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 growth internally 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 September 30, 2024 were $14.4 billion, a decrease of $65 million from December 31, 2023. This decrease in assets was primarily driven by decreases in personal banking loans receivable, partially offset by increases in cash and cash equivalents, marketable securities and commercial banking loans receivable. A discussion of significant changes follows.
Cash and cash equivalents increased by $105 million, or 86%, to $227 million at September 30, 2024, from $122 million at December 31, 2023 due to growth in our deposits coupled with a focus on profitability and credit discipline while investing these cash flows into commercial loans.
Total marketable securities increased to $1.9 billion at September 30, 2024, an increase of $20 million, or 1%, from December 31, 2023. Available-for-sale securities increased by $69 million, driven by the securities portfolio restructure in the prior quarter, while held-to-maturity securities decreased $48 million, driven by maturities and regular monthly cash flows.
Gross loans receivable decreased by $110 million, or 1%, to $11.3 billion at September 30, 2024. Our personal banking loan portfolio decreased by $359 million, or 5%, to $6.4 billion at September 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 $248 million, or 5%, to $4.9 billion at September 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 $228 million, or 14% compared to December 31, 2023.
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The following table provides the various loan sectors in our commercial real estate portfolio at September 30, 2024:
Property type Percent of portfolio
5 or more unit dwelling 16.6 %
Retail Building 11.5
Nursing Home 11.2
Commercial office building - non-owner occupied 8.9
Manufacturing & industrial building 5.4
Warehouse/storage building 5.1
Residential acquisition & development - 1-4 family, townhouses and apartments 4.3
Commercial office building - owner occupied 4.0
Multi-use building - commercial, retail and residential 3.9
Multi-use building - office and warehouse 3.1
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 14.2
Total 100.0 %
The following table describes the collateral of our commercial real estate portfolio by state at September 30, 2024:
State Percent of portfolio
New York 33.9 %
Pennsylvania 29.3
Ohio 19.8
Indiana 8.9
All other 8.1
Total 100.0 %
Total deposits increased by $91 million, or 1%, to $12.1 billion at September 30, 2024 from $12.0 billion at December 31, 2023. This increase was driven by a $107 million, or 4%, increase in time deposits as we continued competitively positioning our deposit products, a $42 million, or 2%, increase in interest demand deposit accounts and a $41 million, or 2%, increase in savings deposits. Partially offsetting these increases was a decrease in non-interest bearing deposit accounts by $87 million, or 3%, due to seasonality in customer deposit account balances .
As of September 30, 2024, we had $212 million of brokered deposits, which made up 8% of our time deposits and 2% 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 $697 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 3.91%.
At September 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 September 30, 2024
Balance Percent of
total deposits Number of relationships
Uninsured deposits per the Call Report (1) $ 3,097,247 25.7 % 5,234
Less intercompany deposit accounts 1,201,625 10.0 % 12
Less collateralized deposit accounts 480,039 4.0 % 262
Uninsured deposits excluding intercompany and collateralized accounts $ 1,415,583 11.7 % 4,960
(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 $19.6 million, or 0.16% of total deposits, as of September 30, 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 September 30, 2024. The average uninsured deposit account balance, excluding intercompany and collateralized accounts, was $285,000 as of September 30, 2024.
Total shareholders’ equity remained stable at $1.6 billion, or $12.49 per share, at September 30, 2024 compared to $12.20 per share at December 31, 2023, increasing by $40 million in the current year. This increase was the result of year-to-date earnings of $68 million as well as an improvement in accumulated other comprehensive loss of $43 million, or 29%, 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 $76 million of cash dividend payments for the nine months ended September 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 September 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. $ 1,705,283 16.024 % $ 1,117,392 10.500 % $ 1,064,183 10.000 %
Northwest Bank 1,460,909 13.740 % 1,116,384 10.500 % 1,063,223 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,457,698 13.698 % 904,555 8.500 % 851,346 8.000 %
Northwest Bank 1,327,894 12.489 % 903,739 8.500 % 850,578 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,331,918 12.516 % 744,928 7.000 % 691,719 6.500 %
Northwest Bank 1,327,894 12.489 % 744,256 7.000 % 691,095 6.500 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,457,698 10.283 % 567,025 4.000 % 708,782 5.000 %
Northwest Bank 1,327,894 9.374 % 566,633 4.000 % 708,292 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).
