Northwest Bancshares(NWBI) - 2024 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's discussion and analysis for the reported periods Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Northwest Bancshares, Inc. and its subsidiaries for the quarter and nine months ended September 30, 2024, and comparative periods Consolidated Statements of Financial Condition This statement provides a snapshot of the company's assets, liabilities, and shareholders' equity at specific points in time Consolidated Statements of Financial Condition (in thousands) | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Assets | | | | Cash and cash equivalents | $226,883 | $122,260 | | Marketable securities AFS | 1,111,868 | 1,043,359 | | Marketable securities HTM | 766,772 | 814,839 | | Loans receivable, net | 11,178,745 | 11,289,566 | | Total assets | $14,354,325 | $14,419,105 | | Liabilities | | | | Total deposits | 12,071,079 | 11,979,902 | | Borrowed funds | 204,374 | 398,895 | | Total liabilities | 12,763,000 | 12,867,788 | | Shareholders' Equity | | | | Total shareholders' equity | 1,591,325 | 1,551,317 | - Total assets decreased by $65 million to $14.35 billion at September 30, 2024, from $14.42 billion at December 31, 2023, primarily due to a decrease in net loans receivable, partially offset by an increase in cash and cash equivalents[6] Consolidated Statements of Income This statement details the company's revenues, expenses, and net income over specific reporting periods Consolidated Statements of Income (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :-------------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Total interest income | $171,381 | $151,598 | $498,474 | $430,534 | | Total interest expense | 60,079 | 43,230 | 177,093 | 101,153 | | Net interest income | 111,302 | 108,368 | 321,381 | 329,381 | | Provision for credit losses - loans | 5,727 | 3,983 | 12,130 | 14,863 | | Total noninterest income | 27,833 | 30,888 | 46,947 | 84,654 | | Total noninterest expense | 90,767 | 87,570 | 273,211 | 260,878 | | Net income | $33,618 | $39,220 | $67,528 | $105,943 | | Basic earnings per share | $0.26 | $0.31 | $0.53 | $0.83 | | Diluted earnings per share | $0.26 | $0.31 | $0.53 | $0.83 | - Net income for Q3 2024 decreased by $6 million (14%) YoY to $33.6 million, primarily due to increased provision for credit losses and lower noninterest income, partially offset by higher net interest income and lower income tax expense[7][203][204] - For the nine months, net income decreased by $38.4 million (36%) YoY to $67.5 million, mainly due to a $39 million loss on sale of investments and decreased net interest income[7][203][204] Consolidated Statements of Comprehensive Income This statement presents net income and other comprehensive income items not recognized in the income statement Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :---------------------------------------------------------------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Net income | $33,618 | $39,220 | $67,528 | $105,943 | | Net unrealized holding gains/(losses) on marketable securities | 27,947 | (29,715) | 45,647 | (28,781) | | Change in fair value of interest rate swaps | (3,654) | 1,825 | (1,170) | 3,562 | | Defined benefit plan actuarial reclassification adjustments | (387) | (382) | (1,163) | (1,146) | | Other comprehensive income/(loss) | 23,906 | (28,272) | 43,314 | (26,365) | | Total comprehensive income | $57,524 | $10,948 | $110,842 | $79,578 | - Total comprehensive income significantly increased to $57.5 million for Q3 2024 from $10.9 million in Q3 2023, primarily driven by net unrealized holding gains on marketable securities in the current quarter compared to losses in the prior year[10] Consolidated Statements of Changes in Shareholders' Equity This statement outlines changes in the company's equity accounts, including net income, dividends, and other comprehensive income Consolidated Statements of Changes in Shareholders' Equity (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :-------------------------------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Beginning balance at June 30 / Dec 31 | $1,556,598 | $1,511,501 | $1,551,317 | $1,491,486 | | Net income | 33,618 | 39,220 | 67,528 | 105,943 | | Other comprehensive income/(loss) | 23,906 | (28,272) | 43,314 | (26,365) | | Dividends paid | (25,479) | (25,420) | (76,369) | (76,249) | | Ending balance at September 30 | $1,591,325 | $1,498,431 | $1,591,325 | $1,498,431 | - Shareholders' equity increased by $40 million to $1.59 billion at September 30, 2024, from $1.55 billion at December 31, 2023[15][179] - This increase was driven by year-to-date net income of $68 million and an improvement in accumulated other comprehensive loss of $43 million, partially offset by $76 million in cash dividends[15][179] Consolidated Statements of Cash Flows This statement reports the cash generated and used by operating, investing, and financing activities Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :-------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $204,642 | $47,729 | | Net cash provided by/(used in) investing activities | 99,067 | (178,256) | | Net cash (used in)/provided by financing activities | (199,086) | 153,157 | | Net increase in cash and cash equivalents | $104,623 | $22,630 | | Cash and cash equivalents at end of period | $226,883 | $161,995 | - Net cash provided by operating activities significantly increased to $204.6 million for the nine months ended September 30, 2024, compared to $47.7 million in the prior year[18] - Investing activities shifted from a net outflow of $178.3 million to a net inflow of $99.1 million, while financing activities changed from a net inflow of $153.2 million to a net outflow of $199.1 million[18] Notes to Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and additional information supporting the consolidated financial statements (1) Basis of Presentation and Informational Disclosures This section outlines the company's structure, accounting principles, and recent accounting standard adoptions - Northwest Bancshares, Inc. (NWBI) is a Maryland corporation and bank holding company, operating Northwest Bank, a Pennsylvania-chartered savings bank with 141 community-banking offices across Pennsylvania, Western New York, Eastern Ohio, and Indiana[20][21] - The unaudited Consolidated Financial Statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[20][21] - The company adopted ASU No. 2023-02 on January 1, 2024, regarding accounting for investments in tax credit structures, which did not have a material impact on its financial statements[23] (2) Marketable Securities This section details the company's marketable securities portfolio, including available-for-sale and held-to-maturity classifications Marketable Securities (in thousands) | Metric (in thousands) | September 30, 2024 | December 31, 2023 | | :-------------------------------------------------- | :----------------- | :---------------- | | Total marketable securities available-for-sale | $1,111,868 | $1,043,359 | | Total marketable securities held-to-maturity | $766,772 | $814,839 | | Total marketable securities | $1,878,640 | $1,858,198 | | Gross unrealized holding losses (AFS) | $(143,954) | $(196,867) | | Gross unrealized holding losses (HTM) | $(94,131) | $(115,334) | | Total unrealized losses (AFS & HTM) | $(238,085) | $(312,201) | - The company does not believe that the unrealized losses on available-for-sale and held-to-maturity debt securities represent a credit loss impairment, as these securities are primarily issued by U.S. government agencies or government-sponsored enterprises, or are highly rated corporate/municipal debt[34][35] - The losses are mainly due to changes in the interest rate environment, not credit quality, and the company does not intend to sell these securities before anticipated recovery[34][35] (3) Loans Receivable This section provides a detailed breakdown of the company's loan portfolio, including categories, allowances, and delinquency status Loans Receivable by Category (in thousands) | Loan Category (in thousands) | September 30, 2024 | December 31, 2023 | | :--------------------------- | :----------------- | :---------------- | | Personal Banking | $6,423,392 | $6,782,070 | | Commercial Banking | 4,881,166 | 4,632,739 | | Total loans receivable, gross| $11,304,558 | $11,414,809 | | Allowance for credit losses | (125,813) | (125,243) | | Total loans receivable, net | $11,178,745 | $11,289,566 | - Gross loans receivable decreased by $110 million (1%) to $11.3 billion at September 30, 2024[171] - Personal banking loans decreased by $359 million (5%), while commercial banking loans increased by $248 million (5%), driven by organic growth from new commercial lending verticals, particularly a 14% increase in the C&I loan portfolio[171] Loan Quality Metrics (in thousands) | Metric (in thousands) | September 30, 2024 | December 31, 2023 | | :-------------------------------------------------- | :----------------- | :---------------- | | Total loans receivable | $11,304,558 | $11,414,809 | | Allowance for credit losses | 125,813 | 125,243 | | Nonaccrual loans | 76,828 | 94,384 | | Loans 90 days past due and accruing | 1,045 | 2,698 | | Total delinquency (30+ days past due) | 79,015 | 93,270 | - Nonaccrual loans decreased by $17.5 million (18.6%) to $76.8 million at September 30, 2024, from $94.4 million at December 31, 2023[52][53][55][56] - Loans 90 days or more past due and accruing also decreased significantly from $2.7 million to $1.0 million[52][53][55][56] (4) Goodwill and Other Intangible Assets This section outlines the company's goodwill and other intangible assets, including amortization and impairment testing results Goodwill and Other Intangible Assets (in thousands) | Metric (in thousands) | September 30, 2024 | December 31, 2023 | | :-------------------------------- | :----------------- | :---------------- | | Core deposit intangibles - net | $3,363 | $5,290 | | Total intangible assets - net | $3,363 | $5,290 | | Goodwill | $380,997 | $380,997 | - Net core deposit intangibles decreased from $5.29 million to $3.36 million, reflecting ongoing amortization[84][86] - Goodwill remained stable at $381 million, and the annual impairment test as of June 30, 2024, concluded that goodwill was not impaired[84][86] (5) Borrowed Funds This section details the company's borrowed funds, including FHLB advances, collateralized borrowings, and subordinated notes Borrowed Funds (in thousands) | Borrowing Type (in thousands) | September 30, 2024 | December 31, 2023 | | :---------------------------- | :----------------- | :---------------- | | Term notes payable to FHLB | $175,000 | $175,000 | | Notes payable to FHLB | — | 163,500 | | Collateralized borrowings | 21,624 | 35,495 | | Collateral received | 7,750 | 24,900 | | Total borrowed funds | $204,374 | $398,895 | - Total borrowed funds decreased significantly to $204.4 million at September 30, 2024, from $398.9 million at December 31, 2023[87] - This reduction was primarily due to the pay-down of FHLB notes payable and collateralized borrowings[87] - The company has $115 million in subordinated notes outstanding (net of repurchases) and $129.8 million in junior subordinated debentures, which qualify as Tier 2 capital and are primarily floating-rate instruments tied to SOFR[92][96] (6) Guarantees This section describes the company's guarantees, including standby letters of credit and unsecured lines of credit - The company issues standby letters of credit, with a maximum potential future payment of $58 million at September 30, 2024, of which $41 million is fully collateralized[100][101] - It also maintains a $20 million unsecured line of credit for private label credit card facilities, with $11 million in notional value issued and $2 million outstanding[100][101] (7) Earnings Per Share This section presents the basic and diluted earnings per share for the reported periods Earnings Per Share (in thousands, except share data) | Metric (in thousands, except share data) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :--------------------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Net income available to common shareholders | $33,575 | $39,121 | $67,442 | $105,676 | | Weighted average common shares outstanding (Basic) | 127,206,579 | 126,767,507 | 127,015,478 | 126,629,786 | | Basic earnings per share | $0.26 | $0.31 | $0.53 | $0.83 | | Diluted earnings per share | $0.26 | $0.31 | $0.53 | $0.83 | - Basic and diluted EPS for Q3 2024 were $0.26, down from $0.31 in Q3 2023[105] - For the nine months, EPS was $0.53, down from $0.83 in the prior year, reflecting the decrease in net income[105] (8) Pension and Other Post-Retirement Benefits This section details the company's pension and other post-retirement benefit costs and related financial impacts Pension and Other Post-Retirement Benefits (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 (Pension) | Quarter ended Sep 30, 2023 (Pension) | Nine months ended Sep 30, 2024 (Pension) | Nine months ended Sep 30, 2023 (Pension) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | | Service cost | $1,425 | $1,560 | $4,275 | $4,680 | | Interest cost | 2,205 | 2,245 | 6,615 | 6,735 | | Expected return on plan assets | (3,776) | (3,479) | (11,328) | (10,437) | | Net periodic cost (Pension) | $(691) | $(218) | $(2,073) | $(654) | | Net periodic cost (Other benefits)| $25 | $17 | $75 | $51 | - Net periodic pension cost increased significantly to $(691) thousand for Q3 2024 from $(218) thousand in Q3 2023, and to $(2,073) thousand for the nine months from $(654) thousand in the prior year, primarily due to changes in expected return on plan assets and interest costs[107][108] - No funding requirement is anticipated for the year ending December 31, 2024[107][108] (9) Disclosures About Fair Value of Financial Instruments This section outlines the fair value hierarchy and valuation methodologies for the company's financial instruments - The company categorizes financial instruments into a three-level fair value hierarchy based on observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[110][111][112][113][119][142] - Loans receivable and loans held-for-sale are primarily classified as Level 3 assets due to the use of discounted cash flow models or adjusted quoted prices for similar loans with unobservable pull-through rates[110][111][112][113][119][142] Fair Value of Financial Instruments (in thousands) | Financial Instrument (in thousands) | Carrying Amount (Sep 30, 2024) | Estimated Fair Value (Sep 30, 2024) | Level 1 | Level 2 | Level 3 | | :---------------------------------- | :----------------------------- | :---------------------------------- | :------ | :---------- | :----------- | | Financial Assets | | | | | | | Cash and cash equivalents | $226,883 | $226,883 | $226,883| — | — | | Securities available-for-sale | 1,111,868 | 1,111,868 | — | 1,111,868 | — | | Securities held-to-maturity | 766,772 | 672,641 | — | 672,641 | — | | Loans receivable, net | 11,169,375 | 10,494,023 | — | — | 10,494,023 | | Loans held-for-sale | 9,370 | 9,370 | — | — | 9,370 | | Total financial assets | $13,384,814 | $12,615,331 | $273,561| $1,816,481 | $10,504,066 | | Financial Liabilities | | | | | | | Total financial liabilities | $12,569,029 | $12,325,739 | $9,571,067| $141,786 | $2,612,886 | - For nonrecurring assets, individually assessed loans, mortgage servicing rights, and real estate owned are classified as Level 3, with fair values determined by appraisal or discounted cash flow analysis using significant unobservable inputs like estimated cost to sell, prepayment rates, and expected life[139][140][141][142] (10) Derivative Financial Instruments This section describes the company's use of derivative instruments for managing interest rate exposure and customer needs - The company uses interest rate swaps, caps, and foreign exchange contracts to manage interest rate exposure and service customer needs[144][145][147][148][149] - Derivatives are categorized as either designated hedging instruments (cash flow hedges) or non-designated instruments (customer swaps, interest rate lock commitments, forward commitments, risk participation agreements)[144][145][147][148][149] Derivative Financial Instruments (in thousands) | Derivative Type (in thousands) | Notional Amount (Sep 30, 2024) | Fair Value (Asset) (Sep 30, 2024) | Notional Amount (Sep 30, 2024) | Fair Value (Liability) (Sep 30, 2024) | | :----------------------------- | :----------------------------- | :-------------------------------- | :----------------------------- | :------------------------------------ | | Hedging interest rate swaps | $50,000 | $90 | $125,000 | $2,085 | | Non-hedging interest rate swaps| 748,903 | 31,761 | 748,903 | 31,924 | | Foreign exchange swaps | 2,987 | 6 | 119 | 173 | | Interest rate lock commitments | 27,536 | 673 | — | — | | Forward commitments | 4,514 | 115 | — | — | | Risk participation agreements | — | — | 137,126 | 49 | | Total Derivatives | $833,940 | $32,645 | $1,011,148 | $34,231 | Derivative Income and Expense (in thousands) | Income/Expense (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :---------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Hedging derivatives (interest expense decrease) | $732 | $627 | $2,198 | $831 | | Non-hedging swap derivatives (other income) | $(221) | $203 | $(45) | $(127) | | Non-hedging swap derivatives (mortgage banking income) | $(73) | $(221) | $135 | $(46) | (11) Legal Proceedings This section addresses the company's involvement in legal proceedings and the assessment of potential financial liabilities - The company accrues for legal proceedings when a loss is probable and estimable[154] - As of September 30, 2024, no pending or threatened legal proceedings are anticipated to have a material ultimate liability on the consolidated financial statements[154] (12) Changes in Accumulated Other Comprehensive Income This section details the changes in accumulated other comprehensive income, including unrealized gains/losses and pension adjustments Changes in Accumulated Other Comprehensive Income (in thousands) | Component (in thousands) | Balance as of June 30, 2024 | Net other comprehensive income/(loss) (Q3 2024) | Balance as of September 30, 2024 | | :----------------------------------------------------- | :-------------------------- | :---------------------------------------------- | :------------------------------- | | Unrealized losses on securities available-for-sale | $(132,959) | $27,947 | $(105,012) | | Change in fair value of interest rate swaps | $2,110 | $(3,654) | $(1,544) | | Change in defined benefit pension plans | $765 | $(387) | $378 | | Total Accumulated Other Comprehensive Income/(Loss) | $(130,084) | $23,906 | $(106,178) | - Accumulated other comprehensive loss improved from $(149.5) million at December 31, 2023, to $(106.2) million at September 30, 2024[158][159] - This was primarily driven by $45.6 million in net unrealized holding gains on marketable securities for the nine months ended September 30, 2024, compared to losses in the prior year[158][159] Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and operating results, including forward-looking statements, critical accounting policies, recent accounting standards, and a detailed comparison of financial performance for the quarter and nine months ended September 30, 2024, against prior periods Forward-Looking Statements This section highlights that the document contains forward-looking statements subject to various risks and uncertainties - The document contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially[161][162] - Important factors include inflation, interest rate changes, asset quality deterioration, regulatory changes, economic conditions, cybersecurity concerns, and technological changes[161][162] Overview of Critical Accounting Policies Involving Estimates This section directs readers to the company's 2023 Annual Report for an overview of critical accounting policies - For an overview of critical accounting policies involving estimates, readers are directed to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of the company's 2023 Annual Report on Form 10-K[163] Recently Issued Accounting Standards This section discusses recently issued accounting standards and their anticipated impact on the company's financial statements - The company is evaluating recently issued ASUs, including ASU No. 2023-06 (Disclosure Improvements), ASU 2023-07 (Segment Reporting), and ASU No. 2023-09 (Improvements to Income Tax Disclosures)[165][166][167] - None of these are expected to have a material impact on the consolidated financial statements or disclosures[165][166][167] Comparison of Financial Condition This section compares key financial condition metrics, including assets, liabilities, and equity, between reporting periods Comparison of Financial Condition (in millions) | Metric (in millions) | Sep 30, 2024 | Dec 31, 2023 | Change ($) | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Total assets | $14,354 | $14,419 | $(65) | (0.5%) | | Cash and cash equivalents | $227 | $122 | $105 | 86% | | Total marketable securities | $1,879 | $1,858 | $21 | 1% | | Gross loans receivable | $11,305 | $11,415 | $(110) | (1%) | | Personal banking loans | $6,423 | $6,782 | $(359) | (5%) | | Commercial banking loans | $4,881 | $4,633 | $248 | 5% | | Total deposits | $12,071 | $11,980 | $91 | 1% | | Time deposits | $2,710 | $2,603 | $107 | 4% | | Noninterest-bearing deposits| $2,582 | $2,669 | $(87) | (3%) | | Total shareholders' equity | $1,591 | $1,551 | $40 | 2.6% | - The increase in commercial banking loans was driven by a 14% increase in the commercial and industrial (C&I) loan portfolio, reflecting the success of new commercial lending verticals[171] - Deposit growth was primarily in time deposits (up $107 million or 4%) and interest-bearing demand deposits (up $42 million or 2%), while noninterest-bearing deposits decreased by $87 million (3%)[174][175][176] - The company utilized brokered deposits ($212 million at 5.37% cost) and Intrafi Network Deposits ($697 million at 3.91% cost) to diversify funding[174][175][176] Regulatory Capital This section presents the company's regulatory capital ratios and compliance with 'well capitalized' requirements Regulatory Capital Ratios | Capital Ratio (Northwest Bancshares, Inc.) | Sep 30, 2024 | Dec 31, 2023 | Minimum Capital Requirements (1) | Well Capitalized Requirements | | :----------------------------------------- | :----------- | :----------- | :------------------------------- | :---------------------------- | | Total capital (to risk-weighted assets) | 16.024% | 16.753% | 10.500% | 10.000% | | Tier 1 capital (to risk-weighted assets) | 13.698% | 14.463% | 8.500% | 8.000% | | CET1 capital (to risk-weighted assets) | 12.516% | 13.294% | 7.000% | 6.500% | | Tier 1 capital (leverage) (to average assets) | 10.283% | 10.841% | 4.000% | 5.000% | - Northwest Bancshares, Inc. and Northwest Bank continue to exceed all minimum regulatory capital requirements, including the capital conservation buffer, and are classified as 'well capitalized' as of September 30, 2024[182][184] Regulatory Considerations This section discusses recent regulatory developments, specifically the FDIC's policy statement on Bank Merger Act applications - In September 2024, the FDIC adopted a final policy statement on Bank Merger Act (BMA) applications, expanding the scope of transactions subject to approval and requiring a more rigorous evaluation process with heightened expectations for statutory factors, which will necessitate additional information in future applications[185] Liquidity This section details the company's liquidity position, including its liquidity ratio and available borrowing capacity - Northwest Bank's liquidity ratio (unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings) was 11.25% at September 30, 2024[186] - The company had $3.3 billion of additional borrowing capacity available, including $250 million on an overnight FHLB line of credit (unused), $500 million with the Federal Reserve Bank, and $105 million with two correspondent banks[186] Dividends This section reports on cash dividends paid and the common stock dividend payout ratio for the reported periods - The company paid cash dividends of $25 million ($0.20 per share) for both Q3 2024 and Q3 2023[187] - The common stock dividend payout ratio for Q3 2024 was 76.9%, up from 64.5% in Q3 2023[187] - A cash dividend of $0.20 per share was declared on October 17, 2024, marking the 120th consecutive quarter of cash dividends[187] Nonperforming Assets This section analyzes the company's nonperforming assets, including delinquent loans and real estate owned Nonperforming Assets (in thousands) | Metric (in thousands) | September 30, 2024 | December 31, 2023 | | :-------------------------------------------------- | :----------------- | :---------------- | | 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 | | Nonaccrual loans - 90 days or more past due | 31,516 | 21,894 | | Nonaccrual 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 nonperforming assets decreased by $19.2 million (19.8%) to $77.9 million at September 30, 2024, from $97.2 million at December 31, 2023[190] - This was primarily driven by a reduction in nonaccrual loans less than 90 days past due[190] - Loans 90 days or more past due increased to $32.6 million from $24.6 million, with a notable increase in commercial loans 90 days or more past due from $2.78 million to $14.48 million[190] Allowance for Credit Losses This section discusses the allowance for credit losses, its changes, and related asset quality metrics - The Allowance for Credit Losses (ACL) increased by $0.6 million to $126 million, or 1.11% of total loans, at September 30, 2024, slightly up from 1.10% at December 31, 2023[199][227] - This reflects growth in the commercial lending portfolio and changes in economic forecasts[199][227] - Total classified loans increased by $101 million to $320 million at September 30, 2024, from $218 million at December 31, 2023, primarily due to exposure to the Long Term Healthcare segment and challenges faced by some operators post-COVID[200][228] - Nonaccrual loans decreased by $18 million (19%) to $77 million at September 30, 2024, representing 0.68% of total loans receivable, down from 0.83% at December 31, 2023[201] - Annualized net charge-offs remained low at 0.14% for the nine months ended September 30, 2024[201] Comparison of Operating Results for the Quarters Ended September 30, 2024 and 2023 This section compares the company's operating results, including net income, EPS, and returns, for the reported quarters and nine-month periods Operating Results for Quarters Ended September 30 (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Change ($) | Change (%) | | :-------------------- | :------------------------- | :------------------------- | :--------- | :--------- | | Net income | $33,618 | $39,220 | $(5,602) | (14%) | | Diluted EPS | $0.26 | $0.31 | $(0.05) | (16.1%) | | Return on average equity | 8.50% | 10.27% | (1.77%) | (17.2%) | | Return on average assets | 0.93% | 1.08% | (0.15%) | (13.9%) | Operating Results for Nine Months Ended September 30 (in thousands) | Metric (in thousands) | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | Change ($) | Change (%) | | :-------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Net income | $67,528 | $105,943 | $(38,415) | (36%) | | Diluted EPS | $0.53 | $0.83 | $(0.30) | (36.1%) | | Return on average equity | 5.80% | 9.37% | (3.57%) | (38.1%) | | Return on average assets | 0.63% | 0.99% | (0.36%) | (36.4%) | - The decrease in net income for Q3 2024 was primarily due to a $4 million increase in provision for credit losses, a $3 million decrease in noninterest income, and a $3 million increase in noninterest expense, partially offset by a $3 million increase in net interest income and a $2 million decrease in income tax expense[203] Net Interest Income This section analyzes net interest income and net interest margin, considering changes in earning assets and funding costs Net Interest Income and Margin (FTE, in thousands) | Metric (FTE, in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Net interest income (FTE) | $112,216 | $109,258 | $324,035 | $331,897 | | Net interest margin (FTE) | 3.33% | 3.23% | 3.21% | 3.32% | | Average loans receivable | $11,223,602 | $11,190,959 | $11,312,229 | $11,049,030 | | Average investments | $1,998,855 | $2,117,135 | $2,049,662 | $2,214,523 | | Average deposits | $12,539,521 | $12,606,882 | $12,851,292 | $12,738,429 | | Average borrowings | $220,677 | $643,518 | $337,427 | $740,011 | - Net interest income (FTE) for Q3 2024 increased by $3 million (3%) YoY to $112.2 million, with net interest margin (FTE) rising 10 basis points to 3.33%[208] - This was driven by higher earning asset yields, partially offset by increased interest-bearing deposit costs and a shift to higher-cost deposits[208] - For the nine months, net interest income (FTE) decreased by $8 million (2%) YoY to $324 million, and net interest margin (FTE) decreased by 11 basis points[209][212][213] - Average loans receivable increased by $263 million (2.4%) for the nine months, while average investments declined by 9%[209][212][213] - Average deposits grew by 4%, primarily in time deposits, leading to a 139% increase in interest expense on deposits[209][212][213] Provision for Credit Losses This section analyzes the provision for credit losses, including changes related to loans and unfunded commitments Provision for Credit Losses (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :-------------------------------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Provision for credit losses - loans | $5,727 | $3,983 | $12,130 | $14,863 | | Provision/(benefit) for credit losses - unfunded commitments | $(852) | $(2,981) | $(4,190) | $65 | | Total provision for credit losses | $4,875 | $1,002 | $7,940 | $14,928 | - The total provision for credit losses increased by $3.87 million for Q3 2024 compared to Q3 2023, driven by a $2 million increase in loan provisions and a $2 million increase in unfunded commitment provisions[225][226] - For the nine months, the total provision decreased by $6.99 million (47%) YoY, primarily due to a $4 million decrease in unfunded commitment provisions[225][226] - Changes in the provision are attributed to growth in the commercial lending portfolio, evolving economic forecasts, and a decline in reserves for unfunded commitments due to the timing of commercial construction loans and lines of credit[227] Noninterest Income This section reviews the components of noninterest income, highlighting changes in service charges, trust income, and investment gains/losses Noninterest Income (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :-------------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Total noninterest income | $27,833 | $30,888 | $46,947 | $84,654 | | Loss on sale of investments | — | — | (39,413) | (8,306) | | Service charges and fees | 15,932 | 15,270 | 46,982 | 43,292 | | Trust and other financial services income | 7,924 | 7,085 | 22,617 | 20,400 | | Income from bank-owned life insurance | 1,434 | 4,561 | 4,307 | 7,134 | | Gain on sale of SBA loans | 667 | 301 | 2,997 | 1,412 | - Noninterest income for Q3 2024 decreased by $3 million (10%) YoY to $27.8 million, primarily due to a $3 million decline in income from bank-owned life insurance (due to death benefits received in the prior period)[232] - For the nine months, excluding a $39 million loss on sale of securities, noninterest income increased by $2 million (2%) YoY[232] - This was driven by a $4 million (9%) increase in service charges and fees and a $2 million (112%) increase in gain on sale of SBA loans[232] Noninterest Expense This section examines the components of noninterest expense, focusing on compensation, marketing, and restructuring costs Noninterest Expense (in thousands) | Metric (in thousands) | Quarter ended Sep 30, 2024 | Quarter ended Sep 30, 2023 | Nine months ended Sep 30, 2024 | Nine months ended Sep 30, 2023 | | :-------------------------------- | :------------------------- | :------------------------- | :----------------------------- | :----------------------------- | | Total noninterest expense | $90,767 | $87,570 | $273,211 | $260,878 | | Compensation and employee benefits | 56,186 | 51,243 | 161,257 | 145,497 | | Marketing expenses | 2,004 | 2,379 | 6,563 | 8,127 | | Merger, asset disposition and restructuring expense | 43 | — | 2,913 | 4,395 | - Noninterest expense increased by $3 million (4%) for Q3 2024 YoY, primarily due to a $5 million (10%) increase in compensation and employee benefits, driven by the expansion of commercial business and related support functions, as well as increased contracted employees and benefits[237] - For the nine months, noninterest expense increased by $12 million (5%) YoY, mainly due to a $16 million (11%) increase in compensation and employee benefits[238] - This was partially offset by a $2 million (19%) decrease in marketing expenses and a $1 million (34%) decrease in merger, asset disposition, and restructuring expenses[238] Income Taxes This section discusses the provision for income taxes and the anticipated effective tax rate - The provision for income taxes decreased by $2 million for Q3 2024 YoY and $13 million for the nine months YoY, primarily due to lower income before income taxes[239] - The anticipated effective tax rate for the year ending December 31, 2024, is between 22.0% and 24.0%[239] GAAP to Non-GAAP Reconciliations This section provides reconciliations of GAAP to non-GAAP financial measures, such as net interest income on a fully taxable equivalent basis GAAP to Non-GAAP Reconciliations (in thousands) | Metric (in thousands) | Sep 30, 2024 | Jun 30, 2024 | Mar 31, 2024 | Dec 31, 2023 | Sep 30, 2023 | Nine months Sep 30, 2024 | Nine months Sep 30, 2023 | | :-------------------------------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------------------- | :----------------------- | | 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 | - The company provides non-GAAP financial measures, such as net interest income on a fully taxable equivalent (FTE) basis, to offer investors a clearer understanding of operating performance and facilitate peer comparisons[205][241] - The FTE adjustment converts tax-exempt income to a taxable equivalent amount[205][241] Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details the company's management of interest rate risk, a primary market risk, through strategies like matching asset and liability re-pricing periods, increasing core deposits, and using fixed-rate borrowings. It outlines the roles of the Asset/Liability Committee and the Board's Risk Management Committee in monitoring and reviewing market risks. Simulation models are used to assess the impact of interest rate shifts on net interest income, net income, and market value of equity, with established guidelines for acceptable decreases - The company manages interest rate risk by matching re-pricing periods of assets and liabilities, increasing core deposits, extending CD maturities, using fixed-rate borrowings, and originating short-term fixed-rate or adjustable-rate loans[244] - Simulation models project the impact of parallel interest rate shifts (100, 200, 300 bps) on net interest income, net income, and market value of equity[247][248][249][251] - For a 300 bps upward shift, net interest income is projected to decrease by 4.8%, net income by 11.5%, and market value of equity by 18.3%[247][248][249][251] - For a 300 bps downward shift, net interest income is projected to decrease by 7.1%, net income by 17.3%, and market value of equity by 2.9%[247][248][249][251] Item 4. CONTROLS AND PROCEDURES Management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2024, and concluded they were effective. There were no material changes in internal controls over financial reporting during the period - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[252] - No material changes in internal controls over financial reporting occurred during the period covered by this report[253] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity security matters Item 1. LEGAL PROCEEDINGS The company is involved in various legal proceedings in the normal course of business. While accruals are made for probable and estimable losses, no additional liability from potential litigation is currently expected to have a material adverse effect on the financial statements - The company does not anticipate any material adverse effect on its financial statements from current legal proceedings, beyond amounts already accrued[254] Item 1A. RISK FACTORS There have been no material updates or additions to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2023. The company acknowledges that additional unknown or currently immaterial risks could also adversely affect its business - No material updates or additions to risk factors have occurred since the 2023 Annual Report on Form 10-K[255] Item 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES This section states that there were no unregistered sales of equity securities or issuer repurchases of common stock during the quarter ended September 30, 2024. A maximum of 2,261,130 shares remain available under the existing repurchase program - No shares of common stock were repurchased during the quarter ended September 30, 2024[258] - A maximum of 2,261,130 shares remain available for repurchase under the program approved on December 13, 2012[258] Item 3. DEFAULTS UPON SENIOR SECURITIES This item is marked as 'Not applicable,' indicating no defaults upon senior securities during the reporting period Item 4. MINE SAFETY DISCLOSURES This item is marked as 'Not applicable,' indicating no mine safety disclosures are required for the reporting period Item 5. OTHER INFORMATION During the three months ended September 30, 2024, no directors or officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended September 30, 2024[259] Item 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act) and various XBRL taxonomy documents - The report includes certifications from the Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[261][262] - Various XBRL taxonomy extension documents (Schema, Calculation, Definition, Label, Presentation Linkbase) and the inline XBRL formatted cover page are filed as exhibits[263] Signature The report is duly signed by Louis J. Torchio, President and Chief Executive Officer, and Joseph D. Canfield Jr., Executive Vice President, Chief Accounting Officer, on November 7, 2024, certifying its submission pursuant to the Securities Exchange Act of 1934 - The report was signed by Louis J. Torchio, President and Chief Executive Officer, and Joseph D. Canfield Jr., Executive Vice President, Chief Accounting Officer, on November 7, 2024[265]