NORTHWEST BANCSHARES, INC.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2019
OR
For the transition period from to
Commission File Number 001-34582
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of Principal Executive Offices) | (Zip Code) | ||||
(814 ) 726-2140
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ Large accelerated filer ☐ Accelerated filer
☐ Non-accelerated filer ☐ Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock ($0.01 par value), 106,672,637 shares outstanding as of October 31, 2019.
NORTHWEST BANCSHARES, INC.
Table of Contents
PART I | FINANCIAL INFORMATION | |||
Item 1. FINANCIAL STATEMENTS
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands, except share data)
September 30, 2019 | December 31, 2018 | |||||
Assets | ||||||
Cash and cash equivalents | $ | |||||
Marketable securities available-for-sale (amortized cost of $801,465 and $811,015, respectively) | ||||||
Marketable securities held-to-maturity (fair value of $19,237 and $22,446, respectively) | ||||||
Total cash and cash equivalents and marketable securities | ||||||
Personal Banking: | ||||||
Residential mortgage loans held-for-sale | ||||||
Residential mortgage loans | ||||||
Home equity loans | ||||||
Consumer loans | ||||||
Total Personal Banking loans | ||||||
Commercial Banking: | ||||||
Commercial real estate loans | ||||||
Commercial loans | ||||||
Total Commercial Banking loans | ||||||
Total loans | ||||||
Allowance for loan losses | ( | ) | ( | ) | ||
Loans receivable, net | ||||||
Federal Home Loan Bank stock, at cost | ||||||
Accrued interest receivable | ||||||
Real estate owned, net | ||||||
Premises and equipment, net | ||||||
Bank-owned life insurance | ||||||
Goodwill | ||||||
Other intangible assets | ||||||
Other assets | ||||||
Total assets | $ | |||||
Liabilities and shareholders’ equity | ||||||
Liabilities: | ||||||
Noninterest-bearing demand deposits | $ | |||||
Interest-bearing demand deposits | ||||||
Money market deposit accounts | ||||||
Savings deposits | ||||||
Time deposits | ||||||
Total deposits | ||||||
Borrowed funds | ||||||
Junior subordinated debentures | ||||||
Advances by borrowers for taxes and insurance | ||||||
Accrued interest payable | ||||||
Other liabilities | ||||||
Total liabilities | ||||||
Shareholders’ equity: | ||||||
Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued | ||||||
Common stock, $0.01 par value: 500,000,000 shares authorized, 106,658,067 and 103,354,030 shares issued and outstanding, respectively | ||||||
Paid-in capital | ||||||
Retained earnings | ||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||
Total shareholders’ equity | ||||||
Total liabilities and shareholders’ equity | $ | |||||
See accompanying notes to unaudited consolidated financial statements.
1
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except share data)
Quarter ended September 30, | Nine months ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Interest income: | ||||||||||||
Loans receivable | $ | |||||||||||
Mortgage-backed securities | ||||||||||||
Taxable investment securities | ||||||||||||
Tax-free investment securities | ||||||||||||
Federal Home Loan Bank stock dividends | ||||||||||||
Interest-earning deposits | ||||||||||||
Total interest income | ||||||||||||
Interest expense: | ||||||||||||
Deposits | ||||||||||||
Borrowed funds | ||||||||||||
Total interest expense | ||||||||||||
Net interest income | ||||||||||||
Provision for loan losses | ||||||||||||
Net interest income after provision for loan losses | ||||||||||||
Noninterest income: | ||||||||||||
Gain on sale of loans | ||||||||||||
Gain on sale of investments | ||||||||||||
Service charges and fees | ||||||||||||
Trust and other financial services income | ||||||||||||
Insurance commission income | ||||||||||||
Loss on real estate owned, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Income from bank-owned life insurance | ||||||||||||
Mortgage banking income | ||||||||||||
Other operating income | ||||||||||||
Total noninterest income | ||||||||||||
Noninterest expense: | ||||||||||||
Compensation and employee benefits | ||||||||||||
Premises and occupancy costs | ||||||||||||
Office operations | ||||||||||||
Collections expense | ||||||||||||
Processing expenses | ||||||||||||
Marketing expenses | ||||||||||||
Federal deposit insurance premiums | ( | ) | ||||||||||
Professional services | ||||||||||||
Amortization of intangible assets | ||||||||||||
Real estate owned expense | ||||||||||||
Restructuring/acquisition expense | ||||||||||||
Other expenses | ||||||||||||
Total noninterest expense | ||||||||||||
Income before income taxes | ||||||||||||
Federal and state income taxes expense | ||||||||||||
Net income | $ | |||||||||||
Basic earnings per share | $ | |||||||||||
Diluted earnings per share | $ | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
2
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
Quarter ended September 30, | Nine months ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Net income | $ | |||||||||||
Other comprehensive income net of tax: | ||||||||||||
Net unrealized holding gains/(losses) on marketable securities: | ||||||||||||
Unrealized holding gains/(losses) net of tax of ($525), $788, ($4,549), $2,869, respectively | ( | ) | ( | ) | ||||||||
Reclassification adjustment for gains included in net income, net of tax of $0, $17, $1 and $54, respectively | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Net unrealized holding gains/(losses) on marketable securities | ( | ) | ( | ) | ||||||||
Change in fair value of interest rate swaps, net of tax of $0, ($51), $0 and ($204), respectively | ||||||||||||
Defined benefit plan: | ||||||||||||
Reclassification adjustments for prior period service costs and net losses included in net income, net of tax of ($83), ($90), ($250) and ($271), respectively | ||||||||||||
Other comprehensive income/(loss) | ( | ) | ( | ) | ||||||||
Total comprehensive income | $ | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
3
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in thousands, expect share data)
Paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||
Common stock | ||||||||||||||||||
Quarter ended September 30, 2019 | Shares | Amount | ||||||||||||||||
Beginning balance at June 30, 2019 | $ | ( | ) | |||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||
Other comprehensive income, net of tax of ($608) | — | — | — | — | ||||||||||||||
Total comprehensive income | — | — | — | |||||||||||||||
Exercise of stock options | — | — | ||||||||||||||||
Stock-based compensation expense | — | — | ||||||||||||||||
Stock-based compensation forfeited | ( | ) | — | — | — | — | ||||||||||||
Dividends paid ($0.18 per share) | — | — | — | ( | ) | — | ( | ) | ||||||||||
Ending balance at September 30, 2019 | $ | ( | ) | |||||||||||||||
Paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||
Common stock | ||||||||||||||||||
Quarter ended September 30, 2018 | Shares | Amount | ||||||||||||||||
Beginning balance at June 30, 2018 | $ | ( | ) | |||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||
Other comprehensive loss, net of tax of $664 | — | — | — | — | ( | ) | ( | ) | ||||||||||
Total comprehensive income/(loss) | — | — | — | ( | ) | |||||||||||||
Exercise of stock options | — | — | ||||||||||||||||
Stock-based compensation expense | — | — | ||||||||||||||||
Stock-based compensation forfeited | ( | ) | — | — | ||||||||||||||
Dividends paid ($0.17 per share) | — | — | — | ( | ) | — | ( | ) | ||||||||||
Ending balance at September 30, 2018 | $ | ( | ) | |||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in thousands, expect share data)
Paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||
Common stock | ||||||||||||||||||
Nine months ended September 30, 2019 | Shares | Amount | ||||||||||||||||
Beginning balance at December 31, 2018 | $ | ( | ) | |||||||||||||||
Comprehensive income: | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||
Other comprehensive income, net of tax of ($4,799) | — | — | — | — | ||||||||||||||
Total comprehensive income | — | — | — | |||||||||||||||
Acquisition of Union Community Bank ("UCB") | — | — | ||||||||||||||||
Reclassification due to adoption of ASU No. 2016-02 | — | — | — | ( | ) | — | ( | ) | ||||||||||
Exercise of stock options | — | — | ||||||||||||||||
Stock-based compensation expense | — | — | ||||||||||||||||
Stock-based compensation forfeited | ( | ) | — | — | ||||||||||||||
Dividends paid ($0.54 per share) | — | — | — | ( | ) | — | ( | ) | ||||||||||
Ending balance at September 30, 2019 | $ | ( | ) | |||||||||||||||
Paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total shareholders’ equity | |||||||||||||||
Common stock | ||||||||||||||||||
Nine months ended September 30, 2018 | Shares | Amount | ||||||||||||||||
Beginning balance at December 31, 2017 | $ | ( | ) | |||||||||||||||
Reclassification due to adoption of ASU No. 2018-02 | — | — | — | ( | ) | — | ||||||||||||
Comprehensive income: | ||||||||||||||||||
Net income | — | — | — | — | ||||||||||||||
Other comprehensive loss, net of tax of $2,448 | — | — | — | — | ( | ) | ( | ) | ||||||||||
Total comprehensive income/(loss) | — | — | — | ( | ) | |||||||||||||
Exercise of stock options | — | — | ||||||||||||||||
Stock-based compensation expense | — | — | ||||||||||||||||
Stock-based compensation forfeited | ( | ) | ( | ) | — | — | ||||||||||||
Dividends paid ($0.51 per share) | — | — | — | ( | ) | — | ( | ) | ||||||||||
Ending balance at September 30, 2018 | $ | ( | ) | |||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
5
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
Nine months ended September 30, | ||||||
2019 | 2018 | |||||
Operating activities: | ||||||
Net income | $ | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Provision for loan losses | ||||||
Net gain/(loss) on sale of assets | ( | ) | ||||
Net depreciation, amortization and accretion | ||||||
Increase in other assets | ( | ) | ( | ) | ||
Increase in other liabilities | ||||||
Net amortization on marketable securities | ||||||
Noncash write-down of real estate owned | ||||||
Deferred income tax expense | ||||||
Origination of loans held-for-sale | ( | ) | ( | ) | ||
Proceeds from sale of loans held-for-sale | ||||||
Noncash compensation expense related to stock benefit plans | ||||||
Net cash provided by operating activities | ||||||
Investing activities: | ||||||
Purchase of marketable securities available-for-sale | ( | ) | ( | ) | ||
Proceeds from maturities and principal reductions of marketable securities held-to-maturity | ||||||
Proceeds from maturities and principal reductions of marketable securities available-for-sale | ||||||
Proceeds from sale of marketable securities available-for-sale | ||||||
Proceeds from bank-owned life insurance | ||||||
Loan originations | ( | ) | ( | ) | ||
Proceeds from loan maturities and principal reductions | ||||||
Proceeds from sale of loans held for investment | ||||||
Net proceeds of Federal Home Loan Bank stock | ( | ) | ( | ) | ||
Proceeds from sale of real estate owned | ||||||
Sale of real estate owned for investment, net | ||||||
Purchase of premises and equipment | ( | ) | ( | ) | ||
Acquisitions, net of cash received | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||
6
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(in thousands)
Nine months ended September 30, | ||||||
2019 | 2018 | |||||
Financing activities: | ||||||
Increase in deposits, net | $ | |||||
Net increase in short-term borrowings | ||||||
Increase in advances by borrowers for taxes and insurance | ( | ) | ( | ) | ||
Cash dividends paid | ( | ) | ( | ) | ||
Proceeds from stock options exercised | ||||||
Net cash provided by financing activities | ||||||
Net increase in cash and cash equivalents | $ | ( | ) | |||
Cash and cash equivalents at beginning of period | $ | |||||
Net increase in cash and cash equivalents | ( | ) | ||||
Cash and cash equivalents at end of period | $ | |||||
Cash paid during the period for: | ||||||
Interest on deposits and borrowings (including interest credited to deposit accounts of $32,893 and $20,927, respectively) | $ | |||||
Income taxes | $ | |||||
Business acquisitions: | ||||||
Fair value of assets acquired | $ | |||||
Northwest Bancshares, Inc. common stock issued | ( | ) | ||||
Cash paid | ( | ) | ||||
Liabilities assumed | $ | |||||
Non-cash activities: | ||||||
Loan foreclosures and repossessions | $ | |||||
Sale of real estate owned financed by the Company | ||||||
See accompanying notes to unaudited consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) | Basis of Presentation and Informational Disclosures |
Northwest Bancshares, Inc. (the “Company”) or (“NWBI”), a Maryland corporation headquartered in Warren, Pennsylvania, is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The primary activity of the Company is the ownership of all of the issued and outstanding common stock of Northwest Bank, a Pennsylvania-chartered savings bank (“Northwest”). Northwest is regulated by the FDIC and the Pennsylvania Department of Banking. Northwest operates 182 community-banking offices throughout Pennsylvania, Western New York, and eastern Ohio.
The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Northwest, and Northwest’s subsidiaries Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, and The Bert Company (doing business as Northwest Insurance Services). The unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes required for complete annual financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position and results of operations have been included. The consolidated statements have been prepared using the accounting policies described in the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 updated, as required, for any new pronouncements or changes.
Certain items previously reported have been reclassified to conform to the current year's reporting format.
The results of operations for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other period.
Stock-Based Compensation
On May 22, 2019, the Company awarded employees 547,410 stock options and directors 64,800 stock options with an exercise price of $17.27 and grant date fair value of $1.14 per stock option, and the Company awarded employees 256,800 restricted common shares and directors 24,300 restricted common shares with a grant date fair value of $17.27 . Awarded stock options and common shares vest over a seven-year period with the first vesting occurring on the grant date. Stock-based compensation expense of $1.7 million and $1.3 million for the quarters ended September 30, 2019 and 2018, and $5.4 million and $4.5 million for the nine months ended September 30, 2019 and 2018, respectively, was recognized in compensation expense relating to our stock benefit plans. At September 30, 2019, there was compensation expense of $3.8 million to be recognized for awarded but unvested stock options and $18.5 million for unvested common shares.
Accounting standards prescribe a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. At September 30, 2019 we had no liability for unrecognized tax benefits.
We recognize interest accrued related to: (1) unrecognized tax benefits in other expenses and (2) refund claims in other operating income. We recognize penalties (if any) in other expenses. We are subject to audit by the Internal Revenue Service and any state in which we conduct business for the tax periods ended December 31, 2018, 2017 and 2016.
8
Recent Accounting Pronouncements
(a) Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Accounting Standards Codification ("ASC") Topic 842 establishes a right of use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company has elected not to recognize ROU assets and lease liabilities for short-term leases of all classes of underlying assets that have a lease term of 12 months or less and recognizes lease expense for these leases on a straight-line basis over the term of the lease.
On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective transition approach as of the effective date, January 1, 2019. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2017). The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company also elected the practical expedient to use hindsight for leases existing at the adoption date.
As a result of the adoption of ASU 2016-02, we recognized an operating lease ROU asset of approximately $40.2 million, an operating lease liability of approximately $42.2 million and a cumulative-effect adjustment on retained earnings of $1.2 million on the consolidated statements of financial condition as of January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model.