Regulatory Considerations
In September 2024, the FDIC adopted a final statement of policy regarding its review of Bank Merger Act (“BMA”) applications. The final policy statement addresses, among other things, an expanded scope of transactions subject to FDIC approval, a more rigorous process for evaluating BMA applications, and heightened expectations with respect to the BMA's statutory factors. As a result, BMA applications to the FDIC will now require additional information.
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 September 30, 2024 was 11.25%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At September 30, 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 no balance as of September 30, 2024, as well as $500 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 September 30, 2024 and 2023. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) for September 30, 2024 and 2023 was 76.9% and 64.5% on dividends of $0.20 per share. On October 17, 2024, the Board of Directors declared a cash dividend of $0.20 per share payable on November 18, 2024 to shareholders of record as of November 8, 2024. This represents the 120 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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September 30, 2024 December 31, 2023
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 5,370 7,995
Home equity loans 2,558 3,126
Vehicle loans 3,077 3,051
Other consumer loans 906 927
Commercial real estate loans 6,167 6,535
Commercial real estate - owner occupied — 177
Commercial loans 14,484 2,780
Total loans 90 days or more past due $ 32,562 24,591
Total real estate owned (REO) $ 76 104
Total loans 90 days or more past due and REO 32,638 24,695
Total loans 90 days or more past due to net loans receivable 0.29 % 0.22 %
Total loans 90 days or more past due and REO to total assets 0.23 % 0.17 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due 31,516 21,894
Nonaccrual loans - loans less than 90 days past due 45,312 72,490
Loans 90 days or more past due still accruing 1,045 2,698
Total nonperforming loans 77,873 97,082
Total nonperforming assets $ 77,949 97,186
Total nonaccrual loans to total loans 0.68 % 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 September 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 increased by $0.6 million to $126 million, or 1.11% of total loans at September 30, 2024, up slightly from 1.10% at December 31, 2023.
Total classified loans increased by $101 million to $320 million at September 30, 2024 compared to $218 million at December 31, 2023. The primary driver of the increase over the current year is reflective of the Company’s exposure to the Long Term Healthcare segment and the challenges a few operators have experienced post Covid.
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 $77 million at September 30, 2024 decreased by $18 million, or 19%, from $94 million at December 31, 2023, or 0.68% of total loans receivable as of September 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 0.14% for the nine months ended September 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 September 30, 2024 and 2023
The following chart provides a reconciliation of net income from the quarter ended September 30, 2023 to the the quarter ended September 30, 2024 (dollars in thousands):
Net income for the quarter ended September 30, 2024 was $34 million, or $0.26 per diluted share, a decrease of $6 million, or 14%, from net income of $39 million, or $0.31 per diluted share, for the quarter ended September 30, 2023. This decrease in net income resulted primarily from a $4 million increase in the provision for credit losses, a $3 million, or 10%, decrease in noninterest income and an increase in noninterest expense of $3 million, or 4%, partially offset by an increase in net interest income of $3 million, or 3%, and a $2 million, or 14%, decrease in income tax expense. Net income for the quarter ended September 30, 2024 represents annualized returns on average equity and average assets of 8.50% and 0.93%, respectively, compared to 10.27% and 1.08% for the same quarter last year.
Net income for the nine months ended September 30, 2024 was $68 million, or $0.53 per diluted share, a decrease of $51 million, or 37%, from net income of $138 million, or $0.83 per diluted share, for the nine months ended September 30, 2023. This decrease in net income resulted primarily from a $39 million loss on sale of securities, a decrease in net interest income of $8 million, or 2%, and an increase in noninterest expense of $12 million, or 5%, partially offset by a decrease in the provision for credit losses of $7 million, or 47%, and a $13 million, or 14%, decrease in income tax expense. Net income for the nine months ended September 30, 2024 represents annualized returns on average equity and average assets of 5.80% and 0.63%, respectively, compared to 9.37% and 0.99% for the nine months ended September 30, 2023. 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 "GAAP to Non-GAAP Reconciliations" for information regarding tax-equivalent adjustments and GAAP results.
