93% for the nine months ended September 30, 2022.

Nonaccrual loans of $95 million at March 31, 2024, remained steady, increasing by $1 million, or 1%, from $94 million at December 31, 2023, or 0.83% of total loans receivable as of both period ends.

As a percentage of average loans, annualized net charge-offs increased slightly to 0.16% for the quarter ended March 31, 2024 compared to 0.11% for the year ended December 31, 2023.

Comparison of Operating Results for the Quarters Ended March 31, 2024 and 2023

Net income for the quarter ended March 31, 2024 was $29 million, or $0.23 per diluted share, a decrease of $5 million, or 13%, from net income of $34 million, or $0.26 per diluted share, for the quarter ended March 31, 2023.

The decrease in net income resulted primarily from a decrease in net interest income, partially offset by an increase in noninterest income.

Net interest income decreased by $9 million, or 8%, and noninterest income increased $4 million, or 17%.

Net income for the quarter ended March 31, 2024 represents annualized returns on average equity and average assets of 7.57% and 0.81%, respectively, compared to 9.11% and 0.97% for the same quarter last year.

A further discussion of notable changes follows.

Interest Income

Total interest income increased by $109.6 million, or 34.1%, to $430.5 million for the nine months ended September 30, 2023 from $320.9 million for the nine months ended September 30, 2022.

This increase is the result of increases in both the average yield and average balance of interest-earning assets.

The average yield on interest-earning assets increased to 4.31% for the nine months ended September 30, 2023 from 3.23% for the nine months ended September 30, 2022.

This increase in average yield is attributed to the increased interest rate environment.

The average balance of interest-earning assets increased $67.7 million, or 0.5%, to $13.369 billion for the nine months ended September 30, 2023 from $13.301 billion for the nine months ended September 30, 2022 driven by an increase in the average balance of loans receivable, offset by a decrease in the average balance of other interest-earning deposits, described further below.

Interest income on loans receivable increased by $106.4 million, or 36.6%, to $397.1 million for the nine months ended September 30, 2023 from $290.7 million for the nine months ended September 30, 2022.

This increase is attributed to increases in both the average yield and the average balance of loans receivable.

The average yield on loans receivable increased to 4.81% for the nine months ended September 30, 2023 from 3.82% for the nine months ended September 30, 2022 due to the increase in market interest rates.

The average balance of loans receivable increased $867.5 million, or 8.5%, to $11.049 billion for the nine months ended September 30, 2023 from $10.182 billion for the nine months ended September 30, 2022 due to organic loan growth in our commercial, residential mortgage, and consumer portfolios.

Additionally contributing to loan growth were purchases of loan pools during 2022 of small business equipment finance loans and one- to four-family jumbo mortgage loans.

Interest income on mortgage-backed securities increased by $2.7 million, or 12.3%, to $24.9 million for the nine months ended September 30, 2023 from $22.2 million for the nine months ended September 30, 2022.

This increase is attributed to an increase in the average yiel d on mortgage-backed securities to 1.80% for the nine months ended September 30, 2023 from 1.50% for the nine months ended September 30, 2022 due to the purchase of higher yielding mortgage-backed securities in the prior year.

Partially offsetting this increase was a decrease in the average balance of mortgage-backed securities of $123.1 million, or 6.2%, to $1.850 billion for the nine months ended September 30, 2023 from $1.973 billion for the nine months ended September 30, 2022 due to the sale of available-for-sale securities during the year coupled with r egularly scheduled payments and maturities.

Interest income on investment securities remained relatively flat, increasing by $34,000, or 0.8%, to $4.3 million for the nine months ended September 30, 2023.

This increase is attributable to an increase in the average yield on investment securities.

The average yield on investment securities increased to 1.58% for the nine months ended September 30, 2023 from 1.51% for the nine months ended September 30, 2022.

Slightly offsetting this increase in average yield was a decrease in the average balance of investment securities by $14.9 million, or 3.9%, to $365.0 million for the nine months ended September 30, 2023 from $379.9 million for the nine months ended September 30, 2022.

