Item 2. Management’s Discussion and Analysis
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this document may contain certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, as they reflect management’s analysis only as of the date of this report. We have no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.
Important factors that might cause such a difference include, but are not limited to:
• inflation and changes in the interest rate environment that reduce our margins, our loan origination, or the fair value of financial instruments;
• changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally;
• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
• 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, including inflationary or recessionary pressures;
• adverse changes in the securities and credit markets;
• cyber-security concerns, including an interruption or breach in the security of our website or other information systems;
• technological changes that may be more difficult or expensive than expected;
• changes in liquidity, including the size and composition of our deposit portfolio, and the percentage of uninsured deposits in the portfolio;
• the ability of third-party providers to perform their obligations to us;
• competition among depository and other financial institutions, including with respect to deposit gathering, service charges and fees;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• our ability to manage our internal growth and our ability to successfully integrate acquired entities, businesses or branch offices;
• changes in consumer spending, borrowing and savings habits;
• our ability to continue to increase and manage our commercial and personal loans;
• possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;
• changes in the value of our goodwill or other intangible assets;
• the impact of the economy on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;
• our ability to receive regulatory approvals for proposed transactions or new lines of business;
• the effects of any federal government shutdown or the inability of the federal government to manage debt limits;
• changes in the financial performance and/or condition of our borrowers;
• the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters;
• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
• our ability to access cost-effective funding;
• the effect of global or national war, conflict, or terrorism;
• our ability to manage market risk, credit risk and operational risk;
• 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; and
• our compensation expense associated with equity allocated or awarded to our employees.
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Overview of Critical Accounting Policies Involving Estimates
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 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 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 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.
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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
Ohio 20.3
Indiana 8.1
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.
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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
Financial institutions and their holding companies are subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct, material effect on a company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting guidelines. Capital amounts and classifications are also subject to qualitative judgments made by the regulators about components, risk-weighting and other factors.
Applicable rules limit an organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a “ capital conservation buffer ” consisting of 2.5% of Total, Tier 1 and Common Equity Tier 1 ( “ CET1 ” ) capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
Quantitative measures, established by regulation to ensure capital adequacy, require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of Total, CET1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Capital requirements are presented in the tables below (dollars in thousands).
At March 31, 2024
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,805,374 15.951 % $ 1,188,406 10.500 % $ 1,131,815 10.000 %
Northwest Bank 1,529,840 13.529 % 1,187,335 10.500 % 1,130,795 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,555,043 13.739 % 962,043 8.500 % 905,452 8.000 %
Northwest Bank 1,393,786 12.326 % 961,176 8.500 % 904,636 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,429,393 12.629 % 792,270 7.000 % 735,680 6.500 %
Northwest Bank 1,393,786 12.326 % 791,557 7.000 % 735,017 6.500 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,555,043 10.828 % 574,453 4.000 % 718,066 5.000 %
Northwest Bank 1,393,786 9.712 % 574,060 4.000 % 717,575 5.000 %
(1) Amounts and ratios include the capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).
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At December 31, 2023
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,799,883 16.040 % $ 1,178,234 10.500 % $ 1,122,128 10.000 %
Northwest Bank 1,520,736 13.564 % 1,177,257 10.500 % 1,121,197 10.000 %
Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,553,766 13.847 % 953,809 8.500 % 897,702 8.000 %
Northwest Bank 1,388,808 12.387 % 953,018 8.500 % 896,958 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,428,181 12.727 % 785,489 7.000 % 729,383 6.500 %
Northwest Bank 1,388,808 12.387 % 784,838 7.000 % 728,778 6.500 %
Tier I capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,553,766 10.841 % 573,290 4.000 % 716,612 5.000 %
Northwest Bank 1,388,808 9.697 % 572,903 4.000 % 716,128 5.000 %
(1) Amounts and ratios include the capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).
Liquidity
We are required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking and Securities during their regular examinations. 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 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 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.
Dividends
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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Nonperforming Assets
The following table sets forth information with respect to nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Generally, when a loan is 90 days past due, we fully reverse all accrued interest thereon and cease to accrue interest thereafter. Exceptions are made for loans that have contractually matured, are in the process of being modified to extend the maturity date and are otherwise current as to principal and interest, and well-secured loans that are in the process of collection. Loans may also be placed on nonaccrual before they reach 90 days past due if conditions exist that call into question our ability to collect all contractual interest. Other nonperforming assets represent property acquired through foreclosure or repossession. Foreclosed property is carried at the lower of its fair value less estimated costs to sell or the principal balance of the related loan.
March 31, 2024 December 31, 2023
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 5,813 7,995
Home equity loans 2,823 3,126
Vehicle loans 2,496 3,051
Other consumer loans 849 927
Commercial real estate loans 6,041 6,535
Commercial real estate - owner occupied 890 177
Commercial loans 3,421 2,780
Total loans 90 days or more past due $ 22,333 24,591
Total real estate owned (REO) $ 50 104
Total loans 90 days or more past due and REO 22,383 24,695
Total loans 90 days or more past due to net loans receivable 0.20 % 0.22 %
Total loans 90 days or more past due and REO to total assets 0.15 % 0.17 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due 19,881 21,894
Nonaccrual loans - loans less than 90 days past due 75,179 72,490
Loans 90 days or more past due still accruing 2,452 2,698
Total nonperforming loans 97,512 97,082
Total nonperforming assets $ 97,562 97,186
Total nonaccrual loans to total loans 0.83 % 0.83 %
Allowance for Credit Losses
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 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. This rating is also reviewed independently by our Loan Review department on a periodic basis. Our loan grading system for problem commercial loans is consistent with industry regulatory guidelines which classifies loans as “substandard”, “doubtful” or “loss”. Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as “special mention”. A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable. Loans classified as “loss” have all the weakness inherent in those classified as “doubtful” and are considered uncollectible.
Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed.
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
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the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal. If the measurement of the fair value of the loan is more or less than the amortized cost basis of the loan, the Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not individually assessed, it is grouped with other loans that possess common characteristics for credit losses and analysis. For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models and qualitative assessments. We use a twenty four month forecasting period and revert to historical average loss rates thereafter. Reversion to average loss rates takes place over twelve months. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.
The credit losses for individually assessed loans along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance for Credit Losses Committee (“ACL Committee”) monthly. The ACL Committee reviews and approves the processes and ACL documentation presented. Based on this review and discussion, the appropriate amount of ACL is estimated and any adjustments to reconcile the actual ACL with this estimate are determined. The ACL Committee also considers if any changes to the methodology are needed. In addition to the ACL Committee’s review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis and annually by internal audit.
In addition to the reviews by management’s ACL Committee and the Board of Directors’ Risk Management Committee, regulators from either the FDIC and/or the Pennsylvania Department of Banking and Securities perform an extensive review on at least an annual basis for the adequacy of the ACL and its conformity with regulatory guidelines and pronouncements. Any recommendations or enhancements from these independent parties are considered by management and the ACL Committee and implemented accordingly.
We acknowledge that this is a dynamic process and consists of factors, many of which are external and out of our control that can change frequently, rapidly and substantially. The adequacy of the ACL is based upon estimates using all the information previously discussed as well as current and known circumstances and events. There is no assurance that actual portfolio losses will not be substantially different than those that were estimated.
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 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 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 $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.
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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.
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 (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.
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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.
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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.
Quarter ended March 31,
2024 2023
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,392,524 32,674 3.85 % $ 3,493,617 32,009 3.66 %
Home equity loans 1,205,273 17,294 5.77 % 1,284,425 16,134 5.09 %
Consumer loans 2,033,620 25,033 4.95 % 2,123,672 20,794 3.97 %
Commercial real estate loans 2,999,224 43,425 5.73 % 2,824,120 37,031 5.24 %
Commercial loans 1,714,667 31,857 7.35 % 1,161,298 18,353 6.32 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $712 and $576, respectively) 11,345,308 150,283 5.33 % 10,887,132 124,321 4.63 %
Mortgage-backed securities (c) 1,717,306 7,944 1.85 % 1,909,676 8,537 1.79 %
Investment securities (c) (d) (includes FTE adjustments of $145 and $216, respectively) 333,752 1,430 1.71 % 384,717 1,761 1.83 %
FHLB stock, at cost 32,249 607 7.57 % 39,631 690 7.06 %
Other interest-earning deposits 61,666 832 5.34 % 38,324 423 4.41 %
Total interest-earning assets (includes FTE adjustments of $857 and $792, respectively) 13,490,281 161,096 4.80 % 13,259,480 135,732 4.15 %
Noninterest-earning assets (e) 918,331 862,016
Total assets $ 14,408,612 $ 14,121,496
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits (g) $ 2,122,035 5,036 0.95 % $ 2,198,988 690 0.13 %
Interest-bearing demand deposits (g) 2,538,823 5,402 0.86 % 2,612,883 951 0.15 %
Money market deposit accounts (g) 1,961,332 7,913 1.62 % 2,408,582 4,403 0.74 %
Time deposits (g) 2,697,983 29,335 4.37 % 1,293,609 5,194 1.63 %
Borrowed funds (f) 469,697 5,708 4.89 % 740,218 7,938 4.35 %
Subordinated debentures 114,225 1,148 4.02 % 113,870 1,148 4.03 %
Junior subordinated debentures 129,597 2,459 7.51 % 129,335 2,152 6.66 %
Total interest-bearing liabilities 10,033,692 57,001 2.28 % 9,497,485 22,476 0.96 %
Noninterest-bearing demand deposits (g) 2,567,781 2,889,973
Noninterest-bearing liabilities 257,269 235,213
Total liabilities 12,858,742 12,622,671
Shareholders’ equity 1,549,870 1,498,825
Total liabilities and shareholders’ equity $ 14,408,612 $ 14,121,496
Net interest income/Interest rate spread 104,095 2.52 % 113,256 3.19 %
Net interest-earning assets/Net interest margin $ 3,456,589 3.10 % $ 3,761,995 3.46 %
Ratio of interest-earning assets to interest- bearing liabilities 1.34X 1.40X
(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.
(c) Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.
(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.
(f) Average balances include FHLB borrowings and collateralized borrowings.
(g) Average cost of deposits were 1.61% and 0.40%, respectively, average cost of interest-bearing deposits were 2.06% and 0.54%, respectively .
(h) 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 — 5.30% and 4.61%, respectively; investment securities — 1.54% and 1.61%, respectively; interest-earning assets — 4.78% and 4.13%, respectively. GAAP basis net interest rate spreads were 2.49% and 3.17%, respectively; and GAAP basis net interest margins were 3.08% and 3.44%, respectively.
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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 quarter ended March 31, 2024 vs. 2023
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 19,893 6,069 25,962
Mortgage-backed securities 296 (889) (593)
Investment securities (112) (219) (331)
FHLB stock, at cost 56 (139) (83)
Other interest-earning deposits 95 314 409
Total interest-earning assets 20,228 5,136 25,364
Interest-bearing liabilities:
Savings deposits 4,529 (183) 4,346
Interest-bearing demand deposits 4,609 (158) 4,451
Money market deposit accounts 5,314 (1,804) 3,510
Time deposits 8,871 15,270 24,141
Borrowed funds 1,057 (3,287) (2,230)
Subordinated debt (4) 4 —
Junior subordinated debentures 302 5 307
Total interest-bearing liabilities 24,678 9,847 34,525
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.
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 March 31, 2024.
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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.
Income Taxes
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.