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:
• the possibility that any of the anticipated benefits of the proposed Merger (as defined below) will not be realized or will not be realized within the expected time period; the risk that integration of the operations of Penns Woods (as defined below) operations with those of the Company will be materially delayed or will be more costly or difficult than expected; the Company’s and Penns Woods’ inability to meet expectations regarding the timing, completion and accounting and tax treatments of the Merger; the failure to satisfy conditions to completion of the Merger, the failure of the proposed Merger to close for any other reason; the diversion of management’s attention from ongoing business operations and opportunities due to the Merger; the challenges of integrating and retaining key employees; the effect of the announcement of the Merger on the Company’s, Penns Woods’ or the combined company’s respective customer and employee relationships and operating results; the possibility that the Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; the dilution caused by the Company’s issuance of additional shares of its common stock in connection with the Merger; and other factors that may affect the results of operations and financial condition of the Company, Penns Woods and the combined company;
• 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, government regulations or supervision, examination and enforcement priorities affecting financial institutions, including as part of the regulatory reform agenda of the Trump administration, as well as 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 or those related to changes in monetary, fiscal, regulatory and tariff policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve Board;
• adverse changes in the securities and credit markets;
• instability or breakdown in the financial services sector, including failures or rumors of failures of other depository institutions, along with actions taken by governmental agencies to address such turmoil;
• 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, including commercial real estate, 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;
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• 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.
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 2024 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 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.
In November 2024, the FASB issued ASU 2024-03, “Income Statement-Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses”. The guidance requires disaggregated disclosure of specified expense categories. The guidance also requires disclosure of total selling expenses and how the Company defines selling expenses. The guidance is effective for fiscal years beginning after December 15, 2026, and interim periods within annual periods beginning after December 15, 2027. Prospective application is required, with retrospective application permitted. The Company is currently evaluating the effect the updated guidance will have on the Company’s financial statement disclosures.
Agreement to Acquire Penns Woods
On December 16, 2024, the Company and Penns Woods Bancorp, Inc., a Pennsylvania corporation (“Penns Woods”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides for a business combination whereby Penns Woods will merge with and into the Company (the “Merger”), with the Company as the surviving corporation in the merger. Immediately after the effective time of the Merger (the “Effective Time”), or at such later time as the Company determines, Penns Woods’ wholly-owned subsidiary banks, Luzerne Bank, a Pennsylvania-chartered state bank, and Jersey Shore State Bank, a Pennsylvania-chartered state bank, will merge with and into Northwest Bank, with Northwest Bank as the surviving bank in the subsidiary bank mergers. Under the terms and subject to the conditions of the Merger Agreement, at the Effective Time, each share of Penns Woods’ common stock, $5.55 par value, issued and outstanding immediately prior to the Effective Time (except for Treasury Shares (as provided for in the Merger Agreement)), will be converted, in accordance with the procedures set forth in the Merger Agreement, into a right to receive 2.385 shares of common stock, $0.01 par value, of the Company.
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On April 23, 2025, the Company announced that it has received all regulatory and shareholder approvals required to complete the Merger. The Merger is expected to close in the third quarter of 2025, subject to the satisfaction of customary closing conditions.
Comparison of Financial Condition
Total assets at March 31, 2025 were $14.5 billion, an increase of $46 million from December 31, 2024. This increase in assets was primarily driven by increases in cash and cash equivalents, marketable securities and loans receivable. A discussion of significant changes follows.
Cash and cash equivalents increased by $65 million, or 22%, to $353 million at March 31, 2025, from $288 million at December 31, 2024 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 remained flat at $1.9 billion at March 31, 2025, increasing by $30 million, or 2%, from December 31, 2024. Available-for-sale securities increased by $44 million, driven by a increase in net portfolio purchases during the quarter, while held-to-maturity securities decreased $15 million, driven by maturities and regular monthly cash flows.
Gross loans receivable remained stable $11.2 billion at March 31, 2025, increasing $36 million. Our personal banking loan portfolio increased by $22 million, to $6.3 billion at March 31, 2025 while our commercial banking loans increased by $14 million, to $4.9 billion at March 31, 2025. Cash flows from our loan portfolio were partially redirected to fund commercial banking growth. 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 $72 million, or 4% compared to December 31, 2024.
The following table provides the various loan sectors in our commercial real estate portfolio at March 31, 2025:
Property type Percent of portfolio
Retail Building 13.7 %
5 or more unit dwelling 13.2
Commercial office building - non-owner occupied 10.3
Nursing Home 10.0
Manufacturing & industrial building 6.1
Warehouse/storage building 4.4
Commercial office building - owner occupied 4.2
Residential acquisition & development - 1-4 family, townhouses and apartments 3.9
Multi-use building - commercial, retail and residential 3.9
Multi-use building - office and warehouse 3.6
Other medical facility 2.9
Student housing 2.4
Single family dwelling 2.3
Hotel/motel 2.3
Agricultural real estate 2.2
Commercial acquisition and development 2.0
All other 12.6
Total 100.0 %
The following table describes the collateral of our commercial real estate portfolio by state at March 31, 2025:
State Percent of portfolio
New York 33.2 %
Pennsylvania 29.0
Ohio 18.8
Indiana 7.9
All other 11.1
Total 100.0 %
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Total deposits increased by $30 million, to $12.2 billion at March 31, 2025 from $12.1 billion at December 31, 2024. This increase was driven by a $117 million, or 6%, increase in money market accounts a $51 million, or 2%, increase in savings deposits. Partially offsetting these increases was a decrease in time deposits of $81 million, or 3%, drively primarily in a decrease in brokered CDs, and a $76 million, or 3%, decrease in interest demand deposit accounts. T he increase in both money market and saving account balances was partly due to customers shifting funds to these competitively priced products as their time deposits matured.
As of March 31, 2025, we had $141 million of brokered de posits, which made up 5% of our time deposits and 1% of our total deposit balance at quarter end. The balance carried an average all-in cost of 4.23% 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 millio n 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 Bank receives an equal amount of deposits from other member banks. The balance carried an average cost of 3.43%.
At March 31, 2025 and December 31, 2024, we had total deposits in excess of $250,000 (the limit for FDIC insurance) of $1.9 billion. At those dates, we had no deposits that were uninsured for any other reason. The following table presents details regarding the Company's uninsured deposits portfolio:
As of March 31, 2025
Balance Percent of
total deposits Number of relationships
Uninsured deposits per the Call Report (1) $ 3,222,098 26.5 % 5,345
Less intercompany deposit accounts 1,282,989 10.5 % 12
Less collateralized deposit accounts 395,737 3.3 % 237
Uninsured deposits excluding intercompany and collateralized accounts $ 1,543,372 12.7 % 5,096
(1) Uninsured deposits presented may be different from actual amounts due to titling of accounts.
Our largest uninsured depositor, excluding intercompany and collateralized deposit accounts, had an aggregate uninsured deposit balance of $29 million, or 0.24% of total deposits, as of March 31, 2025. Our top ten largest uninsured depositors, excluding intercompany and collateralized deposit accounts, had an aggregate uninsured deposit balance of $186 million, or 1.53%, of total deposits, as of March 31, 2025. The average uninsured deposit account balance, excluding intercompany and collateralized accounts, was $303,000 as of March 31, 2025.
Total shareholders’ equity remained stable at $1.6 billion, or $12.75 per share, at March 31, 2025 compared to $12.52 per share at December 31, 2024, increasing by $32 million in the current year. This increase was the result of year-to-date earnings of $43 million as well as an improvement in accumulated other comprehensive loss of $12 million, or 11%, primarily due to a decrease in unrealized losses in the available-for-sale investment portfolio, partially offset by $26 million of cash dividend payments for the three months ended March 31, 2025.
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).
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At March 31, 2025
Actual Minimum capital requirements (1) Well capitalized requirements (2)
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,743,294 16.46 % $ 1,111,756 10.50 % $ 1,058,816 10.00 %
Northwest Bank 1,504,953 14.23 % 1,110,377 10.50 % 1,057,502 10.00 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,496,161 14.13 % 899,993 8.50 % 635,289 6.00 %
Northwest Bank 1,372,608 12.98 % 898,877 8.50 % 846,002 8.00 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,370,251 12.94 % 741,171 7.00 % N/A N/A
Northwest Bank 1,372,608 12.98 % 740,251 7.00 % 687,376 6.50 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,496,161 10.51 % 569,466 4.00 % N/A N/A
Northwest Bank 1,372,608 9.65 % 568,942 4.00 % 711,177 5.00 %
(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).
(2) Reflects the well-capitalized standard applicable to Northwest Bank and the well-capitalized standard applicable to the Company under the Federal Reserve Board’s Regulation Y.
At December 31, 2024 (1)
Actual Minimum capital requirements (2) Well capitalized requirements (3)
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,708,786 16.08 % $ 1,115,932 10.50 % $ 1,062,793 10.00 %
Northwest Bank 1,466,832 13.81 % 1,114,929 10.50 % 1,061,837 10.00 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,468,646 13.82 % 903,374 8.50 % 637,676 6.00 %
Northwest Bank 1,341,230 12.63 % 902,561 8.50 % 849,469 8.00 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,342,801 12.63 % 743,955 7.00 % N/A N/A
Northwest Bank 1,341,230 12.63 % 743,286 7.00 % 690,194 6.50 %
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc. 1,468,646 10.39 % 565,426 4.00 % N/A N/A
Northwest Bank 1,341,230 9.50 % 564,937 4.00 % 706,171 5.00 %
(1) We elected to temporarily delay the estimated impact of current expected credit losses ("CECL") on regulatory capital in accordance with a rule of the Federal Reserve Board and other U.S. banking agencies for a two-year deferral period, followed by a three-year transition period which began January 1, 2022. As of December 31, 2024, 75% of the impact of the CECL deferral was phased, while the impact of the CECL deferral was fully phased in as of March 31, 2025.
(2) Amounts and ratios include the capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).
(3) Reflects the well-capitalized standard applicable to Northwest Bank and the well-capitalized standard applicable to the Company under the Federal Reserve Board’s Regulation Y.
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Regulatory Considerations
It is uncertain how the rapid changes initiated by the Trump administration will impact our business going forward. These include the impact of tariffs, immigration reform, and changes at the agencies that regulate us, including the modification, rescission, withdrawal or changes to the approach and enforcement of rules and guidance relating to us.
Liquidity
Northwest Bank is required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking and Securities during their regular examinations. Northwest frequently monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings (“liquidity ratio”). Northwest Bank’s liquidity ratio at March 31, 2025 was 12.42%. Northwest Bank adjusts liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At March 31, 2025, Northwest had $3.2 billion of additional borrowing capacity available with the FHLB, including $250 million on an overnight line of credit, which had no balance as of March 31, 2025, as well as $546 million of borrowing capacity available with the Federal Reserve Bank and $105 million with two correspondent banks.
Dividends
We paid $26 million in cash dividends during the quarter ended March 31, 2025 compared to $25 million for the quarter ended March 31, 2024. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) for March 31, 2025 and 2024 was 58.8% and 87.0% on dividends of $0.20 per share. On April 17, 2025, the Board of Directors declared a cash dividend of $0.20 per share payable on May 20, 2025 to shareholders of record as of May 8, 2025. This represents the 122 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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March 31, 2025 December 31, 2024
(in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 4,005 4,931
Home equity loans 1,893 2,250
Vehicle loans 3,212 3,191
Other consumer loans 814 776
Commercial real estate loans 23,374 7,702
Commercial real estate - owner occupied 59 —
Commercial loans 5,994 7,335
Total loans 90 days or more past due $ 39,351 26,185
Total real estate owned (REO) $ 80 35
Total loans 90 days or more past due and REO 39,431 26,220
Total loans 90 days or more past due to net loans receivable 0.35 % 0.23 %
Total loans 90 days or more past due and REO to total assets 0.27 % 0.18 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due 38,747 25,529
Nonaccrual loans - loans less than 90 days past due 20,003 35,872
Loans 90 days or more past due still accruing 603 656
Total nonperforming loans 59,353 62,057
Other nonperforming assets (1) 16,102 $ 16,102
Total nonperforming assets $ 75,535 $ 78,194
Total nonaccrual loans to total loans 0.52 % 0.55 %
(1) Other nonperforming assets includes nonaccrual loans held for sale.
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.
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If a substandard or doubtful loan is not individually assessed, it is grouped with other loans that possess common characteristics for credit losses and analysis. For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models and qualitative assessments. We use a twenty four month forecasting period and revert to historical average loss rates thereafter. Reversion to average loss rates takes place over twelve months. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.
The credit losses for individually assessed loans along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance for Credit Losses Committee (“ACL Committee”) monthly. The ACL Committee reviews and approves the processes and ACL documentation presented. Based on this review and discussion, the appropriate amount of ACL is estimated and any adjustments to reconcile the actual ACL with this estimate are determined. The ACL Committee also considers if any changes to the methodology are needed. In addition to the ACL Committee’s review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis and annually by internal audit.
In addition to the reviews by management’s ACL Committee and the Board of Directors’ Risk Management Committee, regulators from either the FDIC and/or the Pennsylvania Department of Banking and Securities perform an extensive review on at least an annual basis for the adequacy of the ACL and its conformity with regulatory guidelines and pronouncements. Any recommendations or enhancements from these independent parties are considered by management and the ACL Committee and implemented accordingly.
We acknowledge that this is a dynamic process and consists of factors, many of which are external and out of our control that can change frequently, rapidly and substantially. The adequacy of the ACL is based upon estimates using all the information previously discussed as well as current and known circumstances and events. There is no assurance that actual portfolio losses will not be substantially different than those that were estimated.
We utilize a structured methodology each period when analyzing the adequacy of the allowance for credit losses and the related provision for credit losses, which the ACL Committee assesses regularly for appropriateness. As part of the analysis as of March 31, 2025, we considered the most recent economic conditions and forecasts available which incorporated the impact of material recent economic events. In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations. The ACL increased by $6 million to $123 million, or 1.09% of total loans at March 31, 2025, up slightly from 1.04% at December 31, 2024.
Total classified loans increased by $7 million to $279 million at March 31, 2025 compared to $272 million at December 31, 2024.
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 $59 million at March 31, 2025 decreased by $2 million, or 4%, from $61 million at December 31, 2024, or 0.52% of total loans receivable as of March 31, 2025 and 0.55% of total loans receivable as of December 31, 2024. As a percentage of average loans, annualized net charge-offs remained low at 0.08% for the three months ended March 31, 2025 compared to 0.32% for the year ended December 31, 2024 which included a $15 million write-down on certain loans to fair value before they were transferred to for sale.
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Comparison of Operating Results for the Quarters Ended March 31, 2025 and 2024
The following chart provides a reconciliation of net income from the quarter ended March 31, 2024 to the the quarter ended March 31, 2025 (dollars in thousands):
Net income for the quarter ended March 31, 2025 was $43 million, or $0.34 per diluted share, an increase of $14 million, or 49%, from net income of $29 million, or $0.23 per diluted share, for the quarter ended March 31, 2024. This increase in net income resulted primarily from a increase in net interest income of $25 million, or 24%, partially offset by a $4 million increase in the provision for credit losses, an increase in noninterest expense of $2 million, or 2% and a $4 million, or 52%, increase in income tax expense. Net income for the quarter ended March 31, 2025 represents annualized returns on average equity and average assets of 10.90% and 1.22%, respectively, compared to 7.57% and 0.81% for the same quarter last year.
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.
Net Interest Income
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Net interest income for the first quarter of 2025 was $128 million which increased $25 million, or 24%, from the first quarter of 2024. Net interest income (FTE) was $129 million for the quarter ended March 31, 2025 and net interest margin (FTE) was 3.87%. Compared to the same quarter of the prior year, net interest income (FTE) increased $25 million and net interest margin (FTE) increased by seventy-seven 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, inclusive of an non-accrual interest recovery, coupled with a decrease in interest expense due to decline in the average balance of borrowings and higher cost brokered CD. Partly offsetting this increase was a decrease in the average balance of earning assets.
Average loans receivable decreased $169 million, or 1.5%, from the quarter ended March 31, 2024. This decrease was driven by personal banking loans and commercial real estate loans, which decreased by $388 million and $120 million, respectively. These decreases were partially offset by an increase in commercial loans of $339 million from the quarter ended March 31, 2024 as we have continued to build-out our commercial lending verticals. Interest income on loans receivable increased by $15 million, or 10%, from the same quarter in the prior year, driven by a loan mix shift towards higher yielding commercial loans and also includes an interest recovery of $13.1 million on a non-accrual commercial loan payoff during the quarter ended March 31, 2025.
Average investments declined 1% from the first quarter of 2024 driven by the sale of investment securities during the second quarter of 2024 coupled with regular principal payments and maturities. Interest income on investment securities increased by $4 million, or 43%, from the quarter ended March 31, 2024. The increase is due to the increase in the average yield on investments (FTE) to 2.62% for the quarter ended March 31, 2025 which was partially offset by a decline in the average balance of investments.
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Average deposits grew 2% from the quarter ended March 31, 2024 driven by an increase in our average money market and saving deposit accounts which grew by $122 million and $72 million, respectively, from the quarter ended March 31, 2024 partly due to customers shifting funds to these competitively priced products as their time deposits matured . These increases were partially offset by a decrease in time deposits of $69 million. Interest expense on deposits remained flat at $47 million for both quarters ended March 31, 2024 and 2025, primarily attributable to decrease in average yield and an increase in average balance of deposit accounts as we continued competitively positioning our deposit products.
Compared to the quarter ended March 31, 2024, average borrowings saw a 52% reduction. This decrease attributable to the strategic pay-down of wholesale borrowings with the proceeds from our investment portfolio restructuring in the second quarter of 2024 . The decrease in the average balance of borrowings resulted in a decrease in interest expense on borrowings by $4 million from the quarter ended March 31, 2024.
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Average Balance Sheet
(in thousands)
The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are calculated using daily averages.
Quarter ended March 31,
2025 2024
Average
balance Interest Avg.
yield/
cost (h) Average
balance Interest Avg.
yield/
cost (h)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,155,738 30,394 3.85 % $ 3,392,524 32,674 3.85 %
Home equity loans 1,139,728 16,164 5.75 % 1,205,273 17,294 5.77 %
Consumer loans 1,948,230 26,273 5.47 % 2,033,620 25,033 4.95 %
Commercial real estate loans 2,879,607 56,508 7.85 % 2,999,224 43,425 5.73 %
Commercial loans 2,053,213 36,012 7.02 % 1,714,667 31,857 7.35 %
Loans receivable (a) (b) (d) (includes FTE adjustments of $713 and $712, respectively) 11,176,516 165,351 6.00 % 11,345,308 150,283 5.33 %
Mortgage-backed securities (c) 1,773,402 11,730 2.65 % 1,717,306 7,944 1.85 %
Investment securities (c) (d) (includes FTE adjustments of $154 and $145, respectively) 263,825 1,599 2.43 % 333,752 1,430 1.71 %
FHLB stock, at cost 20,862 366 7.11 % 32,249 607 7.57 %
Other interest-earning deposits 243,412 2,416 3.97 % 61,666 832 5.34 %
Total interest-earning assets (includes FTE adjustments of $914 and $889, respectively) 13,478,017 181,462 5.46 % 13,490,281 161,096 4.80 %
Noninterest-earning assets (e) 924,466 918,331
Total assets $ 14,402,483 $ 14,408,612
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits $ 2,194,305 6,452 1.19 % $ 2,122,035 5,036 0.95 %
Interest-bearing demand deposits 2,593,228 7,063 1.10 % 2,538,823 5,402 0.86 %
Money market deposit accounts 2,082,948 9,306 1.81 % 1,961,332 7,913 1.62 %
Time deposits 2,629,388 24,504 3.78 % 2,697,983 29,335 4.37 %
Total interest-bearing deposits (g) 9,499,869 47,325 2.02 % 9,320,173 47,686 2.07 %
Borrowed funds (f) 224,122 2,206 3.99 % 469,697 5,708 4.89 %
Subordinated debentures 114,576 1,148 4.01 % 114,225 1,148 4.02 %
Junior subordinated debentures 129,856 2,098 6.46 % 129,597 2,459 7.51 %
Total interest-bearing liabilities 9,968,423 52,777 2.15 % 10,033,692 57,001 2.28 %
Noninterest-bearing demand deposits (g) 2,588,502 2,567,781
Noninterest-bearing liabilities 228,947 257,269
Total liabilities 12,785,872 12,858,742
Shareholders’ equity 1,616,611 1,549,870
Total liabilities and shareholders’ equity $ 14,402,483 $ 14,408,612
Net interest income (FTE)/Interest rate spread (FTE) (d) 128,685 3.31 % 104,095 2.52 %
Net interest-earning assets/Net interest margin (FTE) $ 3,509,594 3.87 % $ 3,456,589 3.10 %
Tax equivalent adjustment (d) 867 857
Net interest income, GAAP basis 127,818 103,238
Ratio of interest-earning assets to interest- bearing liabilities 1.35X 1.34X
(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 1.59% and 1.61%, 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 March 31, 2025 vs. 2024
Increase/(decrease) due to Total
increase/(decrease)
Rate Volume
Interest-earning assets:
Loans receivable $ 17,564 (2,496) 15,068
Mortgage-backed securities 3,416 370 3,786
Investment securities 594 (425) 169
FHLB stock, at cost (42) (199) (241)
Other interest-earning deposits (220) 1,804 1,584
Total interest-earning assets 21,312 (946) 20,366
Interest-bearing liabilities:
Savings deposits 1,204 212 1,416
Interest-bearing demand deposits 1,513 148 1,661
Money market deposit accounts 850 543 1,393
Time deposits (4,192) (639) (4,831)
Borrowed funds (1,085) (2,417) (3,502)
Subordinated debt (3) 3 —
Junior subordinated debentures (365) 4 (361)
Total interest-bearing liabilities (2,078) (2,146) (4,224)
Net change in net interest income (FTE) $ 23,390 1,200 24,590
Provision for Credit Losses
1Q24 2Q24 3Q24 4Q24 1Q25
Provision for credit losses - loans (in thousands) $ 4,234 2,169 5,727 15,549 8,256
Provision/(benefit) for credit losses - unfunded commitments (in thousands) (799) (2,539) (852) 1,016 (345)
Annualized net charge-offs to average loans 0.16 % 0.07 % 0.18 % 0.87 % 0.08 %
The provision for credit losses increased by $4 million from the quarter ended March 31, 2024. This increase included a $4 million increase in the provision for credit losses - loans, as well as a $0.5 million increase 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 $279 million, or 2.49% of total loans, at March 31, 2025 from $229 million, or 1.99% of total loans, at March 31, 2024 and $272 million, or 2.44% of total loans, at December 31, 2024.
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 appropriate, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at March 31, 2025.
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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 March 31, 2025 was $28 million, an increase of $0.4 million, or 1%, from the quarter ended March 31, 2024, which was driven by a $0.8 million increase in income from trust and other financial services from market sensitive income sources . Additionally, the gain on the sale of SBA loans increased $0.4 million, or 42%, to $1 million for the three months ended March 31, 2025 due to increased loan sale activity. Service charges and fees decreased $0.5 million, or 3%, to $15 million for the three months ended March 31, 2025 drive n by commercial loan fees and deposit related fees based on customer activity.
Noninterest Expense
(a) Other noninterest expense includes collections expense, marketing expense, FDIC insurance expense, amortization of intangible assets, 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 $2 million, or 2%, from the quarter ended March 31, 2024. This increase was primarily attributable to an increase in c ompensation and employee benefits expense of $3 million, or 6%, to $55 million for the quarter ended March 31, 2025 driven primarily by an increase in incentive compensation and an increase in medical expenses. Partially offsetting this was a decrease in professional services expense of 1 million, or 32%.
Income Taxes
The provision for income taxes increased by $4 million from the quarter ended March 31, 2024 primarily due to higher 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, 2025.
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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
March 31,
2025 December 31,
2024 September 30,
2024 June 30,
2024 March 31,
2024
Net interest income fully tax equivalent (FTE)
Net interest income (GAAP) $ 127,818 114,197 111,302 106,841 103,238
Plus: Taxable-equivalent adjustment 867 851 914 883 857
Net interest income FTE 128,685 115,048 112,216 107,724 104,095
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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.