Dividends on FHLB stock increased by $1.9 million, or 608.0%, to $2.2 million for the nine months ended September 30, 2023 from $311,000 for the nine months ended September 30, 2022.

This increase was due to increases in both the average balance and the average yield of FHLB stock.

The average balance of FHLB stock increased $27.2 million, or 197.2%, to $40.9 million for the nine months ended September 30, 2023 from $13.8 million for the nine months ended September 30, 2022.

Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

Additionally, the average yield increased to 7.19% for the nine months ended September 30, 2023 from 3.02% for the nine months ended September 30, 2022, due to increases in market interest rates.

Interest income on interest-earning deposits decreased by $1.5 million, or 44.0%, to $1.9 million for the nine months ended September 30, 2023 from $3.4 million for the nine months ended September 30, 2022.

This decrease is attributable to a decrease in the average balance of interest-earning deposits by $688.9 million, or 91.4%, to $64.6 million for the nine months ended September 30, 2023 from $753.5 million for the nine months ended September 30, 2022 as the Bank redeployed these funds into higher yielding loans and investments.

Partially offsetting this decrease in average balance was an increase in the average yield on interest-earning deposits to 4.00% for the nine months ended September 30, 2023 from 0.60% for the nine months ended September 30, 2022, due to the campaign by the Federal Reserve Board over the last year to raise targeted short-term interest rates to combat inflation.

Interest Expense

Interest expense increased by $83.8 million, or 484.4%, to $101.2 million for the nine months ended September 30, 2023 from $17.3 million for the nine months ended September 30, 2022.

This increase in interest expense was due to increases in the average cost of interest-bearing liabilities and the average balance of interest-bearing liabilities as well as the change in liability mix.

The average cost of interest-bearing liabilities increased to 1.40% for the nine months ended September 30, 2023 from 0.25% for the nine months ended September 30, 2022 resulting primarily from the rising interest rate environment.

The average balance of interest-bearing liabilities increased by $252.0 million, or 2.7%, to $9.677 billion for the nine months ended September 30, 2023 from $9.425 billion for the nine months ended September 30, 2022 driven by an increase in average borrowed funds by $608.6 million, or 463.3%.

Wholesale borrowings were utilized to fund loan growth as well as replace the decrease in the average balance of interest-bearing deposits which declined by $351.9 million, or 3.9%.

In addition, noninterest-bearing demand deposits decreased by $259.5 million, or 8.4%, as we believe customers used funds during a period of higher inflationary costs and searched for higher yield alternatives.

To make it easier to compare both the results across several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in the discussion below on a fully taxable equivalent “FTE basis” (i.e., as if all income were taxable and at the same rate).

For example, $100 of tax-exempt income would be presented as $126, an amount that, if taxed at the statutory federal income tax rate of 21%, would yield $100.

See the "Average Balance Sheet" for information regarding tax-equivalent adjustments and GAAP results.

Net Interest Income

Net interest income increased by $25.7 million, or 8.5%, to $329.4 million for the nine months ended September 30, 2023 from $303.6 million for the nine months ended September 30, 2022.

This increase is attributable to the factors discussed above.

Our interest rate spread decreased to 2.91% for the nine months ended September 30, 2023 from 2.98% for the nine months ended September 30, 2022 and our net interest margin increased to 3.29% for the nine months ended September 30, 2023 from 3.05% for the nine months ended September 30, 2022 due to the change in market rates as well as the change in our interest-earning asset and funding mix.

Provision for Credit Losses

The provision for credit losses decreased by $2.5 million, or 14.3%, to $14.9 million for the nine months ended September 30, 2023 from $17.4 million for the nine months ended September 30, 2022.

The current period provision for credit losses includes $14.9 million for credit losses - loans and $65,000 for credit losses - unfunded commitments.

The prior period provision for credit losses includes $8.8 million for credit losses - loans and $8.6 million for credit losses - unfunded commitments.

The $6.0 million increase in the provision for credit losses - loans was driven by continued growth within our loan portfolio, as well as forecasted economic deterioration reflected in our allowance for credit loss models.

This was partially offset by an $8.5 million decrease in our provision for credit losses - unfunded commitments compared to the same period last year based on the timing of the origination of loans with current off-balance sheet exposure.

Annualized net charge-offs to average loans increased to 0.10% for the nine months ended September 30, 2023 from 0.02% for the nine months ended September 30, 2022 due to several large recoveries during 2022.

Additionally, classified assets declined by $29.1 million, or 12.2%, to $208.6 million, or 1.84% of loans outstanding at September 30, 2023 from $237.7 million, or 2.21% of loans outstanding at September 30, 2022 resulting primarily from upgrades and payoffs within our commercial real estate portfolio.

In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.

We analyze the allowance for credit losses as described in the section entitled "Allowance for Credit Losses." The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at September 30, 2023.

Noninterest Income

Noninterest income increased by $1.7 million, or 2.0%, to $84.7 million for the nine months ended September 30, 2023 from $83.0 million for the nine months ended September 30, 2022.

This increase was primarily due to increases in service charges and fees, income from bank-owned life insurance, and a gain on the sale of Small Business Administration (SBA) loans.

Service charges and fees increased by $2.2 million, or 5.4%, to $43.3 million for the nine months ended September 30, 2023 from $41.1 million for the nine months ended September 30, 2022 driven primarily by commercial loan fees and an increase in deposit related fees based on customer activity in the current year.

In addition, income from bank-owned life insurance increased $1.7 million, or 30.5%, to $7.1 million for the nine months ended September 30, 2023 from $5.5 million for the nine months ended September 30, 2022 due to death benefits recognized in the current period.

We also recognized a $1.4 million gain on the sale of SBA loans during the nine months ended September 30, 2023 due to this newly launched lending vertical.

Partially offsetting these increases to income was a decrease in mortgage banking income of $2.2 million, or 50.2%, to $2.2 million for the nine months ended September 30, 2023 from $4.4 million for the nine months ended September 30, 2022 due to the volatile interest rate environment causing less favorable pricing in the secondary market, as well as a decrease in mortgage volumes primarily due to higher market interest rates.

In addition, during the nine months ended September 30, 2023, we recognized an $8.3 million gain on the sale of the servicing rights for a $1.3 billion one- to four- family mortgage portfolio.

We tried to maximize our profit in the current interest rate environment as we pivot towards a commercial bank, and it also enabled us to accelerate the cash flow from our investment portfolio by selling approximately $110.0 million of investment securities yielding 2.0% for an equivalent $8.3 million loss and reinvesting these proceeds into commercial loans yielding over 7.0%.

Noninterest Expense

Noninterest expense increased by $20.1 million, or 8.4%, to $260.9 million for the nine months ended September 30, 2023, from $240.7 million for the nine months ended September 30, 2022.

This increase was due to increases in almost all expense categories due to both inflationary costs as well as the continued build out of talent and infrastructure necessary to propel the organization to a higher level of performance.

In particular, processing expenses increased by $4.8 million, or 12.2%, to $43.7 million for the nine months ended September 30, 2023, from $38.9 million for the nine months ended September 30, 2022 due to the implementation of third party software programs.

Compensation and employee benefits increased by $3.8 million, or 2.7%, to $145.5 million for the nine months ended September 30, 2023 from $141.7 million for the nine months ended September 30, 2022 driven by increases in commercial lending, small business lending, risk management and internal audit salaries and benefits over the past twelve months.

FDIC insurance premiums increased $3.2 million, or 91.6%, to $6.6 million for the nine months ended September 30, 2023, from $3.5 million for the nine months ended September 30, 2022 due to an increase in the deposit insurance assessment rate beginning in the first quarter of 2023.

Merger, asset disposition and restructuring expense increased $3.0 million, or 219.9%, to $4.4 million for the nine months ended September 30, 2023, from $1.4 million for the nine months ended September 30, 2022 due to the severance and fixed asset charges related to the branch optimization and personnel reductions previously announced.

Other expenses increased by $2.4 million, or 83.3%, to $5.4 million for the nine months ended September 30, 2023, from $2.9 million for the nine months ended September 30, 2022 due to an increase in employee relocation and other expenses.

Additionally, professional service expense increased by $2.3 million, or 24.8%, to $11.6 million for the nine months ended September 30, 2023, from $9.3 million for the nine months ended September 30, 2022 due to the use of third-party consulting and staffing support.

Lastly, marketing expenses increased by $1.8 million, or 28.6%, to $8.1 million for the nine months ended September 30, 2023, from $6.3 million for the nine months ended September 30, 2022 due primarily to deposit marketing campaigns.

The provision for income taxes increased by $2.8 million, or 9.6%, to $32.3 million for the nine months ended September 30, 2023 from $29.5 million for the nine months ended September 30, 2022.

This increase was primarily due to the increase in income before tax of $9.8 million, or 7.6%.

We anticipate our effective tax rate to be between 22.5% and 24.5% for the year ending December 31, 2023.

Net interest income (FTE) was $104 million for the quarter ended March 31, 2024 and net interest margin was 3.10%.

Compared to the same quarter of the prior year, net interest income (FTE) decreased $9 million and net interest margin decreased by 36 basis points.

The decrease in net interest income (FTE) and the net interest margin reflects higher interest-bearing deposit costs and a shift in funding mix to higher cost deposits and borrowings due to the higher interest rate environment.

Partly offsetting the decline in net interest income and the net interest margin were higher earning asset balances and yields.

Average loans receivable increased 4% from the quarter ended March 31, 2023 driven by commercial loans, which grew by $553 million, as we have continued to build-out our commercial lending verticals.

Interest income on loans receivable increased by $26 million, or 21%, from the same quarter in prior year as the result of increases in both the average yield and the average balance on loans receivable.

The average yield on loans receivable increased to 5.33% for the quarter ended March 31, 2024 due to the elevated market interest rates as well as a change in mix to higher yield loan products.

Average investments declined 11% from the first quarter of 2023 driven by the sale of investment securities during the prior year coupled with principal payments and maturities.

Interest income on investment securities decreased by $1 million, or 8%, from the quarter ended March 31, 2023.

Average deposits grew 4% from the quarter ended March 31, 2023 driven by a $1.4 billion increase in our average time deposits due to customer preferences for this fixed maturity product type.

This increase was partially offset by a decrease in money market balances as customers shifted balances into higher yielding time deposit accounts.

Interest expense on deposits increased by $36 million primarily attributable to increases in the interest rates paid on deposit accounts as we continued competitively positioning our deposit products, as well as a change in mix to higher cost products.

Compared to the quarter ended March 31, 2023, average borrowings saw a 37% reduction, primarily attributable to the strategic pay-down of wholesale borrowings.

This decrease was made possible by a substantial increase in cash reserves, resulting from a notable rise in the average balance of deposits, which also decreased interest expense on borrowings by $2 million.

Average Balance Sheet

3 unchanged sentences

Average balances are calculated using daily averages.

Quarter ended September 30,

Quarter ended March 31,

balance Interest Avg.

36 unchanged sentences

(d) Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent (“FTE”) basis.

(d) Interest income on tax-free investment securities and tax-free loans are presented on a FTE basis.

(e) Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.

16 unchanged sentences

Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.

For the quarter ended September 30, 2023 vs.