(b) Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments", which eliminates the probable initial recognition threshold for credit losses and instead requires that all financial assets (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected inclusive of the entity’s current estimate of all lifetime expected credit losses. This guidance also applies to certain off-balance-sheet credit exposures such as unfunded commitments and non-derivative financial guarantees. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets in order to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The income statement under this guidance will reflect the initial recognition of current expected credit losses for newly recognized assets, as well as any increases or decreases of expected credit losses that have occurred during the period. This guidance retains many currently-existing disclosures related to the credit quality of an entity’s assets and the related allowance for credit losses amended to reflect the change to an expected credit loss methodology, as well as enhanced disclosures to provide information to users at a more disaggregated level. Upon adoption, ASU 2016-13 provides for a modified retrospective transition by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition is provided in order to maintain the same amortized cost prior to and subsequent to the effective date of the ASU. This guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those annual periods.
Management has created a formal working group to govern the implementation of these amendments, consisting of key stakeholders from finance, risk, credit and accounting. The working group meets periodically to discuss the progress of implementations, monitor the established timeline and discuss latest hot topics and industry trends. We have engaged with a third party to assist in the development of certain portfolio-level estimation methodologies and have chosen, and are in the process of implementing, a third-party software platform provider. We have finalized and documented the portfolio segmentation and methodologies that will be utilized. The model validation process has begun. Management has made decisions on reasonable and supportable forecast period and reversion method. Management is currently developing controls, processes, policies and disclosures in preparation for performing a full end to end parallel run. We are also evaluating the effect this guidance will have on our results of operations, financial position and related disclosures. The impact of the ASU will depend upon the state of the economy and the nature of our portfolios, among other items, at the date of adoption.
9
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes, modifies and adds disclosure requirements for fair value measurements. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, with early adoption permitted for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. We do not expect this guidance to have a material impact on our financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” This guidance removes and adds disclosure requirements for defined benefit pension or other post-retirement plans. This guidance is effective for annual periods beginning after December 15, 2020, with early adoption permitted, and requires retrospective adoption for all periods presented. We do not expect this guidance to have a material impact on our financial statements.
(2) Acquisition
On March 8, 2019, the Company completed the merger with Donegal Financial Services Corporation ("DFSC"), the holding company for Union Community Bank ("UCB"), for total consideration of $85.8 million. The transaction has expanded Northwest’s franchise by 12 offices in Lancaster County in eastern Pennsylvania. The result of UCB's operations are included in the Consolidated Statements of Income from the date of acquisition.
Under the terms of the merger agreement, the two shareholders of DFSC, Donegal Mutual Insurance Company and Donegal Group Inc., received payment in the form of 50 % cash and 50 % stock, or a total of $42.5 million and 2,462,373 shares of common stock of the Company, valued at $43.3 million, based on the $17.58 closing price of the Company's stock on March 8, 2019.
The following table shows the assets acquired and the liabilities assumed that were recorded at fair value on the date of acquisition (in thousands):
Consideration paid: | |||
Northwest Bancshares, Inc. common stock issued | $ | ||
Cash paid to DFSC | |||
Total consideration paid | |||
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value (1) | |||
Cash and cash equivalents | $ | ||
Investment securities available-for-sale | |||
Loans | |||
Federal Home Loan Bank stock | |||
Premises and equipment | |||
Core deposit intangible | |||
Other assets | |||
Deposits | ( | ) | |
Other liabilities | ( | ) | |
Total identifiable net assets | $ | ||
Goodwill | $ | ||
(1) Amounts are estimates and subject to adjustment. Actual amounts are not expected to differ materially from the amounts shown.
We estimated the fair value of loans acquired from UCB by utilizing a methodology wherein similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of UCB’s allowance for
10
loan losses associated with the loans we acquired as the loans were initially recorded at fair value. Loans acquired with evidence of credit quality deterioration were evaluated and not considered to be significant.
The core deposit intangible asset recognized as part of the UCB merger is being amortized over its estimated useful life of seven years utilizing an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our Community Banking segment and is not deductible for tax purposes. The fair values of savings and transaction deposit accounts acquired from UCB were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by projecting out the expected cash flows based on the contractual terms of the certificates of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding maturity.
Direct costs related to the UCB merger were expensed as incurred and were $3.1 million during the nine months ended September 30, 2019, which includes technology and communications costs, professional services, marketing and advertising, and other noninterest expenses.
(3) Leases
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification of a finance or operating lease. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments. ROU assets are further adjusted for lease incentives and initial direct costs.
The Company has operating leases for certain branch and office facilities or land with lease terms up to 35 years. These leases generally contain renewal options for periods ranging from one to ten years . These options are included in the lease term when it is reasonably certain that the options will be exercised.
Some of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g., common area maintenance, taxes, etc.). The Company elected the option of not separating lease and non-lease components and instead we account for them as a single lease component.
Certain lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected adjustment for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Generally, the Company cannot practically determine the interest rate implicit in the lease. Therefore, the Company uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost recognized within our consolidated statements of income were as follows (in thousands):
For the quarter ended September 30, 2019 | For the nine months ended September 30, 2019 | ||||||
Operating lease costs (office operations) | $ | ||||||
Variable lease costs (office operations) | |||||||
Total operating lease costs | $ | ||||||
Amounts reported in the consolidated statements of financial condition were as follows (in thousands):
Operating leases: | As of September 30, 2019 | |||
Operating lease ROU assets (other assets) | $ | |||
Operating lease liabilities (other liabilities) | ||||
11
Other information related to leases as of September 30, 2019 were as follows (in thousands):
Supplemental cash flow information | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flow from operating leases | $ | |||
ROU assets obtained in exchange for lease obligations | $ | |||
Weighted average remaining lease term | ||||
Weighted average discount rate | % | |||
Amounts disclosed for ROU assets obtained in exchange for lease obligations include amounts added to the carrying amount of ROU assets resulting from lease modifications and reassessments.
Maturities of lease liabilities by fiscal year for our operating leases are as follows (in thousands):
As of September 30, 2019 | ||||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total lease payments | ||||
Less amount of lease payments representing interest | ||||
Total present value of lease payments | $ | |||
As of December 31, 2018 | ||||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total lease payments | $ | |||
12
(4) Investment securities and impairment of investment securities
The following table shows the portfolio of investment securities available-for-sale at September 30, 2019 (in thousands):
Amortized cost | Gross unrealized holding gains | Gross unrealized holding losses | Fair value | |||||||||
Debt issued by the U.S. government and agencies: | ||||||||||||
Due in less than one year | $ | |||||||||||
Debt issued by government sponsored enterprises: | ||||||||||||
Due in less than one year | ( | ) | ||||||||||
Due in one year through five years | ( | ) | ||||||||||
Due in five years through ten years | ( | ) | ||||||||||
Municipal securities: | ||||||||||||
Due in less than one year | ||||||||||||
Due in one year through five years | ||||||||||||
Due in five years through ten years | ||||||||||||
Due after ten years | ||||||||||||
Corporate debt issues: | ||||||||||||
Due in five years through ten years | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
Fixed rate pass-through | ( | ) | ||||||||||
Variable rate pass-through | ( | ) | ||||||||||
Fixed rate agency CMOs | ( | ) | ||||||||||
Variable rate agency CMOs | ( | ) | ||||||||||
Total residential mortgage-backed securities | ( | ) | ||||||||||
Total marketable securities available-for-sale | $ | ( | ) | |||||||||
13
The following table shows the portfolio of investment securities available-for-sale at December 31, 2018 (in thousands):
Amortized cost | Gross unrealized holding gains | Gross unrealized holding losses | Fair value | |||||||||
Debt issued by the U.S. government and agencies: | ||||||||||||
Due in one year through five years | $ | |||||||||||
Debt issued by government sponsored enterprises: | ||||||||||||
Due in less than one year | ( | ) | ||||||||||
Due in one year through five years | ( | ) | ||||||||||
Due after ten years | ( | ) | ||||||||||
Municipal securities: | ||||||||||||
Due in less than one year | ( | ) | ||||||||||
Due in one year through five years | ( | ) | ||||||||||
Due in five years through ten years | ||||||||||||
Due after ten years | ||||||||||||
Corporate debt issues: | ||||||||||||
Due in five years through ten years | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
Fixed rate pass-through | ( | ) | ||||||||||
Variable rate pass-through | ( | ) | ||||||||||
Fixed rate agency CMOs | ( | ) | ||||||||||
Variable rate agency CMOs | ( | ) | ||||||||||
Total residential mortgage-backed securities | ( | ) | ||||||||||
Total marketable securities available-for-sale | $ | ( | ) | |||||||||
Amortized cost | Gross unrealized holding gains | Gross unrealized holding losses | Fair value | |||||||||
Residential mortgage-backed securities: | ||||||||||||
Fixed rate pass-through | $ | |||||||||||
Variable rate pass-through | ||||||||||||
Fixed rate agency CMOs | ||||||||||||
Variable rate agency CMOs | ||||||||||||
Total residential mortgage-backed securities | ||||||||||||
Total marketable securities held-to-maturity | $ | |||||||||||
14
The following table shows the portfolio of investment securities held-to-maturity at December 31, 2018 (in thousands):
Amortized cost | Gross unrealized holding gains | Gross unrealized holding losses | Fair value | |||||||||
Residential mortgage-backed securities: | ||||||||||||
Fixed rate pass-through | $ | |||||||||||
Variable rate pass-through | ||||||||||||
Fixed rate agency CMOs | ( | ) | ||||||||||
Variable rate agency CMOs | ||||||||||||
Total residential mortgage-backed securities | ( | ) | ||||||||||
Total marketable securities held-to-maturity | $ | ( | ) | |||||||||
The following table shows the fair value of and gross unrealized losses on investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2019 (in thousands):
Less than 12 months | 12 months or more | Total | ||||||||||||||||
Fair value | Unrealized loss | Fair value | Unrealized loss | Fair value | Unrealized loss | |||||||||||||
U.S. government sponsored enterprises | $ | ( | ) | ( | ) | |||||||||||||
Municipal securities | ||||||||||||||||||
Residential mortgage-backed securities - agency | ( | ) | ( | ) | ( | ) | ||||||||||||
Total temporarily impaired securities | $ | ( | ) | ( | ) | ( | ) | |||||||||||
The following table shows the fair value of and gross unrealized losses on investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2018 (in thousands):
Less than 12 months | 12 months or more | Total | ||||||||||||||||
Fair value | Unrealized loss | Fair value | Unrealized loss | Fair value | Unrealized loss | |||||||||||||
U.S. government sponsored enterprises | $ | ( | ) | ( | ) | |||||||||||||
Municipal securities | ( | ) | ( | ) | ( | ) | ||||||||||||
Residential mortgage-backed securities - agency | ( | ) | ( | ) | ( | ) | ||||||||||||
Total temporarily impaired securities | $ | ( | ) | ( | ) | ( | ) | |||||||||||
We review our investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which amortized costs have exceeded fair values, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the intent and ability to hold the investments for a period of time sufficient to allow for a recovery in value. We do not have the intent to sell these securities and it is more likely than not that we will not have to sell these securities before a recovery of our cost basis. For these reasons, we consider the unrealized losses to be temporary impairment losses.
Credit related impairment on all debt securities is recognized in earnings while noncredit related impairment on available-for-sale debt securities, not expected to be sold, is recognized in other comprehensive income.
The table below shows a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold for the quarters ended September 30, (in thousands):
2019 | 2018 | |||||
Beginning balance at January 1, (1) | $ | |||||
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized | ||||||
Reduction for losses realized during the quarter | ||||||
Reduction for securities sold/called realized during the quarter | ( | ) | ||||
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized | ||||||
Ending balance at September 30, | $ | |||||
(1) The beginning balance represents credit losses included in other-than-temporary impairment charges recognized on debt securities in prior periods.
15
(5) Loans receivable
The following table shows a summary of our loans receivable at September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019 | December 31, 2018 | |||||||||||||||||
Originated | Acquired | Total | Originated | Acquired | Total | |||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans (1) | $ | |||||||||||||||||
Home equity loans | ||||||||||||||||||
Consumer finance loans (2) | ||||||||||||||||||
Consumer loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total loans receivable, gross | ||||||||||||||||||
Deferred loan costs | ||||||||||||||||||
Allowance for loan losses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||
Undisbursed loan proceeds: | ||||||||||||||||||
Residential mortgage loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
Commercial real estate loans | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||
Commercial loans | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||
Total loans receivable, net | $ | |||||||||||||||||
(1) Includes $8.9 million and $0 of loans held-for-sale at September 30, 2019 and December 31, 2018, respectively.
(2) Represents loans from our consumer finance subsidiary that was closed in 2017. Such loans are no longer being originated.