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Net Interest Income
Net interest income for the third quarter of 2024 was $111 million which increased $3 million, or 3%, from the third quarter of 2023. Net interest income (FTE) was $112 million for the quarter ended September 30, 2024 and net interest margin (FTE) was 3.33%. Compared to the same quarter of the prior year, net interest income (FTE) increased $3 million and net interest margin (FTE) increased by ten basis points . The increase in net interest income (FTE) and net interest margin (FTE) was driven by an increase in interest income resulting from higher earning asset yields. Partly offsetting this increase was an increase in interest-bearing deposit costs and a shift in funding mix to higher cost deposits due to the higher interest rate environment.
For the nine months ended September 30, 2024, net interest income was $321 million which decreased $8 million, or 2%, from the nine months ended September 30, 2023. For the nine months ended September 30, 2024, net interest income (FTE) was $324 million, a decrease of $8 million, or 2% from the same period last year. Net interest margin (FTE) decreased by 11 basis points. Similar to the quarterly fluctuations noted above, the decrease in net interest income (FTE) included increases in both interest income and interest expense driven by higher interest-bearing deposit costs and balances, partially offset by higher interest-earning asset yields and balances.
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Average loans receivable increased $33 million, or 0.3%, from the quarter ended September 30, 2023 and $263 million, or 2.4% for the nine months ended September 30, 2023. This increase was driven by commercial loans, which grew by $372 million from the quarter ended September 30, 2023 and $456 million from the nine months ended September 30, 2023, as we have continued to build-out our commercial lending verticals, and commercial real estate loans, which grew by $84 million and $148 million from the same periods. These increases were offset partially by a $423 million decrease in personal banking loans from the quarter ended September 30, 2023 and $341 million from the nine months ended September 30, 2023. Interest income on loans receivable increased by $16 million, or 11%, from the same quarter in the prior year, and by $63 million, or 16%, from the same nine-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 6% from the third quarter of 2023 and 9% from the nine months ended September 30, 2023 driven by the sale of investment securities during the third quarter of 2024 coupled with regular principal payments and maturities. Interest income on investment securities increased by $3 million, or 31%, from the quarter ended September 30, 2023, and increased by $3 million, 9.7%, for the nine months ended September 30, 2023. The increase is due to the increase in the average yield on investments (FTE) to 2.48% for the quarter ended September 30, 2024 and 2.14% for the nine months ended September 30, 2024 which was partially offset by a decline in the average balance of investments for both periods.
Average deposits grew 3% from the quarter ended September 30, 2023 and 4% from the nine months ended September 30, 2023 driven by an increase in our average time deposits due to customer preferences for this fixed maturity product type which grew by $666 million from the quarter ended September 30, 2023 and by $1.1 billion from the nine months ended September 30, 2023. This increase was partially offset by a $146 million decrease in money market balances from the quarter ended September 30, 2023 and $284 million from the nine months ended September 30, 2023 as customers shifted balances into higher yielding time deposit accounts. Interest expense on deposits increased by $23 million, or 71%, from the quarter ended September 30, 2023, and by $90 million, or 139% from the nine months ended September 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 September 30, 2023, average borrowings saw a 66% reduction, and compared to the nine months ended September 30, 2023 average borrowings decreased 54% 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 during the prior quarter, 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 September 30, 2023, and by $14 million from the nine months ended September 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 September 30,
2024 2023
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,286,316 31,537 3.84 % $ 3,476,446 32,596 3.75 %
Home equity loans 1,166,866 17,296 5.90 % 1,264,134 17,435 5.47 %
Consumer loans 1,955,988 26,034 5.29 % 2,092,023 23,521 4.46 %
Commercial real estate loans 2,995,032 47,473 6.31 % 2,911,145 41,611 5.59 %
Commercial loans 1,819,400 34,837 7.62 % 1,447,211 26,239 7.09 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $764 and $735, respectively) 11,223,602 157,177 5.57 % 11,190,959 141,402 5.01 %
Mortgage-backed securities (c) 1,735,728 10,908 2.51 % 1,781,010 8,072 1.81 %
Investment securities (c) (d) (includes FTE adjustments of $150 and $154, respectively) 263,127 1,504 2.29 % 336,125 1,431 1.70 %
FHLB stock, at cost 20,849 394 7.51 % 37,722 668 7.03 %
Other interest-earning deposits 173,770 2,312 5.29 % 67,143 915 5.33 %
Total interest-earning assets (includes FTE adjustments of $914 and $889, respectively) 13,417,076 172,295 5.11 % 13,412,959 152,488 4.51 %
Noninterest-earning assets (e) 934,593 966,364
Total assets $ 14,351,669 $ 14,379,323
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits (g) $ 2,151,933 6,680 1.23 % $ 2,116,759 2,695 0.51 %
Interest-bearing demand deposits (g) 2,567,682 7,452 1.15 % 2,569,229 4,086 0.63 %
Money market deposit accounts (g) 1,966,684 9,170 1.85 % 2,112,228 6,772 1.27 %
Time deposits (g) 2,830,737 30,896 4.34 % 2,164,559 18,136 3.32 %
Borrowed funds (f) 220,677 2,266 4.09 % 643,518 7,937 4.89 %
Subordinated debentures 114,396 1,148 4.01 % 114,045 1,148 4.03 %
Junior subordinated debentures 129,727 2,467 7.56 % 129,466 2,456 7.42 %
Total interest-bearing liabilities 9,981,836 60,079 2.39 % 9,849,804 43,230 1.74 %
Noninterest-bearing demand deposits (g) 2,579,775 2,757,091
Noninterest-bearing liabilities 217,161 257,141
Total liabilities 12,778,772 12,864,036
Shareholders’ equity 1,572,897 1,515,287
Total liabilities and shareholders’ equity $ 14,351,669 $ 14,379,323
Net interest income (FTE)/Interest rate spread (FTE) (d) 112,216 2.72 % 109,258 2.77 %
Net interest-earning assets/Net interest margin (FTE) $ 3,435,240 3.33 % $ 3,563,155 3.23 %
Tax equivalent adjustment (d) 914 890
Net interest income, GAAP basis 111,302 108,368
Ratio of interest-earning assets to interest- bearing liabilities 1.34X 1.36X
(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. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
(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 1.78% and 1.07%, respectively, average cost of interest-bearing deposits were 2.27% and 1.40%, respectively .
(h) Annualized.
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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 (FTE) 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 September 30, 2024 vs. 2023
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 15,318 457 15,775
Mortgage-backed securities 3,121 (285) 2,836
Investment securities 490 (417) 73
FHLB stock, at cost 45 (319) (274)
Other interest-earning deposits (21) 1,418 1,397
Total interest-earning assets 18,953 854 19,807
Interest-bearing liabilities:
Savings deposits 3,876 109 3,985
Interest-bearing demand deposits 3,371 (5) 3,366
Money market deposit accounts 3,077 (679) 2,398
Time deposits 5,489 7,271 12,760
Borrowed funds (1,329) (4,342) (5,671)
Subordinated debt (4) 4 —
Junior subordinated debentures 5 6 11
Total interest-bearing liabilities 14,485 2,364 16,849
Net change in net interest income (FTE) $ 4,468 (1,510) 2,958
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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.
Nine months ended September 30,
2024 2023
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,340,332 96,392 3.85 % $ 3,485,130 97,090 3.71 %
Home equity loans 1,185,145 51,893 5.85 % 1,273,878 50,467 5.30 %
Consumer loans 2,012,461 77,401 5.14 % 2,119,717 66,977 4.22 %
Commercial real estate loans 3,005,966 136,556 6.07 % 2,857,555 117,074 5.40 %
Commercial loans 1,768,325 99,923 7.55 % 1,312,750 67,465 6.78 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $2,227 and $1,937, respectively) 11,312,229 462,165 5.46 % 11,049,030 399,073 4.83 %
Mortgage-backed securities (c) 1,729,064 28,278 2.18 % 1,849,567 24,935 1.80 %
Investment securities (c) (d) (includes FTE adjustments of $427 and $579, respectively) 294,598 4,251 1.92 % 364,956 4,909 1.79 %
FHLB stock, at cost 26,195 1,499 7.64 % 40,945 2,202 7.19 %
Other interest-earning deposits 124,037 4,935 5.31 % 64,560 1,931 4.00 %
Total interest-earning assets (includes FTE adjustments of $2,654 and $2,516, respectively) 13,486,123 501,128 4.96 % 13,369,058 433,050 4.33 %
Noninterest-earning assets (e) 919,969 880,799
Total assets $ 14,406,092 $ 14,249,857
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits (g) $ 2,139,461 17,673 1.10 % $ 2,163,564 4,777 0.30 %
Interest-bearing demand deposits (g) 2,554,172 19,501 1.02 % 2,550,433 6,684 0.35 %
Money market deposit accounts (g) 1,962,019 25,684 1.75 % 2,246,422 17,289 1.03 %
Time deposits (g) 2,787,306 91,780 4.40 % 1,733,428 35,993 2.78 %
Borrowed funds (f) 337,427 11,636 4.61 % 740,011 26,077 4.71 %
Subordinated debentures 114,310 3,444 4.02 % 113,958 3,444 4.03 %
Junior subordinated debentures 129,662 7,375 7.60 % 129,401 6,889 7.02 %
Total interest-bearing liabilities 10,024,357 177,093 2.36 % 9,677,217 101,153 1.40 %
Noninterest-bearing demand deposits (g) 2,581,018 2,822,178
Noninterest-bearing liabilities 245,917 239,034
Total liabilities 12,851,292 12,738,429
Shareholders’ equity 1,554,800 1,511,428
Total liabilities and shareholders’ equity $ 14,406,092 $ 14,249,857
Net interest income (FTE)/Interest rate spread (FTE) (d) 324,035 2.60 % 331,897 2.93 %
Net interest-earning assets/Net interest margin (FTE) $ 3,461,766 3.21 % $ 3,691,841 3.32 %
Tax equivalent adjustment (d) 2,654 2,516
Net interest income, GAAP basis 321,381 329,381
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 fully taxable equivalent (“FTE”) basis. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.
(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 1.72% and 0.75%, respectively and average cost of Interest-bearing deposits were 2.19% and 1%, respectively.
(h) Annualized.
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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 (FTE) and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.
For the nine months ended September 30, 2024 vs. 2023
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 52,338 10,754 63,092
Mortgage-backed securities 5,314 (1,971) 3,343
Investment securities 356 (1,014) (658)
FHLB stock, at cost 142 (845) (703)
Other interest-earning deposits 637 2,367 3,004
Total interest-earning assets 58,787 9,291 68,078
Interest-bearing liabilities:
Savings deposits 13,095 (199) 12,896
Interest-bearing demand deposits 12,788 29 12,817
Money market deposit accounts 12,118 (3,723) 8,395
Time deposits 21,086 34,701 55,787
Borrowed funds (559) (13,882) (14,441)
Subordinated debt (11) 11 —
Junior subordinated debentures 472 14 486
Total interest-bearing liabilities 58,989 16,951 75,940
Net change in net interest income (FTE) $ (202) (7,660) (7,862)
Provision for Credit Losses
3Q23 4Q23 1Q24 2Q24 3Q24
Provision for credit losses - loans (in thousands) $ 3,983 3,801 4,234 2,169 5,727
Provision/(benefit) for credit losses - unfunded commitments (in thousands) (2,981) 4,145 (799) (2,539) (852)
Annualized net charge-offs to average loans 0.13 % 0.12 % 0.16 % 0.07 % 0.18 %
The provision for credit losses increased by $4 million from the quarter ended September 30, 2023. This increase included a $2 million increase in the provision for credit losses - loans, as well as a $2 million increase in the provision for credit losses - unfunded commitments.
Compared to the nine months ended September 30, 2023, the provision for credit losses decreased $7 million , or 47%. This decrease included a $3 million decrease in the provision for credit losses - loans, as well as a $4 million decrease in the provision for credit losses - unfunded commitments.
The changes in the provision noted above is driven by growth within our commercial lending portfolio and changes in the economic forecasts coupled with a decline in our reserves for unfunded commitments in the current period. This decline is based on the timing of origination and funding of commercial construction loans and lines of credit.
Additionally, the Company saw an increase in classified loans to $320 million, or 2.83% of total loans, at September 30, 2024 from $209 million, or 1.84% of total loans, at September 30, 2023 and $257 million, or 2.26% of total loans, at June 30, 2024. The primary driver of the increase over the past year and quarter is reflective of the Company’s exposure to the Long Term Healthcare segment and the challenges a few operators have experienced post Covid.
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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 September 30, 2024.
Noninterest Income
(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 for the quarter ended September 30, 2024 was $28 million, a decrease of $3 million, or 10%, from the quarter ended September 30, 2023, which was driven by a $3 million decline in income from bank-owned life insurance as a result of death benefits received in the prior period. Compared to the nine months ended September 30, 2023, excluding the loss on sale of securities of $39 million, noninterest income increased $2 million, or 2%, in the nine months ended September 30, 2024. The increase from the nine months ended September 30, 2023 was driven by service charges and fees and the gain on sale of SBA loans. Service charges and fees increased $4 million, or 9%, to $47 million for the nine months ended September 30, 2024 driven by commercial loan fees and deposit related fees based on customer activity in the nine months ended September 30, 2024 . Additionally, the gain on the sale of SBA loans increased $2 million, or 112%, to $3 million for the nine months ended September 30, 2024 due to increased loan sale activity in the nine months ended September 30, 2024 . Partially offsetting these increases was a decrease in income from bank owned life insurance of $3 million, or 40% , to $4 million due to death benefits received in the prior period.
Noninterest Expense
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(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 $3 million, or 4%, from the quarter ended September 30, 2023. This increase was primarily attributable to an increase in c ompensation and employee benefits expense of $5 million, or 10%, to $56 million for the quarter ended September 30, 2024, from $51 million for the quarter ended September 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 c oupled with an increase in contracted employees utilized during the quarter and an increase in employee benefits expense.
Noninterest expense increased $12 million, or 5%, to $273 million for the nine months ended September 30, 2024 from $261 million for the nine months ended September 30, 2023. This increase was primarily attributable to an increase in c ompensation and employee benefits expense of $16 million, or 11%, for the nine months ended September 30, 2023 for the same reasons noted above. 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. Marketing expenses decreased by $2 million, or 19%, for the nine months ended September 30, 2024, due primarily to the timing of deposit marketing campaigns. Merger, asset disposition and restructuring expense decreased $1 million, or 34%, due to the severance and fixed asset charges related to the branch optimization and personnel reductions during the prior year.
Income Taxes
The provision for income taxes decreased by $2 million from the quarter ended September 30, 2023 and $13 million from the nine months ended September 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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GAAP to Non-GAAP Reconciliations
The following non-GAAP financial measures used by the Company provide information useful to investors in understanding our operating performance and trends, and facilitate comparisons with the performance of our peers. The following table summarizes the non-GAAP financial measures derived from amounts reported in the Company’s Consolidated Statements of Income.
Quarter ended Nine months ended September 30,
September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 2024 2023
Net interest income fully tax equivalent (FTE)
Net interest income (GAAP) $ 111,302 106,841 103,238 106,302 108,368 321,381 329,381
Plus: Taxable-equivalent adjustment 914 883 857 758 890 2,654 2,516
Net interest income FTE 112,216 107,724 104,095 107,060 109,258 324,035 331,897
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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.