Increase/(decrease) due to Total

increase/(decrease)

Interest-earning assets:

Loans receivable $ 24,962 8,976 33,938

Mortgage-backed securities 470 (1,081) (611)

Investment securities (107) (224) (331)

FHLB stock, at cost 104 416 520

Other interest-earning deposits 2,578 (2,958) (380)

Total interest-earning assets 28,007 5,129 33,136

Interest-bearing liabilities:

Savings deposits 2,398 (297) 2,101

Interest-bearing demand deposits 4,084 (358) 3,726

Money market deposit accounts 7,711 (1,631) 6,080

Time deposits 7,797 8,828 16,625

Borrowed funds 1,328 6,370 7,698

Subordinated debt (4) 3 (1)

Junior subordinated debentures 1,129 5 1,134

Total interest-bearing liabilities 24,443 12,920 37,363

Net change in net interest income $ 3,564 (7,791) (4,227)

Average Balance Sheet

(in thousands)

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.

Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

Average balances are calculated using daily averages.

Nine months ended September 30,

balance Interest Avg.

cost (i) Average

balance Interest Avg.

Interest-earning assets:

Residential mortgage loans $ 3,485,130 97,090 3.71 % $ 3,162,758 82,282 3.47 %

Home equity loans 1,273,878 50,467 5.30 % 1,282,045 37,443 3.90 %

Consumer loans 2,119,717 66,977 4.22 % 1,887,843 47,588 3.37 %

Commercial real estate loans 2,857,555 117,074 5.48 % 2,918,940 95,813 4.33 %

Commercial loans 1,312,750 67,465 6.87 % 929,942 28,981 4.11 %

Loans receivable (a) (b) (d) (includes FTE adjustments of $1,937 and $1,416, respectively) 11,049,030 399,073 4.83 % 10,181,528 292,107 3.84 %

Mortgage-backed securities (c) 1,849,567 24,935 1.80 % 1,972,694 22,201 1.50 %

Investment securities (c) (d) (includes FTE adjustments of $579 and $627, respectively) 364,956 4,909 1.79 % 379,850 4,923 1.73 %

FHLB stock, at cost 40,945 2,202 7.19 % 13,776 311 3.02 %

Other interest-earning deposits 64,560 1,931 4.00 % 753,482 3,447 0.60 %

Total interest-earning assets (includes FTE adjustments of $2,516 and $2,043, respectively) 13,369,058 433,050 4.33 % 13,301,330 322,989 3.25 %

Noninterest-earning assets (e) 880,799 941,947

Total assets $ 14,249,857 $ 14,243,277

Liabilities and shareholders’ equity

Interest-bearing liabilities:

Savings deposits (h) $ 2,163,564 4,777 0.30 % $ 2,348,944 1,758 0.10 %

Interest-bearing demand deposits (h) 2,550,433 6,684 0.35 % 2,842,071 1,008 0.05 %

Money market deposit accounts (h) 2,246,422 17,289 1.03 % 2,647,301 2,067 0.10 %

Time deposits (h) 1,733,428 35,993 2.78 % 1,207,444 5,416 0.60 %

Borrowed funds (f) 740,011 26,077 4.71 % 131,368 563 0.57 %

Subordinated debentures (g) 113,958 3,444 4.03 % 118,919 3,603 4.04 %

Junior subordinated debentures 129,401 6,889 7.02 % 129,142 2,893 2.95 %

Total interest-bearing liabilities 9,677,217 101,153 1.40 % 9,425,189 17,308 0.25 %

Noninterest-bearing demand deposits (h) 2,822,178 3,081,640

Noninterest-bearing liabilities 239,034 199,742

Total liabilities 12,738,429 12,706,571

Shareholders’ equity 1,511,428 1,536,706

Total liabilities and shareholders’ equity $ 14,249,857 $ 14,243,277

Net interest income/Interest rate spread 331,897 2.93 % 305,681 3.00 %

Net interest-earning assets/Net interest margin $ 3,691,841 3.32 % $ 3,876,141 3.07 %

Ratio of interest-earning assets to interest-bearing liabilities 1.38X 1.41X

(a) Average gross loans includes loans held as available-for-sale and loans placed on nonaccrual status.

(b) Interest income includes accretion/amortization of deferred loan fees/expenses, which were not material.

(d) Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent (“FTE”) basis.

(e) Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.

(f) Average balances include FHLB borrowings and collateralized borrowings.

(g) On September 9, 2020, the Company issued $125.0 million of 4.00% fixed-to-floating rate subordinated notes with a maturity of September 15, 2030.

(h) Average cost of deposits were 0.75% and 0.11%, respectively and average cost of Interest-bearing deposits were 1.00% and0.15%, respectively.

(i) Annualized.

Shown on a FTE basis.

The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented.

We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

GAAP basis yields were:

loans — 4.81% and 3.82%, respectively;

investment securities — 1.58% and 1.51%, respectively;

interest-earning assets — 4.31% and 3.23%, respectively.

GAAP basis net interest rate spreads were 2.91% and 2.98%, respectively;

and GAAP basis net interest margins were 3.29% and 3.05%, respectively.

Rate/Volume Analysis

(in thousands)

The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated.

Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change.

Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.

For the nine months ended September 30, 2023 vs.

For the quarter ended March 31, 2024 vs.

Increase/(decrease) due to Total

17 unchanged sentences

Net change in net interest income $ (4,450) (4,711) (9,161)

Provision for Credit Losses

1Q23 2Q23 3Q23 4Q23 1Q24

Provision for credit losses - loans (in thousands) $4,870 6,010 3,983 3,801 4,234

Provision for credit losses - unfunded commitments (in thousands) 126 2,920 (2,981) 4,145 (799)

Annualized net charge-offs to average loans 0.08 % 0.10 % 0.13 % 0.12 % 0.16 %

The provision for credit losses decreased by $2 million, or 31%, from the quarter ended March 31, 2023.

This decrease included a $1 million decrease in the provision for credit losses - loans driven by changes in the economic forecasts reflected in our allowance for credit loss models, as well as a $1 million decrease in the provision for credit losses - unfunded commitments driven by the timing of origination and funding of commercial construction loans and lines of credit.

Classified assets continue to remain low at $229 million, at March 31, 2024 from $209 million at March 31, 2023, or 2% of total loans as of both periods.

We analyze the allowance for credit losses as described in the section entitled “ Allowance for Credit Losses.

Noninterest Income

(a) Other noninterest income includes the gain on sale of SBA loans, net gain on real estate owned, mortgage banking income, and other operating income.

See the "Consolidated Statements of Income" in Item 1.

Financial Statements of this report.

Noninterest income increased by $4 million, or 17%, from the quarter ended March 31, 2023.

This increase was primarily due to a $2 million, or 18%, increase in service charges and fees to $16 million for the quarter ended March 31, 2024 from $13 million for the quarter ended March 31, 2023 driven by commercial loan fees and deposit related fees based on customer activity in the current quarter as well as gain on sale of SBA loans and improvements in trust and other financial services income.

Noninterest Expense

(a) Other noninterest expense includes office operations, collections expense, marketing expense, FDIC insurance expense, amortization of intangible assets, real estate owned expense, merger, asset disposition and restructuring expense, and other expenses.

See the "Consolidated Statements of Income" in Item 1.

Financial Statements of this report.

Noninterest expense increased by $3 million, or 3%, from the quarter ended March 31, 2023.

This increase was primarily attributable to an increase in c ompensation and employee benefits expense of $5 million, or 11%, to $52 million for the quarter ended March 31, 2024, from $47 million for the quarter ended March 31, 2023 driven primarily by the build out of the commercial business and related credit, risk management, and internal audit support functions.

Partially offsetting this increase was a decrease in non-personnel expense related to a decline in merger, asset disposition and restructuring expense of $2 million, or 66%, as a result of the severance and fixed asset charges related to the branch optimization and personnel reduction incurred during the first quarter of the prior year.

The provision for income taxes decreased by $1.7 million, or 17%, to $8.6 million for the quarter ended March 31, 2024 from $10.3 million for the quarter ended March 31, 2023.

This decrease in income taxes was due primarily to a decrease in our income before taxes in the current year.

We anticipate our effective tax rate to be between 22.0% and 24.0% for the year ending December 31, 2024.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis