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 disclosures 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 November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" to improve disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This update requires that an entity that has a single reportable segment, such as the Company, to provide all the disclosures required by this update. The amendments in this update require annual and interim disclosures on significant segment expenses that are regularly provided to the chief operating decision maker to make operating decisions and to allocate resources. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. A public entity should apply the amendments in this update retrospectively to all prior periods presented in the consolidated financial statements with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of ASU 2023-07 and does not expect them to have a material effect on the consolidated financial statements or disclosures.
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 June 30, 2024 were $14.4 billion, a decrease of $34 million from December 31, 2023. This decrease in assets was primarily driven by decreases in personal banking loans receivable and marketable securities, partially offset by increases in cash and cash equivalents and commercial banking loans receivable. A discussion of significant changes follows.
Cash and cash equivalents increased by $106 million, or 87%, to $228 million at June 30, 2024, from $122 million at December 31, 2023. During the current period, the Company restructured its security portfolio by selling 15% of its investment securities as part of a previously announced securities portfolio restructure. The proceeds from the sale have not yet been fully re-invested, therefore contributing to the increase in cash.
Total marketable securities decreased to $1.8 billion at June 30, 2024, a decrease of $45 million, or 2%, from December 31, 2023. Available-for-sale securities decreased by $14 million, driven by the securities sale noted above, while held-to-maturity securities decreased $31 million, driven by maturities and regular monthly cash flows.
Gross loans receivable decreased by $60 million, or 1%, to $11.4 billion at June 30, 2024. Our personal banking loan portfolio decreased by $197 million, or 3%, to $6.6 billion at June 30, 2024 from $6.8 billion at December 31, 2023. Cash flows from our personal banking portfolio were partially redirected to fund commercial banking growth, which increased by $136 million, or 3%, to $4.8 billion at June 30, 2024, from $4.6 billion at December 31, 2023. This increase represents organic loan growth resulting from the new commercial lending verticals that we implemented during the prior year. Specifically, our commercial and industrial (C&I) loan portfolio increased by $83 million, or 5% compared to December 31, 2023.
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The following table provides the various loan sectors in our commercial real estate portfolio at June 30, 2024:
Property type Percent of portfolio
5 or more unit dwelling 16.8 %
Nursing home 12.5
Retail building 11.7
Commercial office building - non-owner occupied 8.9
Manufacturing & industrial building 4.8
Residential acquisition & development - 1-4 family, townhouses and apartments 4.3
Multi-use building - commercial, retail and residential 4.0
Warehouse/storage building 3.9
Commercial office building - owner occupied 3.9
Multi-use building - office and warehouse 3.0
Other medical facility 3.0
Single family dwelling 2.6
Student housing 2.1
Hotel/motel 2.1
Agricultural real estate 2.0
All other 14.4
Total 100.0 %
The following table describes the collateral of our commercial real estate portfolio by state at June 30, 2024:
State Percent of portfolio
New York 32.7 %
Pennsylvania 29.4
Ohio 20.7
Indiana 9.0
All other 8.2
Total 100.0 %
Total deposits increased by $107 million, or 1%, to $12.1 billion at June 30, 2024 from $12.0 billion at December 31, 2023. This increase was driven by a $223 million, or 9%, increase in time deposits as we continued competitively positioning our deposit products, and a $43 million, or 2%, increase in savings deposits. Partially offsetting this increase was a decrease in demand deposit accounts by $156 million, or 3%, as customers shifted balances into higher yielding time deposit accounts.
As of June 30, 2024, we had $355 million of brokered deposits, which made up 13% of our time deposits and 3% of our total deposit balance at quarter end. The balance carried an average all-in cost of 5.37% 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 $537 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 o f 3.92%.
At June 30, 2024 and December 31, 2023, we had total deposits in excess of $250,000 (the limit for FDIC insurance) of $1.9 billion and $1.8 billion respectively. 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 June 30, 2024
Balance Percent of
total deposits Number of relationships
Uninsured deposits per the Call Report (1) $ 3,019,897 24.98 % 5,062
Less intercompany deposit accounts 1,163,566 9.62 % 12
Less collateralized deposit accounts 468,815 3.88 % 243
Uninsured deposits excluding intercompany and collateralized accounts $ 1,387,516 11.48 % 4,807
(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 $19.4 million, or 0.16% of total deposits, as of June 30, 2024. Our top ten largest uninsured depositors, excluding intercompany and collateralized deposit accounts, had an aggregate uninsured deposit balance of $102 million, or 0.84% of total deposits, as of June 30, 2024. The average uninsured deposit account balance, excluding intercompany and collateralized accounts, was $289,000 as of June 30, 2024.
Total shareholders’ equity remained stable at $1.6 billion, or $12.23 per share, at June 30, 2024 compared to $12.20 per share at December 31, 2023, increasing by $5 million in the current quarter. This increase was the result of year-to-date earnings of $34 million as well as a change in accumulated other comprehensive loss of $19 million, or 13%, primarily due to an increase in realized losses on our available-for-sale investment portfolio as a result of the investment sales made during the period, partially offset by $51 million of cash dividend payments for the quarter ended June 30, 2024.
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 June 30, 2024
Actual Minimum capital requirements (1) Well capitalized requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,784,604 16.674 % $ 1,123,831 10.500 % $ 1,070,315 10.000 %
Northwest Bank 1,537,783 14.380 % 1,122,827 10.500 % 1,069,359 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,536,552 14.356 % 909,768 8.500 % 856,252 8.000 %
Northwest Bank 1,404,095 13.130 % 908,955 8.500 % 855,487 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,410,837 13.182 % 749,220 7.000 % 695,705 6.500 %
Northwest Bank 1,404,095 13.130 % 748,551 7.000 % 695,083 6.500 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,536,552 10.654 % 576,913 4.000 % 721,142 5.000 %
Northwest Bank 1,404,095 9.742 % 576,521 4.000 % 720,651 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 16.753 % $ 1,128,054 10.500 % $ 1,074,337 10.000 %
Northwest Bank 1,520,736 14.167 % 1,127,076 10.500 % 1,073,406 10.000 %
Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,553,766 14.463 % 913,186 8.500 % 859,469 8.000 %
Northwest Bank 1,388,808 12.938 % 912,395 8.500 % 858,725 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,428,181 13.294 % 752,036 7.000 % 698,319 6.500 %
Northwest Bank 1,388,808 12.938 % 751,384 7.000 % 697,714 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 June 30, 2024 was 10.43%. 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 June 30, 2024, Northwest had $3.4 billion of additional borrowing capacity available with the FHLB, including $250 million on an overnight line of credit, which had no balance as of June 30, 2024, as well as $404 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 June 30, 2024 and 2023. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) for June 30, 2024 and 2023 was 500.0% and 76.9% on dividends of $0.20 per share. On July 18, 2024, the Board of Directors declared a cash dividend of $0.20 per share payable on August 14, 2024 to shareholders of record as of August 2, 2024. This represents the 119 th consecutive quarter we have paid a cash dividend.
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.
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June 30, 2024 December 31, 2023
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 5,553 7,995
Home equity loans 2,506 3,126
Vehicle loans 2,191 3,051
Other consumer loans 821 927
Commercial real estate loans 5,882 6,535
Commercial real estate - owner occupied 152 177
Commercial loans 3,385 2,780
Total loans 90 days or more past due $ 20,490 24,591
Total real estate owned (REO) $ 74 104
Total loans 90 days or more past due and REO 20,564 24,695
Total loans 90 days or more past due to net loans receivable 0.18 % 0.22 %
Total loans 90 days or more past due and REO to total assets 0.14 % 0.17 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due 17,978 21,894
Nonaccrual loans - loans less than 90 days past due 84,181 72,490
Loans 90 days or more past due still accruing 2,511 2,698
Total nonperforming loans 104,670 97,082
Total nonperforming assets $ 104,744 97,186
Total nonaccrual loans to total loans 0.90 % 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 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
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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 June 30, 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 $0.2 million to $125 million, or 1.10% of total loans at June 30, 2024. The overall coverage ratio remains consistent from December 31, 2023.
Total classified loans remain low at $257 million at June 30, 2024, an increase of $38 million compared to $218 million at December 31, 2023. This increase was primarily within our commercial real estate 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 $102 million at June 30, 2024 increased by $8 million, or 8%, from $94 million at December 31, 2023, or 0.90% of total loans receivable as of June 30, 2024 and 0.83% of total loans receivable as of December 31, 2023. As a percentage of average loans, annualized net charge-offs remained low at 0.12% for the six months ended June 30, 2024 compared to 0.11% for the year ended December 31, 2023.
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Comparison of Operating Results for the Quarters Ended June 30, 2024 and 2023
The following chart provides a reconciliation of net income from the quarter ended June 30, 2023 to the the quarter ended June 30, 2024 (dollars in thousands):
Net income for the quarter ended June 30, 2024 was $5 million, or $0.04 per diluted share, a decrease of $28 million, or 86%, from net income of $33 million, or $0.26 per diluted share, for the quarter ended June 30, 2023. This decrease in net income resulted primarily from a $39 million, or 130%, decrease in noninterest income resulting from the investment sale made as part of the previously announced securities portfolio restructure. Additionally contributing to the decrease in net income was a decrease in net interest income of $2 million, or 2%, and an increase in noninterest expense of $7 million, or 8%, offset by a $9 million, or 89%, decrease in income tax expense. Net income for the quarter ended June 30, 2024 represents annualized returns on average equity and average assets of 1.24% and 0.13%, respectively, compared to 8.72% and 0.93% 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 $108 million for the quarter ended June 30, 2024 and net interest margin was 3.20%. Compared to the same quarter of the prior year, net interest income (FTE) decreased $2 million and net interest margin decreased by eight basis points. The decrease in net interest income (FTE) and the net interest margin were driven by an increase in interest expense resulting from
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higher interest-bearing deposit costs and a shift in funding mix to higher cost deposits due to the higher interest rate environment. Partly offsetting the increase in interest expense was an increase in interest income resulting from higher earning asset balances and yields.
For the six months ended June 30, 2024, net interest income (FTE) was $212 million, a decrease of $11 million, or 5% from the same period last year. Net interest margin decreased by 22 basis points. Similar to the quarterly fluctuations noted above, the decrease in net interest income (FTE) included increases in both interest expense and interest income driven by higher interest-bearing deposit costs and balances, partially offset by higher interest-earning asset yields and balances.
Average loans receivable increased $303 million, or 3%, from the quarter ended June 30, 2023 driven by commercial loans, which grew by $444 million, as we have continued to build-out our commercial lending verticals, and commercial real estate loans, which grew by $187 million. These increases were offset partially by a $328 million decrease in personal banking loans. Interest income on loans receivable increased by $21 million, or 16%, from the same quarter in the prior year, and by $47 million, or 18%, from the same six-month period in the prior year, the result of increases in both the average yield and the average balance on loans receivable. The average yield on loans receivable increased due to the elevated market interest rates as well as a change in mix to higher yield loan products.
Average investments declined 10% from the second quarter of 2023 driven by the sale of investment securities during the current period coupled with regular principal payments and maturities. Interest income on investment securities increased by $1 million, or 8%, from the quarter ended June 30, 2023, and remained relatively flat from the six months ended June 30, 2023 decreasing by 0.4% . The increase in the quarterly results is due to the increase in the average yield on investments to 2.13% for the quarter ended June 30, 2024, while the decrease in the year to date results is due to the decrease in the average balance of investments.
Average deposits grew 6% from the quarter ended June 30, 2023 driven by a $1.1 billion increase in our average time deposits due to customer preferences for this fixed maturity product type. This increase was partially offset by a $264 million decrease in money market balances as customers shifted balances into higher yielding time deposit accounts. Interest expense on deposits increased by
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$31 million, or 142%, from the quarter ended June 30, 2023, and by $67 million, or 204% from the six months ended June 30, 2023, primarily attributable to increases in both the average yield and average balance of deposit accounts as we continued competitively positioning our deposit products.
Compared to the quarter ended June 30, 2023, average borrowings saw a 61% 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 the sale of investment securities noted above, as well as a notable rise in the average balance of deposits. The decrease in the average balance of borrowings resulted in a decrease in interest expense on borrowings by $6 million from the quarter ended June 30, 2023, and by $8 million from the six months ended June 30, 2023.
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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 June 30,
2024 2023
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,342,749 32,182 3.85 % $ 3,485,517 32,485 3.73 %
Home equity loans 1,183,497 17,303 5.88 % 1,273,298 16,898 5.32 %
Consumer loans 2,048,396 26,334 5.17 % 2,143,804 22,662 4.24 %
Commercial real estate loans 3,023,762 45,658 5.97 % 2,836,443 38,426 5.36 %
Commercial loans 1,770,345 33,229 7.43 % 1,326,598 22,872 6.82 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $752 and $619, respectively) 11,368,749 154,706 5.47 % 11,065,660 133,343 4.83 %
Mortgage-backed securities (c) 1,734,085 9,426 2.17 % 1,859,427 8,326 1.79 %
Investment securities (c) (d) (includes FTE adjustments of $131 and $207, respectively) 287,262 1,316 1.83 % 374,560 1,715 1.83 %
FHLB stock, at cost 25,544 498 7.84 % 45,505 844 7.44 %
Other interest-earning deposits 135,520 1,791 5.23 % 46,536 594 5.05 %
Total interest-earning assets (includes FTE adjustments of $883 and $826, respectively) 13,551,160 167,737 4.98 % 13,391,688 144,822 4.34 %
Noninterest-earning assets (e) 907,432 854,229
Total assets $ 14,458,592 $ 14,245,917
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits (g) $ 2,144,278 5,957 1.12 % $ 2,142,941 1,393 0.26 %
Interest-bearing demand deposits (g) 2,555,863 6,646 1.05 % 2,469,666 1,648 0.27 %
Money market deposit accounts (g) 1,957,990 8,601 1.77 % 2,221,713 6,113 1.10 %
Time deposits (g) 2,832,720 31,550 4.48 % 1,765,454 12,663 2.88 %
Borrowed funds (f) 323,191 3,662 4.56 % 837,358 10,202 4.89 %
Subordinated debentures 114,308 1,148 4.02 % 113,958 1,148 4.03 %
Junior subordinated debentures 129,663 2,449 7.47 % 129,401 2,280 6.97 %
Total interest-bearing liabilities 10,058,013 60,013 2.40 % 9,680,491 35,447 1.47 %
Noninterest-bearing demand deposits (g) 2,595,511 2,820,928
Noninterest-bearing liabilities 263,634 224,508
Total liabilities 12,917,158 12,725,927
Shareholders’ equity 1,541,434 1,519,990
Total liabilities and shareholders’ equity $ 14,458,592 $ 14,245,917
Net interest income/Interest rate spread 107,724 2.58 % 109,375 2.87 %
Net interest-earning assets/Net interest margin $ 3,493,147 3.20 % $ 3,711,197 3.28 %
Ratio of interest-earning assets to interest- bearing liabilities 1.35X 1.38X
(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 1.76% and 0.77%, respectively, average cost of interest-bearing deposits were 2.24% and 1.02%, 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 — 5.45% and 4.81%, respectively; investment securities — 1.65% and 1.61%, respectively; interest-earning assets — 4.95% and 4.31%, respectively. GAAP basis net interest rate spreads were 2.55% and 2.84%, respectively; and GAAP basis net interest margins were 3.17% and 3.25%, 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 June 30, 2024 vs. 2023
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 17,239 4,124 21,363
Mortgage-backed securities 1,781 (681) 1,100
Investment securities 2 (401) (399)
FHLB stock, at cost 43 (389) (346)
Other interest-earning deposits 21 1,176 1,197
Total interest-earning assets 19,086 3,829 22,915
Interest-bearing liabilities:
Savings deposits 4,560 4 4,564
Interest-bearing demand deposits 4,774 224 4,998
Money market deposit accounts 3,646 (1,158) 2,488
Time deposits 7,000 11,887 18,887
Borrowed funds (714) (5,826) (6,540)
Subordinated debt (4) 4 —
Junior subordinated debentures 164 5 169
Total interest-bearing liabilities 19,426 5,140 24,566
Net change in net interest income $ (340) (1,311) (1,651)
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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.
Six months ended June 30,
2024 2023
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,367,636 64,855 3.85 % $ 3,489,545 64,494 3.70 %
Home equity loans 1,194,385 34,596 5.83 % 1,278,831 33,033 5.21 %
Consumer loans 2,041,008 51,367 5.06 % 2,133,794 43,457 4.11 %
Commercial real estate loans 3,011,493 89,066 5.85 % 2,830,316 75,463 5.30 %
Commercial loans 1,742,506 65,083 7.39 % 1,244,404 41,225 6.59 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $1,442 and $1,203, respectively) 11,357,028 304,967 5.40 % 10,976,890 257,672 4.73 %
Mortgage-backed securities (c) 1,725,696 17,370 2.01 % 1,884,412 16,863 1.79 %
Investment securities (c) (d) (includes FTE adjustments of $272 and $425, respectively) 310,507 2,742 1.77 % 379,611 3,478 1.83 %
FHLB stock, at cost 28,897 1,105 7.69 % 42,584 1,534 7.26 %
Other interest-earning deposits 99,252 2,623 5.23 % 42,431 1,017 4.77 %
Total interest-earning assets (includes FTE adjustments of $1,714 and $1,628, respectively) 13,521,380 328,807 4.89 % 13,325,928 280,564 4.25 %
Noninterest-earning assets (e) 912,222 858,122
Total assets $ 14,433,602 $ 14,184,050
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits (g) $ 2,133,157 10,993 1.04 % $ 2,187,355 2,082 0.19 %
Interest-bearing demand deposits (g) 2,547,343 12,048 0.95 % 2,540,879 2,599 0.21 %
Money market deposit accounts (g) 1,959,661 16,514 1.69 % 2,314,631 10,516 0.92 %
Time deposits (g) 2,765,351 60,885 4.43 % 1,514,289 17,858 2.38 %
Borrowed funds (f) 396,444 9,370 4.75 % 789,057 18,139 4.64 %
Subordinated debentures 114,267 2,296 4.02 % 113,914 2,296 4.03 %
Junior subordinated debentures 129,630 4,908 7.49 % 129,368 4,433 6.82 %
Total interest-bearing liabilities 10,045,853 117,014 2.34 % 9,589,493 57,923 1.22 %
Noninterest-bearing demand deposits (g) 2,581,646 2,855,260
Noninterest-bearing liabilities 260,452 229,831
Total liabilities 12,887,951 12,674,584
Shareholders’ equity 1,545,651 1,509,466
Total liabilities and shareholders’ equity $ 14,433,602 $ 14,184,050
Net interest income/Interest rate spread 211,793 2.55 % 222,641 3.03 %
Net interest-earning assets/Net interest margin $ 3,475,527 3.15 % $ 3,736,435 3.37 %
Ratio of interest-earning assets to interest-bearing liabilities 1.35X 1.39X
(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 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) Average cost of deposits were 1.69% and 0.58%, respectively and average cost of Interest-bearing deposits were 2.15% and 0.78%, 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 — 5.37% and 4.71%, respectively; investment securities — 1.59% and 1.61%, respectively; interest-earning assets — 4.86% and 4.22%, respectively. GAAP basis net interest rate spreads were 2.52% and 3.00%, respectively; and GAAP basis net interest margins were 3.12% and 3.34%, 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 six months ended June 30, 2024 vs. 2023
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 37,088 10,207 47,295
Mortgage-backed securities 2,105 (1,598) 507
Investment securities (125) (611) (736)
FHLB stock, at cost 98 (527) (429)
Other interest-earning deposits 130 1,476 1,606
Total interest-earning assets 39,296 8,947 48,243
Interest-bearing liabilities:
Savings deposits 9,190 (279) 8,911
Interest-bearing demand deposits 9,418 31 9,449
Money market deposit accounts 8,989 (2,991) 5,998
Time deposits 15,483 27,544 43,027
Borrowed funds 509 (9,278) (8,769)
Subordinated debt (7) 7 —
Junior subordinated debentures 465 10 475
Total interest-bearing liabilities 44,047 15,044 59,091
Net change in net interest income $ (4,751) (6,097) (10,848)
Provision for Credit Losses
2Q23 3Q23 4Q23 1Q24 2Q24
Provision for credit losses - loans (in thousands) $ 6,010 3,983 3,801 4,234 2,169
Provision/(benefit) for credit losses - unfunded commitments (in thousands) 2,920 (2,981) 4,145 (799) (2,539)
Annualized net charge-offs to average loans 0.10 % 0.13 % 0.12 % 0.16 % 0.07 %
The provision for credit losses decreased by $9 million, or 104%, from the quarter ended June 30, 2023. This decrease included a $4 million decrease in the provision for credit losses - loans, as well as a $5 million decrease in the provision for credit losses - unfunded commitments.
Compared to the six months ended June 30, 2023, the provision for credit losses decreased $11 million , or 78%. This decrease included a $4 million decrease in the provision for credit losses - loans, as well as a $6 million decrease in the provision for credit losses - unfunded commitments.
The decreases in the provision for credit losses - loans noted above were driven by changes in the economic forecasts reflected in our allowance for credit loss models, and the decreases in the provision for credit losses - unfunded commitments were related to the timing of origination and funding of commercial construction loans and lines of credit.
Classified assets continue to remain low at $257 million, at June 30, 2024 from $214 million at June 30, 2023, or 2% of total loans as of both periods.
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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 June 30, 2024.
Noninterest Income
Dollars in thousands
2Q24
Noninterest income:
Loss on sale of investments ($39,413)
Gain on sale of SBA loans 1,457
Service charges and fees 15,527
Trust and other financial services income 7,566
Income from bank-owned life insurance 1,371
Other operating income (a) 4,643
Total noninterest (loss)/income (8,849)
(a) Other noninterest income includes the 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 from the quarter ended June 30, 2024 showed a loss of $9 million, which was inclusive of a $39 million loss on sale of investment securities; excluding the loss on sale of securities net income grew by $1 million, or 3%, from the quarter ended June 30, 2023 and $5 million, or 9%, from the six months ended June 30, 2023. The increase from the six months ended June 30, 2023 was driven by service charges and fees and the gain on sale of SBA loans. Service charges and fees increased $3 million, or 11%, to $31 million for the six months ended June 30, 2024 from $28 million for the six months ended June 30, 2023 driven by commercial loan fees and deposit related fees based on customer activity in the current year. Additionally, the gain on the sale of SBA loans increased $1 million, or 110%, to $2 million for the six months ended June 30, 2024 from $1 million for the six months ended June 30, 2023 due to increased activity in the current year.
Noninterest Expense
(a) Other noninterest expense includes 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 $7 million, or 8%, from the quarter ended June 30, 2023. This increase was primarily attributable to an increase in c ompensation and employee benefits expense of $6 million, or 12%, to $54 million for the quarter ended June 30, 2024,
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from $48 million for the quarter ended June 30, 2023 driven primarily by the build out of the commercial business and related credit, risk management, and internal audit support functions over the past year.
Noninterest expense increased $9 million, or 5%, to $182 million for the six months ended June 30, 2024 from $173 million for the six months ended June 30, 2023. This increase was primarily attributable to an increase in c ompensation and employee benefits expense of $11 million, or 11%, to $105 million for the six months ended June 30, 2024, from $94 million for the six months ended June 30, 2023 for the same reasons noted above related to the build-out of staffing over the past year. Partially offsetting this increase was a decrease in non-personnel expense related to a decline in merger, asset disposition and restructuring expense and marketing expenses. Merger, asset disposition and restructuring expense decreased $2 million, or 35%, to $3 million for the six months ended June 30, 2024, from $4 million for the six months ended June 30, 2023 due to the severance and fixed asset charges related to the branch optimization and personnel reductions during the prior year. Marketing expenses decreased by $1 million, or 21%, to $5 million for the six months ended June 30, 2024, from $6 million for the six months ended June 30, 2023 due primarily to the timing of deposit marketing campaigns.
Income Taxes
The provision for income taxes decreased by $9 million from the quarter ended June 30, 2023 and $11 million from the six months ended June 30, 2023 primarily due to lower income before income taxes.
The provision for income taxes is primarily driven by changes in our current period income before taxes. 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.