Acquired loans were initially measured at fair value and subsequently accounted for under either ASC Topic 310-30 or ASC Topic 310-20. The following table provides information related to the outstanding principal balance and related carrying value of acquired loans for the dates indicated (in thousands):
September 30, 2019 | December 31, 2018 | |||||
Acquired loans evaluated individually for future credit losses: | ||||||
Outstanding principal balance | $ | |||||
Carrying value | ||||||
Acquired loans evaluated collectively for future credit losses: | ||||||
Outstanding principal balance | ||||||
Carrying value | ||||||
Total acquired loans: | ||||||
Outstanding principal balance | ||||||
Carrying value | ||||||
16
The following table provides information related to the changes in the accretable discount, which includes income recognized from contractual cash flows for the dates indicated (in thousands):
Total | |||
Balance at December 31, 2017 | $ | ||
Accretion | ( | ) | |
Net reclassification from nonaccretable yield | |||
Balance at December 31, 2018 | |||
Accretion | ( | ) | |
Net reclassification from nonaccretable yield | |||
Balance at September 30, 2019 | $ | ||
The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the nine months ended September 30, 2019 (in thousands):
Carrying value | Outstanding principal balance | Related impairment reserve | Average recorded investment in impaired loans | Interest income recognized | |||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ||||||||||||||
Home equity loans | |||||||||||||||
Consumer loans | |||||||||||||||
Total Personal Banking | |||||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | |||||||||||||||
Commercial loans | |||||||||||||||
Total Commercial Banking | |||||||||||||||
Total | $ | ||||||||||||||
The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the year ended December 31, 2018 (in thousands):
Carrying value | Outstanding principal balance | Related impairment reserve | Average recorded investment in impaired loans | Interest income recognized | |||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ||||||||||||||
Home equity loans | |||||||||||||||
Consumer loans | |||||||||||||||
Total Personal Banking | |||||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | |||||||||||||||
Commercial loans | |||||||||||||||
Total Commercial Banking | |||||||||||||||
Total | $ | ||||||||||||||
17
The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the quarter ended September 30, 2019 (in thousands):
Balance as of September 30, 2019 | Current period provision | Charge-offs | Recoveries | Balance as of June 30, 2019 | |||||||||||
Originated loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ( | ) | ( | ) | ||||||||||
Home equity loans | ( | ) | ( | ) | |||||||||||
Consumer finance loans | ( | ) | ( | ) | |||||||||||
Consumer loans | ( | ) | |||||||||||||
Total Personal Banking | ( | ) | |||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | ( | ) | |||||||||||
Commercial loans | ( | ) | |||||||||||||
Total Commercial Banking | ( | ) | ( | ) | |||||||||||
Total originated loans | ( | ) | |||||||||||||
Acquired loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | ( | ) | |||||||||||||
Home equity loans | ( | ) | |||||||||||||
Consumer loans | ( | ) | |||||||||||||
Total Personal Banking | ( | ) | |||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | |||||||||||||
Commercial loans | ( | ) | ( | ) | |||||||||||
Total Commercial Banking | ( | ) | |||||||||||||
Total acquired loans | ( | ) | |||||||||||||
Total | $ | ( | ) | ||||||||||||
18
The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the quarter ended September 30, 2018 (in thousands):
Balance as of September 30, 2018 | Current period provision | Charge-offs | Recoveries | Balance as of June 30, 2018 | |||||||||||
Originated loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ( | ) | ||||||||||||
Home equity loans | ( | ) | ( | ) | |||||||||||
Consumer finance loans | ( | ) | ( | ) | |||||||||||
Consumer loans | ( | ) | |||||||||||||
Total Personal Banking | ( | ) | |||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | |||||||||||||
Commercial loans | ( | ) | ( | ) | |||||||||||
Total Commercial Banking | ( | ) | |||||||||||||
Total originated loans | ( | ) | |||||||||||||
Acquired loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | ( | ) | ( | ) | |||||||||||
Home equity loans | ( | ) | ( | ) | |||||||||||
Consumer loans | ( | ) | ( | ) | |||||||||||
Total Personal Banking | ( | ) | ( | ) | |||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | ( | ) | |||||||||||
Commercial loans | ( | ) | ( | ) | |||||||||||
Total Commercial Banking | ( | ) | ( | ) | |||||||||||
Total acquired loans | ( | ) | ( | ) | |||||||||||
Total | $ | ( | ) | ||||||||||||
19
The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the nine months ended September 30, 2019 (in thousands):
Balance as of September 30, 2019 | Current period provision | Charge-offs | Recoveries | Balance as of December 31, 2018 | |||||||||||
Originated loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ( | ) | ( | ) | ||||||||||
Home equity loans | ( | ) | |||||||||||||
Consumer finance loans | ( | ) | ( | ) | |||||||||||
Other consumer loans | ( | ) | |||||||||||||
Total Personal Banking | ( | ) | |||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | ( | ) | |||||||||||
Commercial loans | ( | ) | |||||||||||||
Total Commercial Banking | ( | ) | |||||||||||||
Total originated loans | ( | ) | |||||||||||||
Acquired loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | ( | ) | |||||||||||||
Home equity loans | ( | ) | |||||||||||||
Other consumer loans | ( | ) | |||||||||||||
Total Personal Banking | ( | ) | |||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | |||||||||||||
Commercial loans | ( | ) | |||||||||||||
Total Commercial Banking | ( | ) | |||||||||||||
Total acquired loans | ( | ) | |||||||||||||
Total | $ | ( | ) | ||||||||||||
20
The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the nine months ended September 30, 2018 (in thousands):
Balance as of September 30, 2018 | Current period provision | Charge-offs | Recoveries | Balance as of December 31, 2017 | |||||||||||
Originated loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ( | ) | ||||||||||||
Home equity loans | ( | ) | ( | ) | |||||||||||
Consumer finance loans | ( | ) | ( | ) | |||||||||||
Other consumer loans | ( | ) | |||||||||||||
Total Personal Banking | ( | ) | |||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | |||||||||||||
Commercial loans | ( | ) | ( | ) | |||||||||||
Total Commercial Banking | ( | ) | |||||||||||||
Total originated loans | ( | ) | |||||||||||||
Acquired loans | |||||||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | ( | ) | ( | ) | |||||||||||
Home equity loans | ( | ) | |||||||||||||
Other consumer loans | ( | ) | ( | ) | |||||||||||
Total Personal Banking | ( | ) | ( | ) | |||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | ( | ) | ( | ) | |||||||||||
Commercial loans | ( | ) | |||||||||||||
Total Commercial Banking | ( | ) | ( | ) | |||||||||||
Total acquired loans | ( | ) | ( | ) | |||||||||||
Total | $ | ( | ) | ||||||||||||
21
The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at September 30, 2019 (in thousands):
Total loans receivable | Allowance for loan losses | Nonaccrual loans (1) | Loans 90 days past maturity and accruing | TDRs | Allowance related to TDRs | Additional commitments to customers with loans classified as TDRs | |||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | $ | — | |||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer finance loans | — | ||||||||||||||||||||
Consumer loans | — | ||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total | $ | ||||||||||||||||||||
(1) | Includes $ |
The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2018 (in thousands):
Total loans receivable | Allowance for loan losses | Nonaccrual loans (1) | Loans 90 days past maturity and accruing | TDRs | Allowance related to TDRs | Additional commitments to customers with loans classified as TDRs | |||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | $ | ||||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer finance loans | |||||||||||||||||||||
Consumer loans | |||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total | $ | ||||||||||||||||||||
(1) | Includes $ |
22
The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the nine months ended September 30, 2019 (in thousands):
Nonaccrual loans 90 or more days delinquent | Nonaccrual loans less than 90 days delinquent | Loans less than 90 days delinquent reviewed for impairment | TDRs less than 90 days delinquent not included elsewhere | Total impaired loans | Average recorded investment in impaired loans | Interest income recognized on impaired loans | |||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | $ | ||||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer finance loan | |||||||||||||||||||||
Consumer loans | |||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total | $ | ||||||||||||||||||||
The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the year ended December 31, 2018 (in thousands):
Nonaccrual loans 90 or more days delinquent | Nonaccrual loans less than 90 days delinquent | Loans less than 90 days delinquent reviewed for impairment | TDRs less than 90 days delinquent not included elsewhere | Total impaired loans | Average recorded investment in impaired loans | Interest income recognized on impaired loans | |||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | $ | ||||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer finance loans | |||||||||||||||||||||
Consumer loans | |||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total | $ | ||||||||||||||||||||
At September 30, 2019, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider our purchased credit impaired loans that are 90 days or more delinquent to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.
23
The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at September 30, 2019 (in thousands):
Loans collectively evaluated for impairment | Loans individually evaluated for impairment | Loans individually evaluated for impairment for which there is a related impairment reserve | Related impairment reserve | Loans individually evaluated for impairment for which there is no related reserve | |||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ||||||||||||||
Home equity loans | |||||||||||||||
Consumer finance loans | |||||||||||||||
Consumer loans | |||||||||||||||
Total Personal Banking | |||||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | |||||||||||||||
Commercial loans | |||||||||||||||
Total Commercial Banking | |||||||||||||||
Total | $ | ||||||||||||||
The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2018 (in thousands):
Loans collectively evaluated for impairment | Loans individually evaluated for impairment | Loans individually evaluated for impairment for which there is a related impairment reserve | Related impairment reserve | Loans individually evaluated for impairment for which there is no related reserve | |||||||||||
Personal Banking: | |||||||||||||||
Residential mortgage loans | $ | ||||||||||||||
Home equity loans | |||||||||||||||
Consumer finance loans | |||||||||||||||
Consumer loans | |||||||||||||||
Total Personal Banking | |||||||||||||||
Commercial Banking: | |||||||||||||||
Commercial real estate loans | |||||||||||||||
Commercial loans | |||||||||||||||
Total Commercial Banking | |||||||||||||||
Total | $ | ||||||||||||||
24
Our loan portfolios include loans that have been modified in a troubled debt restructuring ("TDR"), where concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include: extending the note’s maturity date, permitting interest only payments, reducing the interest rate to a rate lower than current market rates for new debt with similar risk, reducing the principal payment, principal forbearance or other actions. These concessions are applicable to all loan segments and classes. Certain TDRs are classified as nonperforming at the time of restructuring and may be returned to performing status after considering the borrower’s sustained repayment performance for a period of at least nine months.
When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, the loan’s observable market price or the current fair value of the collateral, less selling costs, for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment in accordance with ASC 310-10. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan.
Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, we evaluate the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, partial charge-offs may be taken to further write-down the carrying value of the loan, or the loan may be charged-off completely.
The following tables provide a roll forward of TDRs for the periods indicated (in thousands):
For the quarter ended September 30, | |||||||||||||
2019 | 2018 | ||||||||||||
Number of contracts | Amount | Number of contracts | Amount | ||||||||||
Beginning TDR balance: | $ | $ | |||||||||||
New TDRs | |||||||||||||
Re-modified TDRs | |||||||||||||
Net paydowns | — | ( | ) | — | ( | ) | |||||||
Charge-offs: | |||||||||||||
Residential mortgage loans | |||||||||||||
Home equity loans | |||||||||||||
Commercial real estate loans | ( | ) | |||||||||||
Commercial loans | ( | ) | ( | ) | |||||||||
Paid-off loans: | |||||||||||||
Residential mortgage loans | ( | ) | |||||||||||
Home equity loans | ( | ) | ( | ) | |||||||||
Commercial real estate loans | ( | ) | ( | ) | |||||||||
Commercial loans | ( | ) | ( | ) | |||||||||
Ending TDR balance: | $ | $ | |||||||||||
Accruing TDRs | $ | $ | |||||||||||
Non-accrual TDRs | |||||||||||||
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For the nine months ended September 30, | |||||||||||||
2019 | 2018 | ||||||||||||
Number of contracts | Amount | Number of contracts | Amount | ||||||||||
Beginning TDR balance: | $ | $ | |||||||||||
New TDRs | |||||||||||||
Re-modified TDRs | |||||||||||||
Net paydowns | — | ( | ) | — | ( | ) | |||||||
Charge-offs: | |||||||||||||
Residential mortgage loans | ( | ) | |||||||||||
Home equity loans | |||||||||||||
Commercial real estate loans | ( | ) | |||||||||||
Commercial loans | ( | ) | ( | ) | |||||||||
Paid-off loans: | |||||||||||||
Residential mortgage loans | ( | ) | ( | ) | |||||||||
Home equity loans | ( | ) | ( | ) | |||||||||
Commercial real estate loans | ( | ) | ( | ) | |||||||||
Commercial loans | ( | ) | ( | ) | |||||||||
Ending TDR balance: | $ | $ | |||||||||||
Accruing TDRs | $ | $ | |||||||||||
Non-accrual TDRs | |||||||||||||
The following tables provide information related to TDRs (including re-modified TDRs) by portfolio segment and by class of financing receivable during the periods indicated (in thousands):
For the quarter ended September 30, 2019 | For the nine months ended September 30, 2019 | ||||||||||||||||||||||||
Number of contracts | Recorded investment at the time of modification | Current recorded investment | Current allowance | Number of contracts | Recorded investment at the time of modification | Current recorded investment | Current allowance | ||||||||||||||||||
Personal Banking: | |||||||||||||||||||||||||
Residential mortgage loans | $ | $ | |||||||||||||||||||||||
Home equity loans | |||||||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||||||
Total | $ | $ | |||||||||||||||||||||||
TDRs modified within the previous twelve months that have subsequently defaulted: | |||||||||||||||||||||||||
Personal Banking: | |||||||||||||||||||||||||
Residential mortgage loans | $ | $ | |||||||||||||||||||||||
Home equity loans | |||||||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||||||
Commercial Banking | |||||||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||||||
Total | $ | $ | |||||||||||||||||||||||
A TDR is considered to be in default when a restructured loan is 90 days or more past due.
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For the quarter ended September 30, 2018 | For the nine months ended September 30, 2018 | ||||||||||||||||||||||||
Number of contracts | Recorded investment at the time of modification | Current recorded investment | Current allowance | Number of contracts | Recorded investment at the time of modification | Current recorded investment | Current allowance | ||||||||||||||||||
Personal Banking: | |||||||||||||||||||||||||
Residential mortgage loans | $ | $ | |||||||||||||||||||||||
Home equity loans | |||||||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||||||
Total | $ | $ | |||||||||||||||||||||||
During the quarter and nine months ended September 30, 2018, no TDRs modified within the previous twelve months of September 30, 2018, subsequently defaulted.
The following table provides information as of September 30, 2019 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended September 30, 2019 (in thousands):
Type of modification | ||||||||||||||||||
Number of contracts | Rate | Payment | Maturity date | Other | Total | |||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | $ | |||||||||||||||||
Home equity loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total | $ | |||||||||||||||||
The following table provides information as of September 30, 2018 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended September 30, 2018 (in thousands):
Type of modification | ||||||||||||||||||
Number of contracts | Rate | Payment | Maturity date | Other | Total | |||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | $ | |||||||||||||||||
Home equity loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total | $ | |||||||||||||||||
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The following table provides information as of September 30, 2019 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the nine months ended September 30, 2019 (in thousands):
Type of modification | ||||||||||||||||||
Number of contracts | Rate | Payment | Maturity date | Other | Total | |||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | $ | |||||||||||||||||
Home equity loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total | $ | |||||||||||||||||
The following table provides information as of September 30, 2018 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the nine months ended September 30, 2018 (in thousands):
Type of modification | ||||||||||||||||||
Number of contracts | Rate | Payment | Maturity date | Other | Total | |||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | $ | |||||||||||||||||
Home equity loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total | $ | |||||||||||||||||
During the nine months ended September 30, 2019, eight commercial banking TDRs were re-modified. During the nine months ended September 30, 2018, three commercial banking TDRs were re-modified.
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The following table provides information related to loan payment delinquencies at September 30, 2019 (in thousands):
30-59 Days delinquent | 60-89 Days delinquent | 90 Days or greater delinquent | Total delinquency | Current | Total loans receivable | 90 Days or greater delinquent and accruing (1) | |||||||||||||||
Originated loans | |||||||||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | $ | ||||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer finance loans | |||||||||||||||||||||
Consumer loans | |||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total originated loans | |||||||||||||||||||||
Acquired loans | |||||||||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | |||||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer loans | |||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total acquired loans | |||||||||||||||||||||
Total loans | $ | ||||||||||||||||||||
(1) | Represents acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing because we can reasonably estimate future cash flows on and expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value and their expected cash flows into interest income. |
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The following table provides information related to loan payment delinquencies at December 31, 2018 (in thousands):
30-59 Days delinquent | 60-89 Days delinquent | 90 Days or greater delinquent | Total delinquency | Current | Total loans receivable | 90 Days or greater delinquent and accruing (1) | |||||||||||||||
Originated loans | |||||||||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | $ | ||||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer finance loans | |||||||||||||||||||||
Consumer loans | |||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total originated loan | |||||||||||||||||||||
Acquired loans | |||||||||||||||||||||
Personal Banking: | |||||||||||||||||||||
Residential mortgage loans | |||||||||||||||||||||
Home equity loans | |||||||||||||||||||||
Consumer loans | |||||||||||||||||||||
Total Personal Banking | |||||||||||||||||||||
Commercial Banking: | |||||||||||||||||||||
Commercial real estate loans | |||||||||||||||||||||
Commercial loans | |||||||||||||||||||||
Total Commercial Banking | |||||||||||||||||||||
Total acquired loan | |||||||||||||||||||||
Total | $ | ||||||||||||||||||||
(1) Represents acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing because we can reasonably estimate future cash flows and expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value and their expected cash flows into interest income.
Credit quality indicators: We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk. Credit relationships greater than or equal to $1.0 million classified as special mention or substandard are reviewed quarterly for deterioration or improvement to determine if the loan is appropriately classified. We use the following definitions for risk ratings other than pass:
Special mention — Loans designated as special mention have specific, well-defined risk issues, which create a high level of uncertainty regarding the long-term viability of the business. Loans in this class are considered to have high-risk characteristics. A special mention loan exhibits material negative financial trends due to company-specific or systemic conditions. If these potential weaknesses are not mitigated, they threaten the borrower’s capacity to meet its debt obligations. Special mention loans still demonstrate sufficient financial flexibility to react to and positively address the root cause of the adverse financial trends without significant deviations from their current business strategy. Their potential weaknesses deserve our close attention and warrant enhanced monitoring.
Substandard — Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
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Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified as substandard. In addition, those weaknesses make collection or liquidation in full highly questionable and improbable. A loan classified as doubtful exhibits discernible loss potential, but a complete loss seems very unlikely. The possibility of a loss on a doubtful loan is high, but because of certain important and reasonably specific pending factors that may strengthen the loan, its classification as an estimated loss is deferred until a more exact status can be determined.
Loss — Loans classified as loss are considered uncollectible and of such value that the continuance as a loan is not warranted. A loss classification does not mean that the loan has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off all or a portion of a basically worthless loan even though partial recovery may be possible in the future.
The following table sets forth information about credit quality indicators as of September 30, 2019 (in thousands):
Pass | Special mention | Substandard | Doubtful | Loss | Total loans receivable | |||||||||||||
Originated loans | ||||||||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | $ | |||||||||||||||||
Home equity loans | ||||||||||||||||||
Consumer finance loans | ||||||||||||||||||
Consumer loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total originated loans | ||||||||||||||||||
Acquired loans | ||||||||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||
Home equity loans | ||||||||||||||||||
Consumer loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total acquired loans | ||||||||||||||||||
Total loans | $ | |||||||||||||||||
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The following table sets forth information about credit quality indicators as of December 31, 2018 (in thousands):
Pass | Special mention | Substandard | Doubtful | Loss | Total loans receivable | |||||||||||||
Originated loans | ||||||||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | $ | |||||||||||||||||
Home equity loans | ||||||||||||||||||
Consumer finance loans | ||||||||||||||||||
Consumer loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total originated loans | ||||||||||||||||||
Acquired loans | ||||||||||||||||||
Personal Banking: | ||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||
Home equity loans | ||||||||||||||||||
Consumer loans | ||||||||||||||||||
Total Personal Banking | ||||||||||||||||||
Commercial Banking: | ||||||||||||||||||
Commercial real estate loans | ||||||||||||||||||
Commercial loans | ||||||||||||||||||
Total Commercial Banking | ||||||||||||||||||
Total acquired loans | ||||||||||||||||||
Total | $ | |||||||||||||||||
(6) | Goodwill and Other Intangible Assets |
The following table provides information for intangible assets subject to amortization at the dates indicated (in thousands):
September 30, 2019 | December 31, 2018 | |||||
Amortizable intangible assets: | ||||||
Core deposit intangibles - gross | $ | |||||
Acquisitions | ||||||
Less: accumulated amortization | ( | ) | ( | ) | ||
Core deposit intangibles - net | ||||||
Customer and Contract intangible assets - gross | ||||||
Less: accumulated amortization | ( | ) | ( | ) | ||
Customer and Contract intangible assets - net | ||||||
Total intangible assets - net | $ | |||||
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The following table shows the actual aggregate amortization expense for the quarters ended September 30, 2019 and 2018, as well as the estimated aggregate amortization expense, based upon current levels of intangible assets, for the current fiscal year and each of the five succeeding fiscal years (in thousands):
For the quarter ended September 30, 2019 | $ | ||
For the quarter ended September 30, 2018 | |||
For the nine months ended September 30, 2019 | |||
For the nine months ended September 30, 2018 | |||
For the year ending December 31, 2019 | |||
For the year ending December 31, 2020 | |||
For the year ending December 31, 2021 | |||
For the year ending December 31, 2022 | |||
For the year ending December 31, 2023 | |||
For the year ending December 31, 2024 | |||
The following table provides information for the changes in the carrying amount of goodwill (in thousands):
Total | |||
Balance at December 31, 2017 | $ | ||
Goodwill from acquisition | |||
Balance at December 31, 2018 | |||
Goodwill from acquisition | |||
Balance at September 30, 2019 | $ | ||
We performed our annual goodwill impairment test as of June 30, 2019 in accordance with ASC 350, as updated by ASU 2017-04, ("Step 0") and concluded that goodwill was not impaired. As of September 30, 2019, there were no events or changes in circumstances that would cause us to update that goodwill impairment test.
(7) Borrowed Funds
(a) Borrowings
Borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB"), are secured by our residential first mortgage and other qualifying loans. Certain of these borrowings are subject to restrictions or penalties in the event of prepayment.
The revolving line of credit with the FHLB carries a commitment of $250.0 million. The rate is adjusted daily by the FHLB, and any borrowings on this line may be repaid at any time without penalty. At September 30, 2019 and December 31, 2018, the balance of the revolving line of credit was $172.2 million and $128.6 million, respectively.
At September 30, 2019 and December 31, 2018, collateralized borrowings due within one year were $83.1 million and $105.8 million, respectively. These borrowings are collateralized by cash or various securities held in safekeeping by the FHLB.
(b) Trust Preferred Securities
Prior to our merger with DFSC, we owned three statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust and LNB Trust II, a Delaware statutory business trust (the Trusts). The Trusts exist solely to issue preferred securities to third parties for cash, issue common securities to the Company in exchange for capitalization of the Trusts, invest the proceeds from the sale of trust securities in an equivalent amount of debentures of the Company, and engage in other activities that are incidental to those previously listed. Northwest Bancorp Capital Trust III issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 5, 2005 (liquidation value of $1,000 per preferred security or $50,000,000 ) with a stated maturity of December 30, 2035 and a floating rate of interest, which is reset quarterly, equal to three-month LIBOR plus 1.38 %. Northwest Bancorp Statutory Trust IV issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 15, 2005 (liquidation value of $1,000 per preferred security or $50,000,000 ) with a stated maturity of December 15, 2035 and a floating rate of interest, which is reset quarterly, equal to three-month LIBOR plus 1.38 %. LNB Trust II has 7,875 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $7,875,000 ) with a stated maturity of June 15, 2037 and a floating rate of interest, which resets quarterly,
33
equal to three-month LIBOR plus 1.48 %. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.
The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures issued by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. Northwest Bancorp Capital Trust III holds $51,547,000 of the Company’s junior subordinated debentures due December 30, 2035 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.38 %. The rate in effect at September 30, 2019 was 3.48 %. Northwest Bancorp Statutory Trust IV holds $51,547,000 of the Company’s junior subordinated debentures due December 15, 2035 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.38 %. The rate in effect at September 30, 2019 was 3.50 %. LNB Trust II holds $8,119,000 of the Company's junior subordinated debentures due June 15, 2037, with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.48 %. The rate in effect at September 30, 2019 was 3.60 %.
As a result of the merger with DFSC, we acquired two additional statutory business trusts: Union National Capital Trust I ("UNCT I") and Union National Capital Trust II ("UNCT II"); both are Delaware statutory business trusts. At September 30, 2019, UNCT I had 8,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $8,000,000 ) with a stated maturity of December 19, 2034. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 2.85 %. At September 30, 2019, UNCT II had 3,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $3,000,000 ) with a stated maturity of October 14, 2034. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 2.00 %. The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures held by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. UNCT I holds $8,248,000 of junior subordinated debentures and UNCT II holds $3,093,000 of junior subordinated debentures. These subordinated debentures are the sole assets of the Trusts. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.
Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts. We have the right to defer payment of interest on the subordinated debentures at any time, or from time-to-time, for periods not exceeding five years . If interest payments on the subordinated debentures are deferred, the distributions on the trust securities also are deferred. To date there have been no interest deferrals. Interest on the subordinated debentures and distributions on the trust securities is cumulative. Our obligation constitutes a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the trust under the preferred securities.
The Trusts must redeem the preferred securities when the debentures are paid at maturity or upon an earlier redemption of the debentures to the extent the debentures are redeemed. All or part of the debentures may be redeemed at any time. Also, the debentures may be redeemed at any time if existing laws or regulations, or the interpretation or application of these laws or regulations, change causing:
• | the interest on the debentures to no longer be deductible by the Company for federal income tax purposes; |
• | the trust to become subject to federal income tax or to certain other taxes or governmental charges; |
• | the trust to register as an investment company; or |
• | the preferred securities do not qualify as Tier I capital. |
We may, at any time, dissolve any of the Trusts and distribute the debentures to the trust security holders, subject to receipt of any required regulatory approval.
(8) | Guarantees |
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(9) Earnings Per Share
Basic earnings per common share ("EPS") is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. All stock options outstanding during the quarter ended September 30, 2019 and 2018 were included in the computation of diluted earnings per share because the stock options’ exercise price was less than the average market price of the common shares of $16.69 and $18.01 , respectively. All stock options outstanding during the nine months ended September 30, 2019 and 2018 were included in the computation of diluted earnings per share because the stock options' exercise price was less than the average market price of the common shares of $17.19 and $17.30 , respectively.
The following table sets forth the computation of basic and diluted EPS (in thousands, except share data and per share amounts):
Quarter ended September 30, | Nine months ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Net income available to common shareholders | $ | |||||||||||
Weighted average common shares outstanding | ||||||||||||
Dilutive potential shares due to effect of stock options | ||||||||||||
Total weighted average common shares and dilutive potential shares | ||||||||||||
Basic earnings per share | $ | |||||||||||
Diluted earnings per share | $ | |||||||||||
(10) Pension and Other Post-retirement Benefits
The following table sets forth the net periodic costs for the defined benefit pension plans and post retirement healthcare plans for the periods indicated (in thousands):
Quarter ended September 30, | ||||||||||||
Pension benefits | Other post-retirement benefits | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Service cost | $ | |||||||||||
Interest cost | ||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ||||||||
Amortization of prior service cost | ( | ) | ( | ) | ||||||||
Amortization of the net loss | ||||||||||||
Net periodic cost | $ | |||||||||||
Nine months ended September 30, | ||||||||||||
Pension benefits | Other post-retirement benefits | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Service cost | $ | |||||||||||
Interest cost | ||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ||||||||
Amortization of prior service cost | ( | ) | ( | ) | ||||||||
Amortization of the net loss | ||||||||||||
Net periodic cost | $ | |||||||||||
We anticipate making a contribution to our defined benefit pension plan of $2.0 million to $4.0 million during the year ending December 31, 2019.
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(11) | Disclosures About Fair Value of Financial Instruments |
We are required to disclose fair value information about financial instruments whether or not recognized in the consolidated statement of financial condition. Fair value information of certain financial instruments and all nonfinancial instruments is not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Financial assets and liabilities recognized or disclosed at fair value on a recurring basis and certain financial assets and liabilities on a non-recurring basis are accounted for using a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. This hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.
Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:
• | Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities. |
• | Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing. |
• | Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following: |
• | Quotes from brokers or other external sources that are not considered binding; |
• | Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price; |
• | Quotes and other information from brokers or other external sources where the inputs are not deemed observable. |
We are responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. We perform due diligence to understand the inputs used or how the data was calculated or derived. We also corroborate the reasonableness of external inputs in the valuation process.
The carrying amounts reported in the consolidated statement of financial condition approximate fair value for the following financial instruments: cash and cash equivalents, marketable securities available-for-sale, accrued interest receivable, interest rate lock commitments, forward commitments, interest rate swaps, savings and checking deposits and accrued interest payable.
Marketable securities
Where available, market values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.
Debt securities — available-for-sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and US government obligations.
Debt securities — held-to-maturity - The fair value of debt securities held-to-maturity is determined in the same manner as debt securities available-for-sale.
Loans held-for-sale
The estimated fair value of loans held-for-sale is based on market bids obtained from potential buyers.
Loans held for investment
The fair value of the loans held of investment is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
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FHLB stock
Due to the restrictions placed on transferability of FHLB stock, it is not practical to determine the fair value.
Borrowed funds
Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost. The carrying amount of collateralized borrowings approximates the fair value.
Junior subordinated debentures
The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.
Interest rate lock commitments and forward commitments
The fair value of interest rate lock commitments is based on the value of underlying loans held-for-sale which is based on quoted prices for similar loans in the secondary market. This value is then adjusted based on the probability of the loan closing (i.e. the “pull-through” amount, a significant unobservable input). The fair value of forward sale commitments is based on quoted prices from the secondary market based on the settlement date of the contracts.
Cash flow hedges, interest rate and foreign exchange swap agreements
The fair value of the interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable. The fair value of the foreign exchange swap is derived from proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions we believe to be reasonable.
Off-balance sheet financial instruments
These financial instruments generally are not sold or traded and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At September 30, 2019 and December 31, 2018, there was no significant unrealized appreciation or depreciation on these financial instruments.
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The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at September 30, 2019 (in thousands):
Carrying amount | Estimated fair value | Level 1 | Level 2 | Level 3 | |||||||||||
Financial assets: | |||||||||||||||
Cash and cash equivalents | $ | ||||||||||||||
Securities available-for-sale | |||||||||||||||
Securities held-to-maturity | |||||||||||||||
Loans receivable, net | |||||||||||||||
Residential mortgage loans held-for-sale | |||||||||||||||
Accrued interest receivable | |||||||||||||||
Interest rate lock commitments | |||||||||||||||
Forward commitments | |||||||||||||||
Interest rate swaps | |||||||||||||||
FHLB stock | |||||||||||||||
Total financial assets | $ | ||||||||||||||
Financial liabilities: | |||||||||||||||
Savings and checking deposits | $ | ||||||||||||||
Time deposits | |||||||||||||||
Borrowed funds | |||||||||||||||
Junior subordinated debentures | |||||||||||||||
Interest rate swaps | |||||||||||||||
Accrued interest payable | |||||||||||||||
Total financial liabilities | $ | ||||||||||||||
The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at December 31, 2018 (in thousands):
Carrying amount | Estimated fair value | Level 1 | Level 2 | Level 3 | |||||||||||
Financial assets: | |||||||||||||||
Cash and cash equivalents | $ | ||||||||||||||
Securities available-for-sale | |||||||||||||||
Securities held-to-maturity | |||||||||||||||
Loans receivable, net | |||||||||||||||
Residential mortgage loans held-for-sale | |||||||||||||||
Accrued interest receivable | |||||||||||||||
Interest rate swaps | |||||||||||||||
FHLB stock | |||||||||||||||
Total financial assets | $ | ||||||||||||||
Financial liabilities: | |||||||||||||||
Savings and checking accounts | $ | ||||||||||||||
Time deposits | |||||||||||||||
Borrowed funds | |||||||||||||||
Junior subordinated debentures | |||||||||||||||
Interest rate swaps | |||||||||||||||
Accrued interest payable | |||||||||||||||
Total financial liabilities | $ | ||||||||||||||
38
Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both September 30, 2019 and December 31, 2018. There were no transfers of financial instruments between Level 1 and Level 2 during the quarter ended September 30, 2019.
Level 1 | Level 2 | Level 3 | Total assets at fair value | |||||||||
Debt securities: | ||||||||||||
U.S. government and agencies | $ | |||||||||||
Government sponsored enterprises | ||||||||||||
States and political subdivisions | ||||||||||||
Corporate | ||||||||||||
Total debt securities | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
GNMA | ||||||||||||
FNMA | ||||||||||||
FHLMC | ||||||||||||
Non-agency | ||||||||||||
Collateralized mortgage obligations: | ||||||||||||
GNMA | ||||||||||||
FNMA | ||||||||||||
FHLMC | ||||||||||||
Total mortgage-backed securities | ||||||||||||
Interest rate lock commitments | ||||||||||||
Forward commitments | ||||||||||||
Interest rate swaps | ||||||||||||
Total assets | $ | |||||||||||
Interest rate swaps | $ | |||||||||||
Total liabilities | $ | |||||||||||
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The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2018 (in thousands):
Level 1 | Level 2 | Level 3 | Total assets at fair value | |||||||||
Debt securities: | ||||||||||||
U.S. government and agencies | $ | |||||||||||
Government sponsored enterprises | ||||||||||||
States and political subdivisions | ||||||||||||
Corporate | ||||||||||||
Total debt securities | ||||||||||||
Residential mortgage-backed securities: | ||||||||||||
GNMA | ||||||||||||
FNMA | ||||||||||||
FHLMC | ||||||||||||
Non-agency | ||||||||||||
Collateralized mortgage obligations: | ||||||||||||
GNMA | ||||||||||||
FNMA | ||||||||||||
FHLMC | ||||||||||||
Total mortgage-backed securities | ||||||||||||
Interest rate swaps | ||||||||||||
Total assets | $ | |||||||||||
Interest rate swaps | $ | |||||||||||
Total liabilities | $ | |||||||||||
The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):
For the quarter ended September 30, | For the nine months ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Beginning balance | $ | |||||||||||
Total gains or losses | ||||||||||||
Included in earnings | ||||||||||||
Purchases | ||||||||||||
Sales | ||||||||||||
Transfers from Level 3 | ||||||||||||
Transfers into Level 3 | ||||||||||||
Ending balance | $ | |||||||||||
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment, real estate owned, and mortgage servicing rights.
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The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of September 30, 2019 (in thousands):
Level 1 | Level 2 | Level 3 | Total assets at fair value | |||||||||
Loans measured for impairment | $ | |||||||||||
Real estate owned | ||||||||||||
Total assets | $ | |||||||||||
The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2018 (in thousands):
Level 1 | Level 2 | Level 3 | Total assets at fair value | |||||||||
Loans measured for impairment | $ | |||||||||||
Real estate owned, net | ||||||||||||
Total assets | $ | |||||||||||
Impaired loans - A loan is considered to be impaired as described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2018 Annual Report on Form 10-K. We classify loans individually evaluated for impairment that require a specific reserve as nonrecurring Level 3.
Real estate owned - Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs. We classify real estate owned as nonrecurring Level 3.
The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at September 30, 2019 (in thousands):
Fair value | Valuation techniques | Significant unobservable inputs | Range (weighted average) | ||||||
Loans measured for impairment | $ | Appraisal value (1) | Estimated cost to sell | ||||||
Discounted cash flow | Discount rate | 4.25% to 11.0% (7.50%) | |||||||
Real estate owned | $ | Appraisal value (1) | Estimated cost to sell | ||||||
(1) | Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent. |
(12) Derivative Financial Instruments
We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. The primary derivatives that we use are interest rate swaps and caps and foreign exchange contracts, which are entered into with counterparties that meet established credit standards. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the netting and collateral provisions of the interest rate swap agreements.
Derivatives Designated as Hedging Instruments
With the expiration of the $50.0 million in notional of interest rate swap agreements (swaps) previously designated in hedging relationships, we are no longer a counterparty to any interest rate swap agreements designated as cash flow hedges. Previously, the swaps were intended to protect against the variability of cash flows associated with Northwest Bancorp Capital Trust III and Northwest Bancorp Capital Trust IV. In 2018, the swaps matured without replacement.
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Derivatives Not Designated as Hedging Instruments
We act as an interest rate or foreign exchange swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for at fair value. We manage our exposure to such interest rate or foreign exchange swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the swaps we have with the commercial borrowers. These positions (referred to as “customer swaps”) directly offset each other and our exposure is the fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. Customer swaps are recorded within other assets or other liabilities on the consolidated statement of financial condition at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.
We enter into interest rate lock commitments for residential mortgage loans which commit us to lend funds to a potential borrower at a specific interest rate within a specified period of time. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative financial instruments under applicable accounting guidance. Interest rate lock commitments on loans held-for-sale are carried at fair value in other assets on the consolidated statement of financial condition. Northwest sells loans to the secondary market on a mandatory or best efforts basis. The loans sold on a mandatory basis commit us to deliver a specific principal amount of mortgage loans to an investor at a specified price, by a specified date, or the commitment must be paired off. These forward commitments entered into on a mandatory delivery basis meet the definition of a derivative financial instrument. All closed loans to be sold on a mandatory delivery basis are classified as held-for-sale on the consolidated statement of financial condition. Changes to the fair value of the interest rate lock commitments and the forward commitments are recorded in mortgage banking income in the consolidated statements of income.
The following table presents information regarding our derivative financial instruments for the periods indicated (in thousands):
Asset derivatives | Liability derivatives | |||||||||||
Notional amount | Fair value | Notional amount | Fair value | |||||||||
At September 30, 2019 | ||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest rate swap agreements | $ | |||||||||||
Interest rate lock commitments | ||||||||||||
Forward commitments | ||||||||||||
Total derivatives | $ | |||||||||||
At December 31, 2018 | ||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest rate swap agreements | $ | |||||||||||
Total derivatives | $ | |||||||||||
The following table presents income or expense recognized on derivatives for the periods indicated (in thousands):
For the quarter ended September 30, | For the nine months ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Hedging derivatives: | ||||||||||||
Increase in interest expense | $ | |||||||||||
Non-hedging swap derivatives: | ||||||||||||
Decrease in other income | ( | ) | ( | ) | ( | ) | ||||||
Increase in mortgage banking income | ||||||||||||
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(13) Legal Proceedings
We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. As of September 30, 2019, we have not accrued for any legal proceedings based on our analysis of currently available information which is subject to significant judgment and a variety of assumptions and uncertainties. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate loss to us from legal proceedings.
During the year-ended December 31, 2018, Northwest and our subsidiary, Northwest Insurance Services (“NWIS”), were involved in a lawsuit against, among others, First National Bank of Pennsylvania (“FNB”) and their insurance subsidiary, First National Insurance Agency, LLC (“FNIA”). All counterclaims against Northwest were discontinued and, on December 21, 2018, a verdict was rendered in favor of NWIS on several of its claims. Post-trial proceedings have concluded with the verdict affirmed and attorneys’ fees awarded. An appeal has been filed with the Pennsylvania Superior Court. Due to the inherent uncertainties with respect to these proceedings, we have not accrued any awards associated with this verdict within our consolidated financial statements as of September 30, 2019.
(14) Changes in Accumulated Other Comprehensive Income
The following tables show the changes in accumulated other comprehensive income/(loss) by component for the periods indicated (in thousands):
For the quarter ended September 30, 2019 | ||||||||||||
Unrealized gains and (losses) on securities available- for-sale | Change in fair value of interest rate swaps | Change in defined benefit pension plans | Total | |||||||||
Balance as of June 30, 2019 | $ | ( | ) | ( | ) | |||||||
Other comprehensive income before reclassification adjustments (1) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (2), (3) | ( | ) | ||||||||||
Net other comprehensive income | ||||||||||||
Balance as of September 30, 2019 | $ | ( | ) | ( | ) | |||||||
For the quarter ended September 30, 2018 | ||||||||||||
Unrealized gains and (losses) on securities available- for-sale | Change in fair value of interest rate swaps | Change in defined benefit pension plans | Total | |||||||||
Balance as of June 30, 2018 | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||
Other comprehensive income/(loss) before reclassification adjustments (4), (5) | ( | ) | ( | ) | ||||||||
Amounts reclassified from accumulated other comprehensive income (6), (7) | ( | ) | ||||||||||
Net other comprehensive income/(loss) | ( | ) | ( | ) | ||||||||
Balance as of September 30, 2018 | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||
(1) | Consists of unrealized holding loss, net of tax of $( |
(2) | Consists of realized gain on securities (gain on sales of investments, net) of $( |
(3) | Consists of amortization of prior service cost (compensation and employee benefits) of $( |
(4) | Consists of unrealized holding gain, net of tax $ |
(5) | Change in fair value of interest rate swaps, net of tax $( |
(6) | Consists of realized gains on securities (gain on sales of investments, net) of $ |
(7) | Consists of amortization of prior service cost (compensation and employee benefits) of $ |
43
For the nine months ended September 30, 2019 | ||||||||||||
Unrealized gains on securities available- for-sale | Change in fair value of interest rate swaps | Change in defined benefit pension plans | Total | |||||||||
Balance as of December 31, 2018 | $ | ( | ) | ( | ) | ( | ) | |||||
Other comprehensive income before reclassification adjustments (1) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income (2), (3) | ( | ) | ||||||||||
Net other comprehensive income | ||||||||||||
Balance as of September 30, 2019 | $ | ( | ) | ( | ) | |||||||
For the nine months ended September 30, 2018 | ||||||||||||
Unrealized gains and (losses) on securities available- for-sale | Change in fair value of interest rate swaps | Change in defined benefit pension plans | Total | |||||||||
Balance as of December 31, 2017 | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||
Reclassification due to adoption of ASU No. 2018-02 | ( | ) | ( | ) | ( | ) | ( | ) | ||||
Other comprehensive income/(loss) before reclassification adjustments (4), (5) | ( | ) | ( | ) | ||||||||
Amounts reclassified from accumulated other comprehensive income (6), (7) | ( | ) | ||||||||||
Net other comprehensive income/(loss) | ( | ) | ( | ) | ||||||||
Balance as of September 30, 2018 | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||
(1) | Consists of unrealized holding loss, net of tax of $( |
(2) | Consists of realized gain on securities (gain on sales of investments, net) of $( |
(3) | Consists of amortization of prior service cost (compensation and employee benefits) of $( |
(4) | Consists of unrealized holding gain, net of tax of $ |
(5) | Change in fair value of interest rate swaps, net of tax of $( |
(6) | Consists of realized gains on securities (gain on sales of investments, net) of $ |
(7) | Consists of amortization of prior service cost (compensation and employee benefits) of $ |
(15) Subsequent events
The Company previously announced that it has entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and between the Company and MutualFirst Financial, Inc. (“MutualFirst Financial”). Pursuant to the Merger Agreement, MutualFirst Financial will merge with and into the Company, with the Company as the surviving entity. Immediately thereafter, MutualBank, the wholly owned subsidiary of MutualFirst Financial, will merge with and into Northwest Bank, the wholly owned subsidiary of the Company, with Northwest Bank as the surviving entity.
Under the terms of the Merger Agreement, each share of common stock of MutualFirst Financial will be converted into the right to receive 2.4 shares of the Company’s common stock, for total consideration valued at approximately $346 million, or $39.89 per share based on the Company's 15 -day volume weighted average closing stock pricing ending on October 23, 2019.
The transaction has been approved by the Boards of Directors of the Company and MutualFirst Financial. Completion of the transaction is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of stockholders of MutualFirst Financial.
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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:
• | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; |
• | general economic conditions, either nationally or in our market areas, that are different than expected; |
• | inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; |
• | 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; |
• | the ability of third-party providers to perform their obligations to us; |
• competition among depository and other financial institutions;
• | our ability to enter new markets successfully and capitalize on growth opportunities; |
• | managing our internal growth and our ability to successfully integrate acquired entities, businesses or branch offices; |
• | changes in consumer spending, borrowing and savings habits; |
• | our ability to continue to increase and manage our commercial and personal loans; |
• | possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises; |
• | 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; |
• | changes in the financial performance and/or condition of our borrowers; and |
• | 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 and other accounting standard setters. |
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 2018 Annual Report on Form 10-K.
Comparison of Financial Condition
On March 8, 2019, we acquired all of the outstanding common shares of Donegal Financial Services Corporation ("DFSC"), the holding company for Union Community Bank ("UCB"), for total consideration of $85.8 million, and thereby acquired UCB's 12 branch locations in Lancaster County in eastern Pennsylvania. As a result, we acquired assets with a fair value of $537.9 million, including loans with a fair value of $407.8 million, and we assumed deposits of $479.4 million. Under the terms of the merger agreement, the two shareholders of DFSC, Donegal Mutual Insurance Company and Donegal Group Inc., received payment in the form of 50% cash and 50% stock, or a total of $42.5 million and 2,462,373 shares of NWBI common stock.
Total assets at September 30, 2019 were $10.580 billion, an increase of $972.7 million, or 10.1%, from $9.608 billion at December 31, 2018. This increase in assets was due primarily to the addition of $627.4 million, at fair value, of assets related to the UCB acquisition and organic loan growth of $392.7 million.
45
Total loans receivable increased by $800.6 million, or 9.9%, to $8.852 billion at September 30, 2019, from $8.051 billion at December 31, 2018. This increase was due primarily to the addition of $407.8 million, at fair value, of loans related to the UCB acquisition. Additionally, originated loans receivable increased by $392.7 million, or 4.9% .
Total deposits increased by $787.3 million, or 10.0%, to $8.682 billion at September 30, 2019 from $7.894 billion at December 31, 2018 primarily due to the addition of $479.4 million of deposits, at fair value, related to the UCB acquisition. In addition, legacy total deposits increased by $307.9 million, or 3.9%, with increases across all deposit products except for a slight decrease in savings deposits. Legacy interest-bearing demand deposits increased by $132.9 million, or 9.1%, to $1.588 billion at September 30, 2019 from $1.455 billion at December 31, 2018. These increases are due primarily to our continued efforts to attract low cost accounts to whom we can also cross-sell other products and services. Legacy money market deposits also increased $166.4 million, or 10.0%, to $1.828 billion at September 30, 2019 from $1.662 billion at December 31, 2018, and legacy time deposits grew $108.1 million, or 7.7%, to $1.513 billion at September 30, 2019 from $1.405 billion at December 31, 2018.
Total shareholders’ equity at September 30, 2019 was $1.352 billion, or $12.67 per share, an increase of $94.1 million, or 7.5%, from $1.258 billion, or $12.17 per share, at December 31, 2018. This increase in equity was primarily the result of the issuance of 2,462,373 shares of our common stock at $17.58 per share for the UCB acquisition as well as the result of net income of $84.8 million for the nine months ended September 30, 2019. Partially offsetting this increase was the payment of cash dividends of $57.0 million for the nine months ended September 30, 2019.
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.
In July 2013, the FDIC and the other federal regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rule limits 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.
The capital conservation buffer requirement was phased in, which began on January 1, 2016 and ended on January 1, 2019, when the full capital conservation buffer requirement was implemented.
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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 ratios are presented in the tables below (in thousands).
At September 30, 2019 | ||||||||||||||||||||
Minimum capital | Well capitalized | |||||||||||||||||||
Actual | requirements (1) | requirements | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | $ | 1,286,503 | 15.399 | % | $ | 877,231 | 10.500 | % | $ | 835,458 | 10.000 | % | ||||||||
Northwest Bank | 1,225,458 | 14.678 | % | 876,646 | 10.500 | % | 834,901 | 10.000 | % | |||||||||||
Tier 1 capital (to risk weighted assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | 1,233,644 | 14.766 | % | 710,140 | 8.500 | % | 668,367 | 8.000 | % | |||||||||||
Northwest Bank | 1,171,628 | 14.033 | % | 709,666 | 8.500 | % | 667,921 | 8.000 | % | |||||||||||
CET1 capital (to risk weighted assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | 1,115,536 | 13.352 | % | 584,821 | 7.000 | % | 543,048 | 6.500 | % | |||||||||||
Northwest Bank | 1,171,628 | 14.033 | % | 584,431 | 7.000 | % | 542,686 | 6.500 | % | |||||||||||
Tier 1 capital (leverage) (to average assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | 1,233,644 | 11.793 | % | 418,433 | 4.000 | % | 523,041 | 5.000 | % | |||||||||||
Northwest Bank | 1,171,628 | 11.270 | % | 415,849 | 4.000 | % | 519,812 | 5.000 | % | |||||||||||
(1) Amounts and ratios include the 2019 capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).
At December 31, 2018 | ||||||||||||||||||||
Minimum capital | Well capitalized | |||||||||||||||||||
Actual | requirements (1) | requirements | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
Total capital (to risk weighted assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | $ | 1,183,619 | 15.833 | % | $ | 738,212 | 9.875 | % | $ | 747,557 | 10.000 | % | ||||||||
Northwest Bank | 1,026,027 | 13.736 | % | 737,647 | 9.875 | % | 746,984 | 10.000 | % | |||||||||||
Tier I capital (to risk weighted assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | 1,128,405 | 15.095 | % | 588,701 | 7.875 | % | 598,045 | 8.000 | % | |||||||||||
Northwest Bank | 970,813 | 12.996 | % | 588,250 | 7.875 | % | 597,587 | 8.000 | % | |||||||||||
CET1 capital (to risk weighted assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | 1,020,530 | 13.652 | % | 476,567 | 6.375 | % | 485,912 | 6.500 | % | |||||||||||
Northwest Bank | 970,813 | 12.996 | % | 776,202 | 6.375 | % | 448,190 | 6.000 | % | |||||||||||
Tier I capital (leverage) (to average assets) | ||||||||||||||||||||
Northwest Bancshares, Inc. | 1,128,405 | 11.899 | % | 379,342 | 4.000 | % | 474,177 | 5.000 | % | |||||||||||
Northwest Bank | 970,813 | 10.240 | % | 379,236 | 4.000 | % | 474,045 | 5.000 | % | |||||||||||
(1) Amounts and ratios include the 2018 capital conservation buffer of 1.875%, which does not apply to Tier 1 capital to average assets (leverage ratio).
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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 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’s liquidity ratio at September 30, 2019 was 9.2%. 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, 2019, Northwest had $3.190 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit, which had a balance of $172.2 million, as well as $43.9 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.
Dividends
We paid $19.2 million and $17.5 million in cash dividends during the quarters ended September 30, 2019 and 2018, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 58.1% and 63.0% for the quarters ended September 30, 2019 and 2018, respectively, on dividends of $0.18 per share for the quarter ended September 30, 2019 and on dividends of $0.17 per share for the quarter ended September 30, 2018. We paid $57.0 million and $52.4 million in cash dividends during the nine months ended September 30, 2019 and 2018, respectively. The common stock dividend payout ratio was 67.5% and 67.1% for the nine months ended September 30, 2019 and 2018, respectively, on dividends of $0.54 per share for the nine months ended September 30, 2019 and on dividends of $0.51 per share for the nine months ended September 30, 2018. On October 21, 2019, the Board of Directors declared a cash dividend of $0.18 per share payable on November 15, 2019 to shareholders of record as of November 1, 2019. This represents the 100th 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.
September 30, 2019 | December 31, 2018 | |||||
(in thousands) | ||||||
Loans 90 days or more delinquent | ||||||
Residential mortgage loans | $ | 11,816 | 12,985 | |||
Home equity loans | 5,966 | 6,037 | ||||
Consumer finance loans | 1 | — | ||||
Consumer loans | 3,400 | 3,254 | ||||
Commercial real estate loans | 22,292 | 25,587 | ||||
Commercial loans | 5,741 | 3,010 | ||||
Total loans 90 days or more delinquent | $ | 49,216 | 50,873 | |||
Total real estate owned, net (REO) | 1,237 | 2,498 | ||||
Total loans 90 days or more delinquent and REO | 50,453 | 53,371 | ||||
Total loans 90 days or more delinquent to net loans receivable | 0.56 | % | 0.64 | % | ||
Total loans 90 days or delinquent and REO to total assets | 0.48 | % | 0.56 | % | ||
Nonperforming loans: | ||||||
Nonaccrual loans - loans 90 days or more delinquent | 49,121 | 50,730 | ||||
Nonaccrual loans - loans less than 90 days delinquent | 16,536 | 21,552 | ||||
Loans 90 days or more past maturity and still accruing | 85 | 166 | ||||
Total nonperforming loans | 65,742 | 72,448 | ||||
Total nonperforming assets | $ | 66,979 | 74,946 | |||
Nonaccrual TDR loans (1) | 9,138 | 15,306 | ||||
Accruing TDR loans | 21,162 | 18,302 | ||||
Total TDR loans | $ | 30,300 | 33,608 | |||
(1) | Included in nonaccurual loans above. |
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At September 30, 2019, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider these loans that are 90 days or more delinquent, which total $95,000, to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.
A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement including both contractual principal and interest payments. The amount of impairment is required to be measured using 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 collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, a specific allowance is allocated for the impairment. Impaired loans at September 30, 2019 and December 31, 2018 were $88.8 million and $98.3 million, respectively.
Allowance for Loan Losses
Our Board of Directors has adopted an “Allowance for Loan and Lease Losses” (“ALL”) policy designed to provide management with a systematic methodology for determining and documenting the ALL each reporting period. This methodology was developed to provide a consistent process and review procedure to ensure that the ALL is in conformity with GAAP, our policies and procedures and other supervisory and regulatory guidelines.
On an ongoing basis, the Credit Administration department, as well as loan officers, branch managers 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 region 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” are considered uncollectible so that their continuance as assets without the establishment of a specific loss allowance is not warranted.
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 for possible impairment. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including both contractual principal and interest payments.
If such an individual loan is deemed to be impaired, the Credit Administration department determines the proper measure of impairment 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 impaired loan is more or less than the recorded investment in the loan, the Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not considered individually for impairment, it is grouped with other loans that possess common characteristics for impairment evaluation and analysis. This segmentation is accomplished by grouping loans of similar product types, risk characteristics and industry concentration into homogeneous pools. Historical loss ratios are analyzed and adjusted based on delinquency trends as well as the current economic, political, regulatory, and interest rate environment and used to estimate the current measure of impairment.
The individual impairment measures 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 Loan Loss Committee ("ALL Committee") monthly. The ALL Committee reviews and approves the processes and ALL documentation presented. Based on this review and discussion, the appropriate amount of ALL is estimated and any adjustments to reconcile the actual ALL with this estimate are determined. The ALL Committee also considers if any changes to the methodology are needed. In addition to the ALL 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.
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In addition to the reviews by management’s ALL 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 ALL and its conformity with regulatory guidelines and pronouncements. Any recommendations or enhancements from these independent parties are considered by management and the ALL 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 ALL 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 loan losses and the related provision for loan losses, which the ALL Committee assesses regularly for appropriateness. As part of the analysis as of September 30, 2019, we considered the economic conditions in our markets, such as unemployment and bankruptcy levels as well as changes in estimates of real estate collateral values, and no material changes in methodology were determined to be necessary. In addition, we considered the overall trends in asset quality, specific reserves needed and/or already established for criticized loans, historical loss rates and collateral valuations. The ALL decreased by $2.4 million, or 4.3%, to $52.9 million, or 0.60% of total loans at September 30, 2019 from $55.2 million, or 0.69% of total loans, at December 31, 2018. This decrease is due primarily to the write down of $4.0 million on a residential land development loan in our Western New York region which was previously fully reserved. Partially offsetting this decrease was an increase in substandard loans of $21.8 million, or 11.9%, slightly offset by the decrease in loans classified as special mention of $6.9 million, or 6.1%. Loans classified as substandard increased to $205.6 million at September 30, 2019 from $183.8 million at December 31, 2018. Loans classified as special mention decreased to $107.0 million at September 30, 2019 from $114.0 million at December 31, 2018.
We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for loan losses. Nonaccrual loans of $65.7 million, or 0.74% of total loans receivable at September 30, 2019, decreased by $6.624 million, or 9.2%, from $72.3 million, or 0.90% of total loans receivable, at December 31, 2018. As a percentage of average loans, annualized net charge-offs increased to 0.26% for the nine months ended September 30, 2019 compared to 0.28% for the year ended December 31, 2018.
Comparison of Operating Results for the Quarters Ended September 30, 2019 and 2018
Net income for the quarter ended September 30, 2019 was $33.4 million, or $0.31 per diluted share, an increase of $5.7 million, or 20.5%, from net income of $27.7 million, or $0.27 per diluted share, for the quarter ended September 30, 2018. The increase in net income resulted from an increase in net interest income of $5.1 million, or 6.0%, a decrease in the provision for loan losses of $3.7 million or 52.7% and an increase in noninterest income of $3.6 million, or 16.0%. Partially offsetting these improvements was an increase in noninterest expense of $4.0 million, or 6.0% and an increase in income tax expense of $2.8 million, or 39.2%. Net income for the quarter ended September 30, 2019 represents annualized returns on average equity and average assets of 9.90% and 1.25%, respectively, compared to 8.93% and 1.15% for the same quarter last year. A further discussion of notable changes follows.
Interest Income
Total interest income increased by $11.3 million, or 11.8%, to $106.9 million for the quarter ended September 30, 2019 from $95.6 million for the quarter ended September 30, 2018. This increase is attributed to increases in both the average balance and average yield on interest earning assets. The average yield earned on interest earning assets increased to 4.39% for the quarter ended September 30, 2019 from 4.31% for the quarter ended September 30, 2018 due to increases in market interest rates over the past year before the Federal Reserve started its recent interest rate easing strategy. Additionally, the average balance of interest earning assets increased by $845.3 million, or 9.6%, to $9.651 billion for the quarter ended September 30, 2019 from $8.806 billion for the quarter ended September 30, 2018 due primarily to internal loan growth as well as the acquisition of UCB.
Interest income on loans receivable increased by $10.4 million, or 11.4%, to $101.1 million for the quarter ended September 30, 2019 from $90.7 million for the quarter ended September 30, 2018. This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $819.2 million, or 10.3%, to $8.747 billion for the quarter ended September 30, 2019 from $7.927 billion for the quarter ended September 30, 2018. This increase is due to organic loan growth of $451.2 million during the last twelve months as well as loans acquired of $407.8 million from UCB. Additionally, the average yield on loans receivable increased to 4.59% for the quarter ended September 30, 2019 from 4.54% for the quarter ended September 30, 2018 primarily as a result of the increases in market interest rates last year.
Interest income on mortgage-backed securities increased by $616,000, or 17.2%, to $4.2 million for the quarter ended September 30, 2019 from $3.6 million for the quarter ended September 30, 2018. This increase is attributed to increases in both the average balance and the average yield on mortgage-backed securities. The average yield on mortgage-backed securities increased to 2.61% for the quarter ended September 30, 2019 from 2.39% for the quarter ended September 30, 2018 due to the purchase of fixed-rate
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mortgage-backed securities, including the UCB portfolio, with yields higher than the existing Northwest portfolio. The average balance of mortgage-backed securities increased by $42.5 million, or 7.1%, to $641.1 million for the quarter ended September 30, 2019 from $598.6 million for the quarter ended September 30, 2018 primarily as a result of investment securities received as part of the UCB acquisition.
Interest income on investment securities increased by $89,000, or 8.7%, to $1.1 million for the quarter ended September 30, 2019 from $1.0 million for the quarter ended September 30, 2018. This increase is attributed to an increase in the average yield on investment securities which increased to 2.03% for the quarter ended September 30, 2019 from 1.67% for the quarter ended September 30, 2018 due to the addition of higher yielding investments, including municipal bonds, from the UCB acquisition. Partially offsetting this increase was a decrease in the average balance of investment securities of $25.6 million, or 10.5% to $218.8 million for the quarter ended September 30, 2019 from $244.3 million for the quarter ended September 30, 2018. This decrease is due primarily to the maturity or call of government agency securities.
Dividends on FHLB stock increased by $188,000, or 158.0%, to $307,000 for the quarter ended September 30, 2019 from $119,000 for the quarter ended September 30, 2018. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 7.47% for the quarter ended September 30, 2019 from 4.81% for the quarter ended September 30, 2018, as the FHLB of Pittsburgh recently increased yields on required stock purchases for active members. Additionally, the average balance increased by $6.5 million, or 66.0%, to $16.3 million for the quarter ended September 30, 2019 from $9.8 million for the quarter ended September 30, 2018. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.
Interest income on interest-earning deposits remained relatively flat, increasing by just $10,000, or 6.2%, to $172,000 for the quarter ended September 30, 2019 from $162,000 for the quarter ended September 30, 2018. The average balance of interest-earning deposits increased by $2.8 million, or 10.6%, to $28.8 million for the quarter ended September 30, 2019 from $26.1 million for the quarter ended September 30, 2018, which was offset by the decrease in the average yield on interest-earning deposits to 2.33% for the quarter ended September 30, 2019 from 2.43% for the quarter ended September 30, 2018 as the Federal Reserve recently started decreasing their targeted federal funds rate.
Interest Expense
Interest expense increased by $6.1 million, or 62.8%, to $15.9 million for the quarter ended September 30, 2019 from $9.8 million for the quarter ended September 30, 2018. This increase in interest expense was primarily due to an increase in the average cost of interest-bearing liabilities, which increased to 0.89% for the quarter ended September 30, 2019 from 0.60% for the quarter ended September 30, 2018. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates last year. In addition, the average balance of interest-bearing liabilities increased by $633.5 million, or 9.8%, to $7.097 billion for the quarter ended September 30, 2019 from $6.464 billion for the quarter ended September 30, 2018. This increase was primarily due to the UCB acquisition which included $479.4 million in deposits.
Net Interest Income
Net interest income increased by $5.1 million, or 6.0%, to $90.9 million for the quarter ended September 30, 2019 from $85.8 million for the quarter ended September 30, 2018. This increase is attributable to the factors discussed above. Our interest bearing deposit costs rose greater than yields on interest earning assets reducing our interest rate spread and, as a result of the inverted yield curve, we are experiencing net interest margin compression. Our interest rate spread decreased to 3.50% for the quarter ended September 30, 2019 from 3.71% for the quarter ended September 30, 2018 and our net interest margin decreased to 3.77% for the quarter ended September 30, 2019 from 3.90% for the quarter ended September 30, 2018.
Provision for Loan Losses
The provision for loan losses decreased by $3.7 million, or 52.7%, to $3.3 million for the quarter ended September 30, 2019 from $7.0 million for the quarter ended September 30, 2018. The provision was elevated in the prior year due primarily to a $4.6 million write-down of a land development loan in the third quarter of 2018. In addition, total loan delinquency decreased by $12.5 million to $81.0 million, or 0.9% of total loans, at September 30, 2019 from $93.6 million, or 1.2% of total loans at September 30, 2018. Annualized net charge-offs to average loans decreased to 0.16% for the quarter ended September 30, 2019 from 0.42% for the quarter ended September 30, 2018 due primarily to the land development write-down noted above.
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In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, 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 loan losses as described in the section entitled “Allowance for Loan Losses.” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience at September 30, 2019.
Noninterest Income
Noninterest income increased by $3.6 million, or 16.0%, to $26.2 million for the quarter ended September 30, 2019 from $22.6 million for the quarter ended September 30, 2018. This increase was primarily due to a $1.8 million increase in mortgage banking income as a result of expanding our secondary market sales capabilities. In addition, there was a $696,000 increase in other operating income from increases in interest rate swap fees and Visa dividend income, a $400,000 increase in service charges and fees as a result of increased customer activity from the UCB acquisition, and a $355,000 increase in trust and other financial services income due to new brokerage production. In addition, we recognized a gain of $826,000 in the current quarter on the sale of $46.0 million of one-to-four family mortgage loans from our portfolio. We chose to sell these loans as they were identified as most likely to refinance due to declining interest rates and redeploy those proceeds into shorter duration loans at an equivalent yield.
Noninterest Expense
Noninterest expense increased by $4.0 million, or 6.0%, to $70.6 million for the quarter ended September 30, 2019 from $66.6 million for the quarter ended September 30, 2018. This increase resulted primarily from a $3.3 million, or 8.7%, increase in compensation and employee benefits due to both internal growth in compensation and staff as well as the addition of UCB employees. In addition, processing expenses increased by $1.5 million, or 15.6%, as we continue to invest in technology and infrastructure and refresh our loan origination platforms. Partially offsetting this increase was a decrease in federal deposit insurance premiums of $1.4 million due to an assessment credit received during the quarter as a result of the deposit insurance fund becoming fully funded.
Income Taxes
The provision for income taxes increased by $2.8 million, or 39.2%, to $9.8 million for the quarter ended September 30, 2019 from $7.0 million for the quarter ended September 30, 2018. In addition to the increase in income before tax of $8.4 million, or 24.2%, our effective tax rate for the quarter ended September 30, 2019 was 22.7% compared to 20.2% for the quarter ended September 30, 2018. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2019.
Comparison of Operating Results for the Nine Months Ended September 30, 2019 and 2018
Net income for the nine months ended September 30, 2019 was $84.8 million, or $0.80 per diluted share, an increase of $5.8 million, or 7.4%, from $79.0 million, or $0.76 per diluted share, for the nine months ended September 30, 2018. The increase in net income resulted from an increase in interest income of $35.9 million, or 12.9%, and an increase in noninterest income of $2.7 million, or 4.0%. Partially offsetting this improvement were increases in interest expense of $16.2 million, or 62.0%, and noninterest expense of $15.7 million, or 7.7%. Net income for the nine months ended September 30, 2019 represents annualized returns on average equity and average assets of 8.65% and 1.10%, respectively, compared to 8.67% and 1.11% for the nine months ended September 30, 2018. A discussion of significant changes follows.
Interest Income
Total interest income increased by $35.9 million, or 12.9%, to $314.0 million for the nine months ended September 30, 2019 from $278.0 million for the nine months ended September 30, 2018. This increase is the result of increases in both the average balance and average yield earned on interest earning assets. The average yield earned on interest earning assets increased to 4.47% for the nine months ended September 30, 2019 from 4.26% for the nine months ended September 30, 2018. This increase in average yield is attributed to increases in market interest rates over the past year. Additionally, the average balance of interest earning assets increased by $656.2 million, or 7.5%, to $9.391 billion for the nine months ended September 30, 2019 from $8.735 billion for the nine months ended September 30, 2018 due primarily to internal loan growth as well as the UCB acquisition.
Interest income on loans receivable increased by $32.9 million, or 12.5%, to $296.9 million for the nine months ended September 30, 2019 from $264.1 million for the nine months ended September 30, 2018. This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $649.8 million, or 8.3%, to $8.501 billion for the nine months ended September 30, 2019 from $7.851 billion for the nine months ended September 30, 2018. This increase is due to organic loan growth of $451.2 million during the last twelve months as well as loans of $407.8 million from the UCB acquisition. Additionally, the average yield on loans receivable increased to 4.67% for the nine months ended September 30, 2019 from 4.50% for the nine months ended September 30, 2018, primarily as a result of the increases in market interest rates over the past year.
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Interest income on mortgage-backed securities increased by $2.6 million, or 26.4%, to $12.4 million for the nine months ended September 30, 2019 from $9.8 million for the nine months ended September 30, 2018. This increase is attributed to increases in both the average balance and average yield on mortgage-backed securities. The average balance of mortgage-backed securities increased by $54.6 million, or 9.5%, to $630.3 million for the nine months ended September 30, 2019 from $575.7 million for the nine months ended September 30, 2018. This increase is due primarily to the addition of the UCB portfolio. Additionally, the average yield on mortgage-backed securities increased to 2.63% for the nine months ended September 30, 2019 from 2.28% for the nine months ended September 30, 2018, due to both an increase in short-term market interest rates that positively impacted our adjustable rate mortgage-backed securities and the purchase of fixed-rate mortgage-backed securities with yields higher than the existing portfolio.
Interest income on investment securities increased by $313,000, or 10.3%, to $3.4 million for the nine months ended September 30, 2019 from $3.0 million for the nine months ended September 30, 2018. This increase is primarily attributable to an increase in the average yield on investment securities to 2.00% for the nine months ended September 30, 2019 from 1.66% for the nine months ended September 30, 2018. The increase in yield is due to the addition of higher yielding investments from the UCB acquisition. Partially offsetting this increase was a decrease in the average balance of investment securities of $21.3 million, or 8.7%, to $224.1 million for the nine months ended September 30, 2019 from $245.4 million for the nine months ended September 30, 2018. This decrease is due primarily to the maturity or call of government agency securities.
Dividends on FHLB stock increased by $493,000, or 163.8%, to $794,000 for the nine months ended September 30, 2019 from $301,000 for the nine months ended September 30, 2018. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 7.15% for the nine months ended September 30, 2019 from 4.47% for the nine months ended September 30, 2018, and the average balance increased by $5.8 million, or 64.9%, to $14.8 million for the nine months ended September 30, 2019 from $9.0 million for the nine months ended September 30, 2018. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB and dividend yields.
Interest income on interest-earning deposits decreased by $335,000, or 43.7%, to $431,000 for the nine months ended September 30, 2019 from $766,000 for the nine months ended September 30, 2018. This decrease is attributable to a decrease in the average balance of interest-earning deposits, which decreased by $32.7 million, or 61.4%, to $20.5 million for the nine months ended September 30, 2019 from $53.3 million for the nine months ended September 30, 2018, due to the utilization of excess cash to fund loan growth. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 2.77% for the nine months ended September 30, 2019 from 1.90% for the nine months ended September 30, 2018, as a result of increases in the targeted Federal Funds rate by the Federal Reserve last year.
Interest Expense
Interest expense increased by $16.2 million, or 62.0%, to $42.4 million for the nine months ended September 30, 2019 from $26.2 million for the nine months ended September 30, 2018. This increase in interest expense was due to an increase in the average cost of interest-bearing liabilities to 0.82% for the nine months ended September 30, 2019 from 0.54% for the nine months ended September 30, 2018. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates. In addition, the average balance of interest-bearing liabilities increased by $431.9 million, or 6.7%, to $6.910 billion for the nine months ended September 30, 2019 from $6.478 billion for the nine months ended September 30, 2018. This increase was primarily due to the UCB acquisition, which included $479.4 million in deposits, as well as internal growth of funding sources.
Net Interest Income
Net interest income increased by $19.7 million, or 7.8%, to $271.5 million for the nine months ended September 30, 2019 from $251.8 million for the nine months ended September 30, 2018. This increase is attributable to the factors discussed above. Our interest rate spread decreased to 3.65% for the nine months ended September 30, 2019 from 3.71% for the nine months ended September 30, 2018 and our net interest margin increased slightly to 3.86% for the nine months ended September 30, 2019 from 3.84% for the nine months ended September 30, 2018.
Provision for Loan Losses
The provision for loan losses decreased by $2.1 million, or 12.7%, to $14.4 million for the nine months ended September 30, 2019 from $16.5 million for the nine months ended September 30, 2018. Total nonaccrual loans decreased by $8.6 million to $65.7 million, or 0.74% of total loans, at September 30, 2019 from $74.2 million, or 0.93% of total loans at September 30, 2018. Annualized net charge-offs to average loans decreased to 0.26% for the nine months ended September 30, 2019 from 0.29% for the nine months ended September 30, 2018.
53
In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, 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 loan losses as described in the section entitled “Allowance for Loan Losses.” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience at June 30, 2019.
Noninterest Income
Noninterest income increased by $2.7 million, or 4.0%, to $71.2 million for the nine months ended September 30, 2019 from $68.5 million for the nine months ended September 30, 2018. This increase was primarily due to a $1.9 million increase in mortgage banking income as a result of expanding our secondary market sales capabilities. Additionally, service charges and fees increased by $1.0 million, or 2.6%, as a result of increased customer activity from the UCB acquisition and trust and other financial services income increased by $913,000, or 7.4%, due to new brokerage production. Offsetting this increase was a decrease in bank owned life insurance income of $1.5 million, or 31.1%, due to a death benefit received during the prior year.
Noninterest Expense
Noninterest expense increased by $15.7 million, or 7.7%, to $219.5 million for the nine months ended September 30, 2019, from $203.8 million for the nine months ended September 30, 2018. This increase resulted primarily from a $7.9 million, or 7.0%, increase in compensation and employee benefits due to both internal growth in compensation and staff as well as the addition of UCB employees. Also contributing to this increase was an increase in processing expense by $3.3 million, or 11.4%, as we continue to invest in technology and infrastructure, an increase in restructuring and acquisition expense of $2.5 million due to expenses incurred as part of the UCB acquisition, an increase in other expenses of $1.4 million, or 19.3%, primarily due to an increase in pension related servicing costs, and an increase in professional services of $1.3 million, or 17.3% due primarily to he engagement of deposit strategy consultants. Partially offsetting this increase was a decrease in federal deposit insurance premiums of $1.4 million due to an assessment credit received during the quarter as a result of the deposit insurance fund becoming fully funded.
Income Taxes
The provision for income taxes increased by $3.0 million, or 14.5%, to $23.9 million for the nine months ended September 30, 2019 from $20.9 million for the nine months ended September 30, 2018. In addition to the increase in income before tax of $8.8 million, or 8.9%, our effective tax rate for the nine months ended September 30, 2019 was 22.0% compared to 20.9% for the nine months ended September 30, 2018. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2019.
54
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, | |||||||||||||||||||
2019 | 2018 | ||||||||||||||||||
Average balance | Interest | Avg. yield/ cost (g) | Average balance | Interest | Avg. yield/ cost (g) | ||||||||||||||
Assets | |||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||
Residential mortgage loans | $ | 2,894,716 | 28,991 | 4.01 | % | $ | 2,804,027 | 28,974 | 4.13 | % | |||||||||
Home equity loans | 1,316,033 | 16,131 | 4.86 | % | 1,272,847 | 15,248 | 4.75 | % | |||||||||||
Consumer loans | 1,027,451 | 11,861 | 4.58 | % | 704,203 | 8,337 | 4.70 | % | |||||||||||
Consumer finance loans | 1,128 | 55 | 19.50 | % | 7,176 | 343 | 19.12 | % | |||||||||||
Commercial real estate loans | 2,796,351 | 34,441 | 4.82 | % | 2,540,270 | 29,974 | 4.62 | % | |||||||||||
Commercial loans | 710,847 | 9,949 | 5.48 | % | 598,842 | 8,203 | 5.36 | % | |||||||||||
Loans receivable (a) (b) (d) (includes FTE adjustments of $336 and $346, respectively) | 8,746,526 | 101,428 | 4.60 | % | 7,927,365 | 91,079 | 4.56 | % | |||||||||||
Mortgage-backed securities (c) | 641,085 | 4,188 | 2.61 | % | 598,596 | 3,572 | 2.39 | % | |||||||||||
Investment securities (c) (d) (includes FTE adjustments of $60 and $55, respectively) | 218,753 | 1,168 | 2.14 | % | 244,346 | 1,074 | 1.76 | % | |||||||||||
FHLB stock, at cost | 16,302 | 307 | 7.47 | % | 9,819 | 119 | 4.81 | % | |||||||||||
Other interest-earning deposits | 28,832 | 172 | 2.33 | % | 26,057 | 162 | 2.43 | % | |||||||||||
Total interest-earning assets (includes FTE adjustments of $396 and $401, respectively) | 9,651,498 | 107,263 | 4.41 | % | 8,806,183 | 96,006 | 4.33 | % | |||||||||||
Noninterest earning assets (e) | 916,781 | 746,077 | |||||||||||||||||
Total assets | $ | 10,568,279 | $ | 9,552,260 | |||||||||||||||
Liabilities and shareholders’ equity | |||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Savings deposits | $ | 1,658,670 | 788 | 0.19 | % | $ | 1,672,990 | 785 | 0.19 | % | |||||||||
Interest-bearing demand deposits | 1,655,952 | 1,711 | 0.41 | % | 1,460,556 | 1,064 | 0.29 | % | |||||||||||
Money market deposit accounts | 1,798,175 | 3,772 | 0.83 | % | 1,685,368 | 1,565 | 0.37 | % | |||||||||||
Time deposits | 1,618,591 | 7,423 | 1.82 | % | 1,403,967 | 4,819 | 1.36 | % | |||||||||||
Borrowed funds (f) | 243,960 | 1,002 | 1.63 | % | 129,523 | 239 | 0.73 | % | |||||||||||
Junior subordinated debentures | 121,767 | 1,235 | 3.97 | % | 111,213 | 1,316 | 4.63 | % | |||||||||||
Total interest-bearing liabilities | 7,097,115 | 15,931 | 0.89 | % | 6,463,617 | 9,788 | 0.60 | % | |||||||||||
Noninterest-bearing demand deposits (g) | 1,915,392 | 1,724,427 | |||||||||||||||||
Noninterest-bearing liabilities | 216,433 | 132,062 | |||||||||||||||||
Total liabilities | 9,228,940 | 8,320,106 | |||||||||||||||||
Shareholders’ equity | 1,339,339 | 1,232,154 | |||||||||||||||||
Total liabilities and shareholders’ equity | $ | 10,568,279 | $ | 9,552,260 | |||||||||||||||
Net interest income/Interest rate spread | 91,332 | 3.52 | % | 86,218 | 3.73 | % | |||||||||||||
Net interest-earning assets/Net interest margin | $ | 2,554,383 | 3.79 | % | $ | 2,342,566 | 3.92 | % | |||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 1.36 | X | 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 fully taxable equivalent ("FTE") basis. |
(e) | Average balances include the effect of unrealized gains or losses on securities held as available-for-sale. |
(f) | Average balances include FHLB borrowings and collateralized borrowings. |
(g) | Average cost of deposits were 0.63% and 0.41%, respectively. |
(h) | Annualized. Shown on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.59% and 4.54%, respectively; investment securities — 2.03% and 1.67%, respectively; interest-earning assets — 4.39% and 4.31%, respectively. GAAP basis net interest rate spreads were 3.50% and 3.71%, respectively; and GAAP basis net interest margins were 3.77% and 3.90%, respectively. |
55
Rate/Volume Analysis
(in thousands)
The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.
For the quarter ended September 30, 2019 vs. 2018 | |||||||||
Increase/(decrease) due to | Total increase/(decrease) | ||||||||
Rate | Volume | ||||||||
Interest-earning assets: | |||||||||
Loans receivable | $ | 850 | 9,499 | 10,349 | |||||
Mortgage-backed securities | 338 | 278 | 616 | ||||||
Investment securities | 230 | (136 | ) | 94 | |||||
FHLB stock, at cost | 65 | 121 | 186 | ||||||
Other interest-earning deposits | (6 | ) | 16 | 10 | |||||
Total interest-earning assets | 1,477 | 9,778 | 11,255 | ||||||
Interest-bearing liabilities: | |||||||||
Savings deposits | 10 | (7 | ) | 3 | |||||
Interest-bearing demand deposits | 445 | 202 | 647 | ||||||
Money market deposit accounts | 1,970 | 237 | 2,207 | ||||||
Time deposits | 1,620 | 984 | 2,604 | ||||||
Borrowed funds | 293 | 470 | 763 | ||||||
Junior subordinated debentures | (188 | ) | 107 | (81 | ) | ||||
Total interest-bearing liabilities | 4,150 | 1,993 | 6,143 | ||||||
Net change in net interest income | $ | (2,673 | ) | 7,785 | 5,112 | ||||
56
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, | |||||||||||||||||||
2019 | 2018 | ||||||||||||||||||
Average balance | Interest | Avg. yield/ cost (g) | Average balance | Interest | Avg. yield/ cost (g) | ||||||||||||||
Assets | |||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||
Residential mortgage loans | $ | 2,865,091 | 87,572 | 4.08 | % | $ | 2,774,074 | 84,585 | 4.07 | % | |||||||||
Home equity loans | 1,300,537 | 48,868 | 5.02 | % | 1,284,114 | 45,617 | 4.75 | % | |||||||||||
Consumer loans | 947,326 | 32,562 | 4.60 | % | 666,055 | 23,788 | 4.78 | % | |||||||||||
Consumer finance loans | 1,977 | 282 | 19.02 | % | 10,923 | 1,627 | 19.86 | % | |||||||||||
Commercial real estate loans | 2,720,435 | 99,930 | 4.84 | % | 2,510,206 | 86,188 | 4.53 | % | |||||||||||
Commercial loans | 665,867 | 28,724 | 5.69 | % | 606,076 | 23,273 | 5.06 | % | |||||||||||
Loans receivable (a) (b) (d) (includes FTE adjustments of $994 and $1,019, respectively) | 8,501,233 | 297,938 | 4.69 | % | 7,851,448 | 265,078 | 4.51 | % | |||||||||||
Mortgage-backed securities (c) | 630,279 | 12,433 | 2.63 | % | 575,663 | 9,839 | 2.28 | % | |||||||||||
Investment securities (c) (d) (includes FTE adjustments of $171 and $241, respectively) | 224,111 | 3,532 | 2.10 | % | 245,429 | 3,289 | 1.79 | % | |||||||||||
FHLB stock, at cost | 14,840 | 794 | 7.15 | % | 8,999 | 301 | 4.47 | % | |||||||||||
Other interest-earning deposits | 20,531 | 431 | 2.77 | % | 53,254 | 766 | 1.90 | % | |||||||||||
Total interest-earning assets (includes FTE adjustments of $1,165 and $1,260, respectively) | 9,390,994 | 315,128 | 4.49 | % | 8,734,793 | 279,273 | 4.27 | % | |||||||||||
Noninterest earning assets (e) | 898,459 | 753,403 | |||||||||||||||||
Total assets | $ | 10,289,453 | $ | 9,488,196 | |||||||||||||||
Liabilities and shareholders’ equity | |||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Savings deposits | $ | 1,668,806 | 2,323 | 0.19 | % | $ | 1,680,892 | 2,307 | 0.18 | % | |||||||||
Interest-bearing demand deposits | 1,611,554 | 4,442 | 0.37 | % | 1,449,573 | 2,541 | 0.23 | % | |||||||||||
Money market deposit accounts | 1,756,251 | 9,784 | 0.74 | % | 1,694,519 | 3,830 | 0.30 | % | |||||||||||
Time deposits | 1,538,113 | 19,774 | 1.72 | % | 1,419,849 | 13,322 | 1.25 | % | |||||||||||
Borrowed funds (f) | 216,160 | 2,421 | 1.50 | % | 122,376 | 412 | 0.45 | % | |||||||||||
Junior subordinated debentures | 119,417 | 3,698 | 4.08 | % | 111,213 | 3,791 | 4.50 | % | |||||||||||
Total interest-bearing liabilities | 6,910,301 | 42,442 | 0.82 | % | 6,478,422 | 26,203 | 0.54 | % | |||||||||||
Noninterest-bearing demand deposits (g) | 1,847,344 | 1,669,423 | |||||||||||||||||
Noninterest-bearing liabilities | 219,806 | 122,199 | |||||||||||||||||
Total liabilities | 8,977,451 | 8,270,044 | |||||||||||||||||
Shareholders’ equity | 1,312,002 | 1,218,152 | |||||||||||||||||
Total liabilities and shareholders’ equity | $ | 10,289,453 | $ | 9,488,196 | |||||||||||||||
Net interest income/Interest rate spread | 272,686 | 3.67 | % | 253,070 | 3.73 | % | |||||||||||||
Net interest-earning assets/Net interest margin | $ | 2,480,693 | 3.87 | % | $ | 2,256,371 | 3.86 | % | |||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 1.36X | 1.35X | |||||||||||||||||
(a) | Average gross loans includes loans held as available-for-sale and loans placed on nonaccrual status. |
(b) | Interest income includes accretion/amortization of deferred loan fees/expenses, which were not material. |
(c) | Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale. |
(d) | Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent ("FTE") basis. |
(e) | Average balances include the effect of unrealized gains or losses on securities held as available-for-sale. |
(f) | Average balances include FHLB borrowings and collateralized borrowings. |
(g) | Average cost of deposits were 0.58% and 0.37%, respectively. |
(h) | Annualized. Shown on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.67% and 4.50%, respectively; investment securities — 2.00% and 1.66%, respectively; interest-earning assets — 4.47% and 4.26%, respectively. GAAP basis net interest rate spreads were 3.65% and 3.71%, respectively; and GAAP basis net interest margins were 3.86% and 3.84%, respectively. |
57
Rate/Volume Analysis
(in thousands)
The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.
For the nine months ended September 30, 2019 vs. 2018 | |||||||||
Increase/(decrease) due to | Total increase/(decrease) | ||||||||
Rate | Volume | ||||||||
Interest-earning assets: | |||||||||
Loans receivable | $ | 10,087 | 22,773 | 32,860 | |||||
Mortgage-backed securities | 1,517 | 1,077 | 2,594 | ||||||
Investment securities | 579 | (336 | ) | 243 | |||||
FHLB stock, at cost | 181 | 313 | 494 | ||||||
Other interest-earning deposits | 352 | (687 | ) | (335 | ) | ||||
Total interest-earning assets | 12,716 | 23,140 | 35,856 | ||||||
Interest-bearing liabilities: | |||||||||
Savings deposits | 33 | (17 | ) | 16 | |||||
Interest-bearing demand deposits | 1,455 | 446 | 1,901 | ||||||
Money market deposit accounts | 5,610 | 344 | 5,954 | ||||||
Time deposits | 4,932 | 1,520 | 6,452 | ||||||
Borrowed funds | 959 | 1,050 | 2,009 | ||||||
Junior subordinated debentures | (347 | ) | 254 | (93 | ) | ||||
Total interest-bearing liabilities | 12,642 | 3,597 | 16,239 | ||||||
Net change in net interest income | $ | 74 | 19,543 | 19,617 | |||||
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As the holding company for a savings bank, one of our primary market risks is interest rate risk. Interest rate risk is the sensitivity of net interest income to variations in interest rates over a specified time period. The sensitivity results from differences in the time periods in which interest rate sensitive assets and liabilities mature or re-price. We attempt to control interest rate risk by matching, within acceptable limits, the re-pricing periods of assets and liabilities. We have attempted to limit our exposure to interest sensitivity by increasing core deposits, enticing customers to extend certificates of deposit maturities, borrowing funds with fixed-rates and longer maturities and by shortening the maturities of our assets by emphasizing the origination of more short-term fixed rate loans and adjustable rate loans. We also have the ability to sell a portion of the long-term, fixed-rate mortgage loans that we originate. In addition, we purchase shorter term or adjustable-rate investment securities and mortgage-backed securities.
We have an Asset/Liability Committee consisting of members of management which meets monthly to review market interest rates, economic conditions, the pricing of interest-earning assets and interest-bearing liabilities and the balance sheet structure. On a quarterly basis, this Committee also reviews the interest rate risk position and cash flow projections.
The Board of Directors has a Risk Management Committee which meets quarterly and reviews interest rate risk and trends, our interest sensitivity position, the liquidity position and the market risk inherent in the investment portfolio.
In an effort to assess interest rate risk and market risk, we utilize a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net income and the market value of equity. Certain assumptions are made regarding loan prepayments and decay rates of savings and interest-bearing demand accounts. Because it is difficult to accurately project the market reaction of depositors and borrowers, the effect of actual changes in interest rates on these assumptions may differ from simulated results. We have established the following guidelines for assessing interest rate risk:
Net interest income simulation. Given a parallel shift of 100 basis points (“bps”), 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 5%, 10% and 15%, respectively, within a one-year period.
Net income simulation. Given a parallel shift of 100 bps, 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 10%, 20% and 30%, respectively, within a one-year period.
Market value of equity simulation. The market value of equity is the present value of assets and liabilities. Given a parallel shift of 100 bps, 200 bps and 300 bps in interest rates, the market value of equity may not decrease by more than 15%, 30% and 35%, respectively, from the computed economic value at current interest rate levels.
The following table illustrates the simulated impact of a 100 bps, 200 bps or 300 bps upward or a 100 bps downward movement in interest rates on net income, return on average equity, earnings per share and market value of equity. This analysis was prepared assuming that interest-earning asset and interest-bearing liability levels at September 30, 2019 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from September 30, 2019 levels.
Increase | Decrease | |||||||||||||||
Parallel shift in interest rates over the next 12 months | 100 bps | 200 bps | 300 bps | 100 bps | ||||||||||||
Projected percentage increase/(decrease) in net interest income | (1.6 | )% | (2.7 | )% | (4.2 | )% | (4.9 | )% | ||||||||
Projected percentage increase/(decrease) in net income | (3.6 | )% | (6.2 | )% | (9.7 | )% | (12.0 | )% | ||||||||
Projected increase/(decrease) in return on average equity | (3.6 | )% | (6.0 | )% | (9.4 | )% | (11.7 | )% | ||||||||
Projected increase/(decrease) in earnings per share | $ | 0.04 | $ | (0.07 | ) | $ | (0.10 | ) | $ | (0.13 | ) | |||||
Projected percentage increase/(decrease) in market value of equity | (3.0 | )% | (5.8 | )% | (9.2 | )% | (3.4 | )% | ||||||||
The figures included in the table above represent projections that were computed based upon certain assumptions including prepayment rates and decay rates. These assumptions are inherently uncertain and, as a result, cannot precisely predict the impact of changes in interest rates. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions, and actions that may be taken by management in response to interest rate changes.
Item 4. CONTROLS AND PROCEDURES
Under the supervision of and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective.
There were no changes in the internal controls over financial reporting during the period covered by this report or in other factors that have materially affected, or are reasonably likely to materially affect the internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are subject to a number of asserted and unasserted claims encountered in the normal course of business. We believe that any additional liability, other than that which has already been accrued, that may result from such potential litigation will not have a material adverse effect on the financial statements. However, we cannot presently determine whether or not any claims against us will have a material adverse effect on our results of operations in any future reporting period. Refer to note 13.
Item 1A. RISK FACTORS
Except as previously disclosed, there have been no material updated or additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.
58
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a) Not applicable.
b) Not applicable.
c) The following table discloses information regarding the repurchase of shares of common stock during the quarter ending September 30, 2019:
Month | Number of shares purchased | Average price paid per share | Total number of shares purchased as part of a publicly announced repurchase plan (1) | Maximum number of shares yet to be purchased under the plan (1) | |||||||||
July | — | $ | — | — | 4,834,089 | ||||||||
August | — | — | — | 4,834,089 | |||||||||
September | — | — | — | 4,834,089 | |||||||||
— | |||||||||||||
(1) | Reflects the program for 5,000,000 shares announced December 13, 2012. This program does not have an expiration date. |
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS
Certification of the Chief Executive Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification of the Chief Financial Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | The cover page of this Quarterly Report on Form 10-Q, formatted in inline XBRL. |
59
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
NORTHWEST BANCSHARES, INC. | |||
(Registrant) | |||
Date: | November 8, 2019 | By: | /s/ Ronald J. Seiffert |
Ronald J. Seiffert | |||
Chairman, President and Chief Executive Officer | |||
(Duly Authorized Officer) | |||
Date: | November 8, 2019 | By: | /s/ Jeffrey R. White |
Jeffrey R. White | |||
Controller | |||
(Principal Accounting Officer) | |||
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TABLE OF CONTENTS
Item 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits