NORTHWEST BANCSHARES, INC. Forward-Looking Statements
In addition to historical information, this document may contain certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, as they reflect management's analysis only as of the date of this report. We have no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.
Important factors that might cause such a difference include, but are not limited to:
• the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the recent outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may have on our growth, operations and earnings; •changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally, and specifically resulting from the economic dislocation caused by the COVID-19 pandemic; •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 theSecurities and Exchange Commission , thePublic Company Accounting Oversight Board , theFinancial 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 2019 Annual Report on Form 10-K.
Recently Issued Accounting Standards
The following accounting standard updates issued by the
In
53
--------------------------------------------------------------------------------
Table of Contents
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.
In December 2019 , the FASB issued ASU 2019-12, "Income Taxes - Simplifying
the Accounting for Income Taxes." This guidance simplifies the accounting for
income taxes by eliminating certain exceptions to the guidance in ASC 740
related to the approach for intraperiod tax allocation, the methodology for
calculating income taxes in an interim period and the recognition for deferred
tax liabilities for outside basis differences. ASU 2019-12 also simplifies
aspects of the accounting for franchise taxes and enacted changes in tax laws or
rates and clarifies the accounting for transactions that result in a step-up in
the tax basis of goodwill. This guidance is effective for annual periods
beginning after December 15, 2020 , including interim periods within those years,
with early adoption permitted. We do not expect this guidance to have a material
impact on our financial statements.
In March 2020 , the FASB issued ASU No. 2020-04, "Facilitation of the Effects
of Reference Rate Reform on Financial Reporting." This ASU provides temporary
optional guidance on contract modifications and hedge accounting to ease the
financial reporting burdens of the expected market transition from LIBOR and
other interbank offered rates to alternative reference rates. The guidance
provides expedients and exceptions for applying GAAP to transactions affected by
reference rate reform if certain criteria are met. The amendments primarily
includes contract modifications and hedge accounting, as well as providing a
one-time election for the sale or transfer of debt securities classified as
held-to-maturity. This guidance is effective March 12, 2020 through December 31,
2022 . We are currently in the process of evaluating the amendments and
determining the impact on our financial statements.
Comparison of Financial Condition
OnApril 24, 2020 , we acquired all of the outstanding common shares ofMutualFirst Financial, Inc. , the holding company forMutualBank , for total consideration of$213.4 million , and thereby acquiredMutualBank's 36 branch locations throughout the state ofIndiana . As a result, we acquired assets with a fair value of$2.086 billion , including loans with a fair value of$1.517 billion , and we assumed deposits of$1.617 billion . Under the terms of the Merger Agreement, each share of common stock ofMutualBank converted into the right to receive 2.4 shares of the Company's common stock.
Total assets at
Total cash and cash equivalents increased by$776.4 million to$837.2 million atJune 30, 2020 from$60.8 million atDecember 31, 2019 . This increase was primarily due to the increase in customer deposit balances associated with the Payroll Protection Program ("PPP") loan funds and consumer stimulus checks as well as an increase of$261.7 million from the acquisition ofMutualBank . Total loans receivable increased by$2.050 billion , or 23.3%, to$10.859 billion atJune 30, 2020 , from$8.809 billion atDecember 31, 2019 . This increase was primarily due to the addition of$1.517 billion of loans acquired fromMutualBank , at fair value. Additionally, our legacy commercial loan portfolio increased$431.9 million , or 60.1%, primarily due to the addition of approximately$450.0 million of PPP loans during the current quarter. Total deposits increased by$2.871 billion , or 33.4%, to$11.463 billion atJune 30, 2020 from$8.592 billion atDecember 31, 2019 due to both theMutualBank acquisition, which added$1.617 billion in total deposits, as well as from organic deposit growth of$1.254 billion . The organic deposit growth was associated with the PPP loan funds and consumer stimulus checks and primarily impacted our noninterest-bearing demand deposits which increased by$743.5 million , or 46.2%, to$2.353 billion atJune 30, 2020 from$1.610 billion atDecember 31, 2019 . Total shareholders' equity atJune 30, 2020 was$1.531 billion , or$11.97 per share, an increase of$177.6 million , or 13.1%, from$1.353 billion , or$12.66 per share, atDecember 31, 2019 . This increase was primarily the result of the issuance of 20,658,957 shares of our common stock at$10.33 per share for theMutualBank acquisition. Partially offsetting this increase was the payment of cash dividends of$44.6 million for the six months endedJune 30, 2020 .
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
54
--------------------------------------------------------------------------------
Table of Contents
amounts and classifications are also subject to qualitative judgments made by
the regulators about components, risk-weighting and other factors.
Applicable rules limit an organization's capital distributions and certain
discretionary bonus payments if the organization does not hold a "capital
conservation buffer" consisting of 2.5% of Total, Tier 1 and Common Equity Tier
1 ("CET1") capital to risk-weighted assets in addition to the amount necessary
to meet its minimum risk-based capital requirements.
Quantitative measures, established by regulation to ensure capital adequacy,
require financial institutions to maintain minimum amounts and ratios (set forth
in the table below) of Total, CET1 and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Capital requirements are presented in the tables
below (in thousands).
At June 30, 2020
Minimum capital Well capitalized
Actual requirements (1) requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,521,506 14.454 % $ 1,105,299 10.500 % $ 1,052,666 10.000 %
Northwest Bank 1,409,018 13.397 % 1,104,346 10.500 % 1,051,759 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,383,261 13.141 % 894,766 8.500 % 842,133 8.000 %
Northwest Bank 1,270,773 12.082 % 893,995 8.500 % 841,407 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,258,620 11.957 % 736,866 7.000 % 684,233 6.500 %
Northwest Bank 1,270,773 12.082 % 736,231 7.000 % 683,643 6.500 %
Tier 1 capital (leverage) (to average
assets)
Northwest Bancshares, Inc. 1,383,261 10.488 % 527,571 4.000 % 659,464 5.000 %
Northwest Bank 1,270,773 9.680 % 525,093 4.000 % 656,366 5.000 %
(1) Amounts and ratios include the capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).
At December 31, 2019
Minimum capital Well capitalized
Actual requirements (1) requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,300,321 15.701 % $ 869,585 10.500 % $ 828,176 10.000 %
Northwest Bank 1,146,641 13.858 % 868,768 10.500 % 827,398 10.000 %
Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,242,380 15.001 % 703,950 8.500 % 662,541 8.000 %
Northwest Bank 1,087,727 13.146 % 703,288 8.500 % 661,918 8.000 %
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,124,259 13.575 % 579,723 7.000 % 538,314 6.500 %
Northwest Bank 1,087,727 13.146 % 879,178 7.000 % 537,809 6.500 %
Tier I capital (leverage) (to average
assets)
Northwest Bancshares, Inc. 1,242,380 11.913 % 417,143 4.000 % 521,428 5.000 %
Northwest Bank 1,087,727 10.515 % 413,772 4.000 % 517,216 5.000 %
(1) Amounts and ratios include the capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).
55
--------------------------------------------------------------------------------
Table of Contents
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 June 30, 2020
was 15.9%. We adjust liquidity levels in order to meet funding needs for deposit
outflows, payment of real estate taxes and insurance on mortgage loan escrow
accounts, repayment of borrowings and loan commitments. At June 30, 2020 ,
Northwest had $3.079 billion of additional borrowing capacity available with the
FHLB, including $250.0 million on an overnight line of credit, as well as $110.1
million of borrowing capacity available with the Federal Reserve Bank and $110.0
million with three correspondent banks.
Dividends
We paid$24.3 million and$19.1 million in cash dividends during the quarters endedJune 30, 2020 and 2019, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was (380.0)% and 72.0% for the quarters endedJune 30, 2020 and 2019, respectively, on dividends of$0.19 per share f`or the quarter endedJune 30, 2020 and$0.18 per share for the quarter endedJune 30, 2019 . OnJuly 22, 2020 , the Board of Directors declared a cash dividend of$0.19 per share payable onAugust 14, 2020 to shareholders of record as ofAugust 6, 2020 . This represents the 103rd 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.
June 30, 2020 December 31, 2019
(in thousands)
Loans 90 days or more delinquent
Residential mortgage loans $ 15,369 12,775
Home equity loans 7,060 5,688
Consumer loans 6,896 3,611
Commercial real estate loans 29,729 25,014
Commercial loans 11,535 4,739
Total loans 90 days or more delinquent $ 70,589 51,827
Total real estate owned, net (REO) $ 1,897 950
Total loans 90 days or more delinquent and REO 72,486 52,777
Total loans 90 days or more delinquent to net loans receivable 0.66 % 0.59 %
Total loans 90 days or delinquent and REO to total assets 0.52 % 0.50 %
Nonperforming loans:
Nonaccrual loans - loans 90 days or more delinquent 70,589 51,680
Nonaccrual loans - loans less than 90 days delinquent 44,921 17,190
Loans 90 days or more past maturity and still accruing 77 32
Total nonperforming loans 115,587 68,902
Total nonperforming assets $ 117,484 69,852
Nonaccrual TDR loans (1) $ 17,562 9,043
Accruing TDR loans 17,888 22,956
Total TDR loans $ 35,450 31,999
(1)Included in nonaccurual loans above.
56-------------------------------------------------------------------------------- Table of Contents Allowance for Credit Losses We adopted CECL onJanuary 1, 2020 , a further described in Note 1. Our Board of Directors has adopted an "Allowance for Credit Losses" policy designed to provide management with a systematic methodology for determining and documenting the allowance for credit losses each reporting period. This methodology was developed to provide a consistent process and review procedure to ensure that the allowance for credit losses is in conformity with GAAP, our policies and procedures and other supervisory and regulatory guidelines. On an ongoing basis, theCredit 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" have all the weakness inherent in those classified as "doubtful" and considered uncollectible. Credit relationships that have been classified as substandard or doubtful and are greater than or equal to$1.0 million are reviewed by theCredit Administration department to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed. If it is determined that a loan needs to be individually assessed, theCredit Administration department determines the proper measure of fair value for each loan based on one of three methods: (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal. If the measurement of the fair value of the loan is more or less than the amortized cost basis of the loan, theCredit 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. For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models. We use a twelve month forecasting period and revert to historical average loss rates thereafter. Reversion to average loss rates takes place over twelve months. Historical average loss rates are calculated using historical data beginning inOctober 2009 through the current period. The the credit losses for individually assessed loans along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management's Allowance for Credit Loss Committee ("ACL Committee") monthly. The ACL Committee reviews and approves the processes and ACL documentation presented. Based on this review and discussion, the appropriate amount of ACL is estimated and any adjustments to reconcile the actual ACL with this estimate are determined. The ACL Committee also considers if any changes to the methodology are needed. In addition to the ACL Committee's review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis and annually by internal audit. In addition to the reviews by management's ACL Committee and the Board of Directors' Risk Management Committee, regulators from either theFDIC and/or thePennsylvania Department of Banking and Securities perform an extensive review on at least an annual basis for the adequacy of the ACL and its conformity with regulatory guidelines and pronouncements. Any recommendations or enhancements from these independent parties are considered by management and the ACL Committee and implemented accordingly. We acknowledge that this is a dynamic process and consists of factors, many of which are external and out of our control that can change frequently, rapidly and substantially. The adequacy of the ACL is based upon estimates using all the information 57 -------------------------------------------------------------------------------- Table of Contents previously discussed as well as current and known circumstances and events. There is no assurance that actual portfolio losses will not be substantially different than those that were estimated. We utilize a structured methodology each period when analyzing the adequacy of the allowance for credit losses and the related provision for credit losses, which the ACL Committee assesses regularly for appropriateness. As part of the analysis as ofJune 30, 2020 , we considered the most recent economic conditions and forecasts available which incorporated the impact of COVID-19. In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations. The ACL increased by$82.6 million , or 142.6%, to$140.6 million , or 1.29% of total loans atJune 30, 2020 from$57.9 million , or 0.66% of total loans, atDecember 31, 2019 . Due to the adoption of CECL, our allowance increased$10.8 million . In addition, our allowance increased$8.8 million as a result of recording the initial allowance on the purchased credit deteriorated loans acquired fromMutualBank . The non-purchased credit deteriorated loans acquired fromMutualBank resulted in a credit mark of$28.1 million and an additional allowance of$18.2 million , as required by CECL. The estimated economic impact of COVID-19 caused us to increase our provision for loan loss expense by approximately$45.0 million for the six months endedJune 30, 2020 . Loans classified as substandard increased$76.7 million to$291.2 million atJune 30, 2020 from$214.5 million atDecember 31, 2019 this increase was primarily due to one large commercial credit being downgraded from pass to substandard and the addition ofMutualBank loans. Loans classified as special mention decreased$8.7 million to$114.2 million atJune 30, 2020 from$123.0 million atDecember 31, 2019 . We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for credit losses. Nonaccrual loans of$115.5 million , or 1.06% of total loans receivable atJune 30, 2020 , increased by$46.6 million , or 67.7%, from$68.9 million , or 0.78% of total loans receivable, atDecember 31, 2019 . As a percentage of average loans, annualized net charge-offs increased to 0.35% for the six months endedJune 30, 2020 compared to 0.23% for the year endedDecember 31, 2019 . The increase in net charge-offs was largely impacted by a$9.1 million charge-off on one commercial loan which was previously downgraded and reserved for.
Comparison of Operating Results for the Quarters Ended
The Company reported a net loss of$6.2 million , or$(0.05) per diluted share, for the quarter endedJune 30, 2020 , a decrease of$32.6 million , or 123.5%, from net income of$26.4 million , or$0.25 per diluted share, for the quarter endedJune 30, 2019 . The decrease in net income resulted from an increase in the provision for credit losses of$47.1 million and an increase in noninterest expense of$11.7 million , or 15.0%. Partially offsetting these changes were an increase in noninterest income of$12.1 million , or 51.9%, a decrease in income tax expense of$8.5 million , or 115.4%, and an increase in net interest income of$5.5 million , or 5.9%. The net loss for the quarter endedJune 30, 2020 represents annualized returns on average equity and average assets of (1.63)% and (0.18)%, respectively, compared to 8.01% and 1.02% for the same quarter last year. A further discussion of notable changes follows.
Interest Income
Total interest income increased $1.7 million , or 1.6%, to $108.5 million for
the quarter ended June 30, 2020 from $106.8 million for the quarter ended
June 30, 2019 . This increase is due to an increase in the average balance of
interest-earning assets which increased by $2.229 billion , or 23.5%, to $11.732
billion for the quarter ended June 30, 2020 from $9.502 billion for the quarter
ended June 30, 2019 . This increase is due primarily to internal loan growth as
well as the MutualBank acquisition. Offsetting this increase in average balance
was a decrease in the average yield earned on interest-earning assets to 3.72%
for the quarter ended June 30, 2020 from 4.51% for the quarter ended June 30,
2019 due to a decline in overall market interest rates.
Interest income on loans receivable increased by $2.1 million , or 2.1%, to
$103.0 million for the quarter ended June 30, 2020 compared to $100.9 million
for the quarter ended June 30, 2019 . This increase is primarily due to the
increase in the average balance of loans receivable of $1.606 billion , or 18.7%,
to $10.201 billion for the quarter ended June 30, 2020 from $8.594 billion for
the quarter ended June 30, 2019 . This increase is primarily due to organic loan
growth of $533.1 million during the last twelve months as well as loans of
$1.517 billion from the MutualBank acquisition. Partially offsetting this
increase in average balance was a decrease in the average yield on loans
receivable to 4.06% for the quarter ended June 30, 2020 from 4.71% for the
quarter ended June 30, 2019 , again due to the decrease in market interest rates
as well as the addition of approximately $450.0 million of PPP loans with coupon
rates of 1.00%.
Interest income on mortgage-backed securities decreased by $242,000 , or
5.7%, to $4.0 million for the quarter ended June 30, 2020 from $4.3 million for
the quarter ended June 30, 2019 . This decrease was due to a decrease in the
average yield on mortgage-backed securities to 2.26% for the quarter ended
June 30, 2020 from 2.65% for the quarter ended June 30, 2019 . This decrease in
yield was primarily due to the assumption of mortgage-backed securities from
MutualBank with market yields lower than the existing legacy Northwest portfolio
due to purchase accounting adjustments. Partially offsetting this decrease was
an increase in the average balance of mortgage-backed securities of $69.8
million , or 10.8%, to $714.7 million for the quarter ended June 30, 2020 from
$644.9
58--------------------------------------------------------------------------------
Table of Contents
million for the quarter ended
Interest income on investment securities decreased by $132,000 , or 11.6%, to
$1.0 million for the quarter ended June 30, 2020 from $1.1 million for the
quarter ended June 30, 2019 . This decrease is attributed to a decrease in the
average balance of investment securities of $56.0 million , or 24.8% to $170.3
million for the quarter ended June 30, 2020 from $226.3 million for the quarter
ended June 30, 2019 primarily due to the maturity or call of government agency
securities. Partially offsetting this decrease was an increase in the average
yield on investment securities which increased to 2.36% for the quarter ended
June 30, 2020 from 2.01% for the quarter ended June 30, 2019 .
Dividends on FHLB stock remained relatively flat, decreasing by $7,000 , or
2.2%, to $309,000 for the quarter ended June 30, 2020 from $316,000 for the
quarter ended June 30, 2019 . The average yield decreased to 5.60% for the
quarter ended June 30, 2020 from 7.86% for the quarter ended June 30, 2019 . The
average balance of FHLB stock increased by $6.1 million , or 37.7%, to $22.2
million for the quarter ended June 30, 2020 from $16.1 million for the quarter
ended June 30, 2019 . 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 increased by $26,000 , or 16.4%,
to $185,000 for the quarter ended June 30, 2020 from $159,000 for the quarter
ended June 30, 2019 . The average balance of interest-earning deposits increased
by $602.9 million to $623.9 million for the quarter ended June 30, 2020 from
$21.0 million for the quarter ended June 30, 2019 due to excess liquidity from
recent deposit inflows. This increase in average balance was offset by the
decrease in the average yield on interest-earning deposits to 0.12% for the
quarter ended June 30, 2020 from 3.00% for the quarter ended June 30, 2019 as
the Federal Reserve decreased their targeted federal funds rate.
Interest Expense
Interest expense decreased by$3.7 million , or 26.3%, to$10.5 million for the quarter endedJune 30, 2020 from$14.2 million for the quarter endedJune 30, 2019 . This decrease in interest expense was primarily due to the decline in the average cost of interest-bearing liabilities which decreased to 0.48% for the quarter endedJune 30, 2020 from 0.82% for the quarter endedJune 30, 2019 as theFederal Reserve decreased their targeted Fed Funds rate in March of 2020. Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities by$1.800 billion , or 25.8%, to$8.778 billion for the quarter endedJune 30, 2020 from$6.978 billion for the quarter endedJune 30, 2019 . This increase in average balance resulted from both internal deposit growth as well as the addition of$1.617 billion of deposits acquired through theMutualBank acquisition.
Net Interest Income
Net interest income increased by$5.5 million , or 5.9%, to$98.1 million for the quarter endedJune 30, 2020 from$92.6 million for the quarter endedJune 30, 2019 . This increase is attributable to the factors discussed above. Despite the overall increase in net interest income due primarily to balance sheet growth, our interest rate spread decreased to 3.24% for the quarter endedJune 30, 2020 from 3.69% for the quarter endedJune 30, 2019 and our net interest margin decreased to 3.34% for the quarter endedJune 30, 2020 from 3.90% for the quarter endedJune 30, 2019 primarily due to declining interest-earning asset yields. Contributing to the decline in asset yields was an increase in average cash balances of$602.9 million , earning just 0.12%, due to deposit growth associated with the PPP loan funds and consumer stimulus checks. In addition, PPP loan balances of approximately$450.0 million with coupon rates of 1.00%, have negatively impacted overall interest-earning asset yields.
Provision for Credit Losses
The provision for credit losses increased by $47.1 million to $51.8 million
for the quarter ended June 30, 2020 from $4.7 million for the quarter ended
June 30, 2019 . This increase was largely driven by the estimated economic impact
of COVID-19 of approximately $21.3 million for the second quarter of 2020 and
additional provision expense of approximately $18.2 million as a result of the
integration of MutualBank loans. Also contributing to this increase were the
effects of an increase in annualized net charge-offs to average loans to 0.51%
for the quarter ended June 30, 2020 from 0.34% for the quarter ended June 30,
2019 and the increase in classified loans by $98.3 million , or almost 50%, to
$296.5 million at June 30, 2020 from $198.2 million at June 30, 2019 .
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 credit losses as described in the section entitled
"Allowance for Credit Losses." The provision that is recorded is sufficient, in
our judgment, to bring this reserve to a level that reflects the current
expected lifetime losses in our loan portfolio relative to loan mix, a
reasonable and supportable economic forecast period and historical loss
experience at June 30, 2020 .
59
--------------------------------------------------------------------------------
Table of Contents
Noninterest Income
Noninterest income increased by $12.1 million , or 51.9%, to $35.5 million for
the quarter ended June 30, 2020 from $23.4 million for the quarter ended
June 30, 2019 . This increase was primarily due to an increase of $11.8 million
in mortgage banking income due to continued efforts to expand our secondary
market sales capabilities over the last year, as well as an interest rate
environment conducive to refinance activity and attractive secondary market
pricing. In addition, trust and other financial services income increased by
$379,000 , or 8.5%, primarily due to additional trust fee income as a result of
the MutualBank acquisition.
Noninterest Expense
Noninterest expense increased by$11.7 million , or 15.0%, to$89.2 million for the quarter endedJune 30, 2020 from$77.5 million for the quarter endedJune 30, 2019 . This increase resulted primarily from an increase in acquisition expense of$8.6 million over the prior year due to expenses incurred as a result of theMutualBank acquisition onApril 24, 2020 . Also contributing to the increase was a$4.6 million increase in other expenses primarily due to the increase in the reserve for unfunded commitments during the second quarter of 2020 as a result of an increase in unfunded commitments and the estimated economic impact of COVID-19. Partially offsetting this increase was a decrease of$2.0 million , or 4.7%, in compensation and employee benefits primarily due to an increase in deferred loan costs directly related to the origination of PPP loans during the current quarter.
Income Taxes
The provision for income taxes decreased by$8.5 million , or 115.4%, to a tax benefit of$1.1 million for the quarter endedJune 30, 2020 from a tax expense of$7.4 million for the quarter endedJune 30, 2019 . This decrease was primarily due to a decrease of$41.1 million , or 121.7%, in income before taxes. We anticipate our effective tax rate to be between 19.0% and 22.0% for the year endingDecember 31, 2020 .
Comparison of Operating Results for the Six Months Ended
Net income for the six months endedJune 30, 2020 was$1.7 million , or$0.02 per diluted share, a decrease of$49.7 million , or 96.6%, from$51.4 million , or$0.49 per diluted share, for the six months endedJune 30, 2019 . The decrease in net income resulted primarily from an increase in provision for credit losses of$68.3 million , or 613.0% as well as an increase of$18.8 million , or 12.6%, in noninterest expense. Partially offsetting these factors were an increase in noninterest income of$18.4 million , or 41.0%, a decrease in income tax expense of$14.2 million , or 100.9%, and an increase in net interest income of$4.7 million , or 2.6%. Net income for the six months endedJune 30, 2020 represents annualized returns on average equity and average assets of 0.24% and 0.03%, respectively, compared to 7.99% and 1.02% for the six months endedJune 30, 2019 . A further discussion of notable changes follows.
Interest Income
Total interest income increased by $1.8 million , or 0.9%, to $208.9 million
for the six months ended June 30, 2020 from $207.1 million for the six months
ended June 30, 2019 . This increase is the result of an increase in the average
balance of interest-earning assets of $1.424 billion , or 15.4%, to $10.685
billion for the six months ended June 30, 2020 from $9.261 billion for the six
months ended June 30, 2019 due primarily to internal loan growth as well as the
MutualBank acquisition. Offsetting this increase was a decrease in the average
yield earned on interest-earning assets to 3.93% for the six months ended
June 30, 2020 from 4.51% for the six months ended June 30, 2019 . This decrease
in average yield is attributed to a decline in overall market interest rates.
Interest income on loans receivable increased by $2.1 million , or 1.1%, to
$198.0 million for the six months ended June 30, 2020 from $195.9 million for
the six months ended June 30, 2019 . This increase is attributed to an increase
in the average balance of loans receivable of $1.111 billion , or 13.3%, to
$9.487 billion for the six months ended June 30, 2020 from $8.377 billion for
the six months ended June 30, 2019 . This increase is due to organic loan growth
of $533.1 million during the last twelve months as well as loans of $1.517
billion from the MutualBank acquisition. Partially offsetting this increase was
a decrease in the average yield on loans receivable to 4.20% for the six months
ended June 30, 2020 from 4.71% for the six months ended June 30, 2019 primarily
as a result of the decreases in market interest rates as well as the addition of
approximately $450.0 million of PPP loans with coupon rates of 1.00%.
Interest income on mortgage-backed securities remained flat at $8.2 million
for both six month periods ended June 30, 2020 and June 30, 2019 . The average
balance of mortgage-backed securities increased by $66.8 million , or 10.7%, to
$691.6 million for the six months ended June 30, 2020 from $624.8 million for
the six months ended June 30, 2019 . This increase is due primarily to the
addition of the MutualBank portfolio. The average yield on mortgage-backed
securities decreased to 2.38% for the six months ended June 30, 2020 from 2.64%
for the six months ended June 30, 2019 . This decrease in yield was primarily due
to the assumption of mortgage-backed securities from MutualBank with market
yields lower than the existing legacy Northwest portfolio due to purchase
accounting adjustments.
60
--------------------------------------------------------------------------------
Table of Contents
Interest income on investment securities decreased by $417,000 , or 18.5%, to
$1.8 million for the six months ended June 30, 2020 from $2.3 million for the
six months ended June 30, 2019 . This decrease is primarily attributable to a
decrease in the average balance of investment securities of $69.6 million , or
30.7%, to $157.2 million for the six months ended June 30, 2020 from $226.8
million for the six months ended June 30, 2019 . This decrease is due primarily
to the maturity or call of government agency securities. Slightly offsetting
this decrease was an increase in the average yield on investment securities to
2.34% for the six months ended June 30, 2020 from 1.99% for the six months ended
June 30, 2019 .
Dividends on FHLB stock increased by $84,000 , or 17.2%, to $571,000 for the six
months ended June 30, 2020 from $487,000 for the six months ended June 30, 2019 .
This increase is attributable to a $3.0 million , or 18.4%, increase in the
average balance of FHLB stock to $19.1 million for the six months ended June 30,
2020 from $16.1 million for the six months ended June 30, 2019 as average yields
remained relatively flat at 6.02% and 6.10%, respectively. 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 increased by $61,000 , or 23.6%, to
$320,000 for the six months ended June 30, 2020 from $259,000 for the six months
ended June 30, 2019 . This increase is attributable to an increase in the
average balance of interest-earning deposits, which increased by $312.9 million ,
to $329.3 million for the six months ended June 30, 2020 from $16.4 million for
the six months ended June 30, 2019 due to excess liquidity from recent deposit
inflows. Partially offsetting this increase was a decrease in the average yield
on interest-earning deposits to 0.19% for the six months ended June 30, 2020
from 3.14% for the six months ended June 30, 2019 , as a result of decreases in
the targeted Federal Funds rate by the Federal Reserve .
Interest Expense
Interest expense decreased by$2.9 million , or 10.9%, to$23.6 million for the six months endedJune 30, 2020 from$26.5 million for the six months endedJune 30, 2019 . This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities to 0.59% for the six months endedJune 30, 2020 from 0.78% for the six months endedJune 30, 2019 . This decrease resulted from decreases in the interest rate paid on deposits and borrowed funds in response to decreases in market interest rates. Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities which increased by$1.241 billion , or 18.2%, to$8.056 billion for the six months endedJune 30, 2020 from$6.816 billion for the six months endedJune 30, 2019 . This increase was primarily due to theMutualBank acquisition, which included$1.617 billion in deposits and$232.2 million in borrowed funds in addition to the internal growth of deposits.
Net Interest Income
Net interest income increased by$4.7 million , or 2.6%, to$185.3 million for the six months endedJune 30, 2020 from$180.6 million for the six months endedJune 30, 2019 . This increase is attributable to the factors discussed above. Despite the overall increase in net interest income due primarily to balance sheet growth, our interest rate spread and net interest margin both decreased. Our interest rate spread decreased to 3.34% for the six months endedJune 30, 2020 from 3.73% for the six months endedJune 30, 2019 and our net interest margin decreased to 3.47% for the six months endedJune 30, 2020 from 3.90% for the six months endedJune 30, 2019 . These decreases were primarily due to declining interest-earning asset yields as a result of increased higher average cash balances of$312.9 million , earning just 0.12% due to deposit growth associated with the PPP loan funds and consumer stimulus checks, as well as the addition of approximately$450.0 million of PPP loan balances with coupon rates of 1.00%. Provision for Loan Losses
The provision for loan losses increased by $68.3 million , or 613.0%, to
$79.4 million for the six months ended June 30, 2020 from $11.1 million for the
six months ended June 30, 2019 . This increase was largely driven by the
estimated economic impact of COVID-19 representing approximately $45.0 million
of the increase for the six months ended June 30, 2020 and additional provision
expense of approximately $18.2 million as a result of the integration of
MutualBank loans.
Total nonaccrual loans increased by $46.6 million to $115.5 million , or 1.06% of
total loans, at June 30, 2020 from $67.7 million , or 0.77% of total loans at
June 30, 2019 . Annualized net charge-offs to average loans increased to 0.35%
for the six months ended June 30, 2020 from 0.32% for the six months ended
June 30, 2019 .
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 credit losses as described in the section entitled
"Allowance for Credit Losses." The provision that is recorded is sufficient, in
our judgment, to bring this reserve to a level that reflects the current
expected lifetime losses in our loan portfolio relative to loan mix, a
reasonable and supportable economic forecast period and historical loss
experience at June 30, 2020 .
61
--------------------------------------------------------------------------------
Table of Contents
Noninterest Income
Noninterest income increased by $18.4 million , or 41.0%, to $63.5 million for
the six months ended June 30, 2020 from $45.0 million for the six months ended
June 30, 2019 . This increase was primarily due to a $12.8 million increase in
mortgage banking income due to continued efforts to expand our secondary market
sales capabilities, as well as an interest rate environment conducive to
refinance activity and attractive secondary market pricing. Additionally,
service charges and fees increased by $2.8 million , or 11.0%, as a result of
recent changes to per item fee structures and increased customer activity from
the MutualBank acquisition and trust and other financial services income
increased by $1.2 million , or 13.7%, due to the additional trust fee income as a
result of the MutualBank acquisition.
Noninterest Expense
Noninterest expense increased by$18.8 million , or 12.6%, to$167.8 million for the six months endedJune 30, 2020 , from$148.9 million for the six months endedJune 30, 2019 . This increase resulted primarily from an increase in acquisition expense of$9.1 million due to expenses incurred as part of theMutualBank acquisition onApril 24, 2020 . Other expenses increased by$6.0 million , or 89.2%, primarily due to the increase in the reserve for unfunded commitments as a result of an increase in unfunded commitments and the estimated economic impact of COVID-19. In addition, compensation and employee benefits expense increased$2.6 million , or 3.2%, primarily due to internal growth in compensation and staff as well as both the addition ofMutualBank employees in April of 2020 and the addition of UCB employees in March of 2019 which was offset slightly by an increase in deferred loan costs directly related to the origination of PPP loans during the current quarter.
Income Taxes
The provision for income taxes decreased by$14.2 million , or 100.9%, to a tax benefit of$122,000 for the six months endedJune 30, 2020 from a tax expense of$14.1 million for the six months endedJune 30, 2019 . This decrease was primarily due to the decrease in income before tax of$63.9 million , or 97.5%. Our effective tax rate for the six months endedJune 30, 2020 was (7.5)% compared to 21.5% for the six months endedJune 30, 2019 . We anticipate our effective tax rate to be between 19.0% and 22.0% for the year endingDecember 31, 2020 . 62
--------------------------------------------------------------------------------
Table of Contents
Average Balance Sheet
(in thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on interest-earning assets
and average cost of interest-bearing liabilities for the periods indicated.
Such yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are calculated using daily averages.
Quarter ended June 30,
2020 2019
Avg. Avg.
Average yield/ Average yield/
balance Interest cost (g) balance Interest cost (g)
Assets
Interest-earning assets:
Residential mortgage loans $ 3,092,392 29,019 3.75 % $ 2,857,425 29,300 4.10 %
Home equity loans 1,415,091 13,806 3.92 % 1,319,056 17,717 5.39 %
Consumer loans 1,375,130 14,993 4.39 % 945,080 10,736 4.57 %
Commercial real estate loans 3,156,749 34,595 4.34 % 2,801,953 35,537 5.02 %
Commercial loans 1,161,228 11,269 3.84 % 670,613 7,966 4.70 %
Loans receivable (a) (b) (d) (includes FTE
adjustments of $669 and $339 , respectively) 10,200,590 103,682 4.09 % 8,594,127 101,256 4.73 %
Mortgage-backed securities (c) 714,657 4,038 2.26 % 644,887 4,280 2.65 %
Investment securities (c) (d) (includes FTE
adjustments of $241 and $63 , respectively) 170,309 1,244 2.92 % 226,325 1,198 2.12 %
FHLB stock, at cost 22,192 309 5.60 % 16,117 316 7.86 %
Other interest-earning deposits 623,870 185 0.12 % 20,983 159 3.00 %
Total interest-earning assets (includes FTE
adjustments of $910 and $402 , respectively) 11,731,618 109,458 3.75 % 9,502,439 107,209 4.53 %
Noninterest-earning assets (e) 1,858,513 910,225
Total assets $ 13,590,131 $ 10,412,664
Liabilities and shareholders' equity
Interest-bearing liabilities:
Savings deposits $ 1,884,202 648 0.14 % $ 1,696,715 777 0.18 %
Interest-bearing demand deposits 2,428,060 812 0.13 % 1,674,779 1,569 0.38 %
Money market deposit accounts 2,204,810 1,600 0.29 % 1,776,558 3,433 0.78 %
Time deposits 1,761,260 6,276 1.43 % 1,561,034 6,705 1.72 %
Borrowed funds (f) 371,700 296 0.32 % 147,119 413 1.13 %
Junior subordinated debentures 127,472 837 2.60 % 121,757 1,307 4.25 %
Total interest-bearing liabilities 8,777,504 10,469 0.48 % 6,977,962 14,204 0.82 %
Noninterest-bearing demand deposits (g) 2,401,368 1,888,697
Noninterest-bearing liabilities 882,391 225,623
Total liabilities 12,061,263 9,092,282
Shareholders' equity 1,528,868 1,320,382
Total liabilities and shareholders' equity $ 13,590,131 $ 10,412,664
Net interest income/Interest rate spread 98,989 3.27 % 93,005 3.71 %
Net interest-earning assets/Net interest
margin $ 2,954,114 3.38 % $ 2,524,477 3.91 %
Ratio of interest-earning assets to
interest-bearing liabilities 1.34X 1.36X
(a)Average gross loans includes loans held as available-for-sale and loans
placed on nonaccrual status.
(b)Interest income includes accretion/amortization of deferred loan
fees/expenses, which were not material.
(c)Average balances do not include the effect of unrealized gains or losses on
securities held as available-for-sale.
(d)Interest income on tax-free investment securities and tax-free loans are
presented on a 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 0.35% and 0.58%, 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 - 4.06% and 4.71%, respectively; investment securities - 2.36% and
2.01%, respectively; interest-earning assets - 3.72% and 4.51%, respectively.
GAAP basis net interest rate spreads were 3.24% and 3.69%, respectively; and
GAAP basis net interest margins were 3.34% and 3.90%, respectively.
63--------------------------------------------------------------------------------
Table of Contents
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
Increase/(decrease) due to Total
Rate Volume increase/(decrease)
Interest-earning assets:
Loans receivable $ (13,626) 16,052 2,426
Mortgage-backed securities (636) 394 (242)
Investment securities 455 (408) 47
FHLB stock, at cost (91) 83 (8)
Other interest-earning deposits (153) 179 26
Total interest-earning assets (14,051) 16,300 2,249
Interest-bearing liabilities:
Savings deposits (191) 61 (130)
Interest-bearing demand deposits (1,005) 248 (757)
Money market deposit accounts (2,134) 302 (1,832)
Time deposits (1,124) 694 (430)
Borrowed funds (295) 178 (117)
Junior subordinated debentures (508) 39 (469)
Total interest-bearing liabilities (5,257) 1,522 (3,735)
Net change in net interest income $ (8,794) 14,778 5,984
64--------------------------------------------------------------------------------
Table of Contents
Average Balance Sheet
(in thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on interest-earning assets
and average cost of interest-bearing liabilities for the periods indicated.
Such yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Average balances are calculated using daily averages.
Six months ended June 30,
2020 2019
Avg. Avg.
Average yield/ Average yield/
balance Interest cost (g) balance Interest cost (g)
Assets
Interest-earning assets:
Residential mortgage loans $ 2,969,096 57,081 3.85 % $ 2,850,031 58,582 4.11 %
Home equity loans 1,380,076 28,607 4.17 % 1,292,662 33,765 5.27 %
Consumer loans 1,249,233 27,153 4.37 % 909,007 20,927 4.64 %
Commercial real estate loans 2,952,084 66,032 4.42 % 2,681,848 66,303 4.92 %
Commercial loans 936,924 20,124 4.25 % 643,005 16,933 5.24 %
Loans receivable (a) (b) (d) (includes FTE
adjustments of $1,011 and $658 , respectively) 9,487,413 198,997 4.22 % 8,376,553 196,510 4.73 %
Mortgage-backed securities (c) 691,564 8,213 2.38 % 624,786 8,245 2.64 %
Investment securities (c) (d) (includes FTE
adjustments of $289 and $111 , respectively) 157,231 2,125 2.70 % 226,815 2,364 2.08 %
FHLB stock, at cost 19,062 571 6.02 % 16,096 487 6.10 %
Other interest-earning deposits 329,284 320 0.19 % 16,381 259 3.14 %
Total interest-earning assets (includes FTE
adjustments of $1,300 and $769 , respectively) 10,684,554 210,226 3.96 % 9,260,631 207,865 4.53 %
Noninterest-earning assets (e) 1,409,247 889,409
Total assets $ 12,093,801 $ 10,150,040
Liabilities and shareholders' equity
Interest-bearing liabilities:
Savings deposits $ 1,747,656 1,375 0.16 % $ 1,673,957 1,535 0.18 %
Interest-bearing demand deposits 2,171,970 2,119 0.20 % 1,588,989 2,732 0.35 %
Money market deposit accounts 2,061,226 4,688 0.46 % 1,735,185 6,011 0.70 %
Time deposits 1,645,077 12,557 1.54 % 1,497,208 12,351 1.66 %
Borrowed funds (f) 305,910 1,005 0.66 % 202,029 1,419 1.42 %
Junior subordinated debentures 124,638 1,875 2.98 % 118,242 2,463 4.14 %
Total interest-bearing liabilities 8,056,477 23,619 0.59 % 6,815,610 26,511 0.78 %
Noninterest-bearing demand deposits (g) 2,022,177 1,699,496
Noninterest-bearing liabilities 575,658 336,600
Total liabilities 10,654,312 8,851,706
Shareholders' equity 1,439,489 1,298,334
Total liabilities and shareholders' equity $ 12,093,801 $ 10,150,040
Net interest income/Interest rate spread 186,607 3.37 % 181,354 3.75 %
Net interest-earning assets/Net interest margin $ 2,628,077 3.49 % $ 2,445,021 3.92 %
Ratio of interest-earning assets to
interest-bearing liabilities 1.33X 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 0.43% and 0.56%, 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 - 4.20% and 4.71%, respectively; investment securities - 2.34% and
1.99%, respectively; interest-earning assets - 3.93% and 4.51%, respectively.
GAAP basis net interest rate spreads were 3.34% and 3.73%, respectively; and
GAAP basis net interest margins were 3.47% and 3.90%, respectively.
65--------------------------------------------------------------------------------
Table of Contents
Rate/Volume Analysis
(in thousands)
The following table represents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected interest income and interest expense during the
periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (iii) net change. Changes that cannot be
attributed to either rate or volume have been allocated to both rate and
volume.
For the
six months ended
Increase/(decrease) due to Total
Rate Volume increase/(decrease)
Interest-earning assets:
Loans receivable $ (21,359) 23,846 2,487
Mortgage-backed securities (825) 793 (32)
Investment securities 701 (940) (239)
FHLB stock, at cost (6) 90 84
Other interest-earning deposits (245) 306 61
Total interest-earning assets (21,734) 24,095 2,361
Interest-bearing liabilities:
Savings deposits (222) 62 (160)
Interest-bearing demand deposits (1,189) 576 (613)
Money market deposit accounts (2,081) 758 (1,323)
Time deposits (957) 1,164 207
Borrowed funds (759) 344 (415)
Junior subordinated debentures (698) 110 (588)
Total interest-bearing liabilities (5,906) 3,014 (2,892)
Net change in net interest income $ (15,828) 21,081 5,253
66-------------------------------------------------------------------------------- Table of Contents 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 atJune 30, 2020 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 fromJune 30, 2020 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 1.4 % 2.2 % 2.9 % (1.7) % Projected percentage increase/(decrease) in net income 4.0 % 6.3 % 8.5 % (4.7) % Projected increase/(decrease) in return on average equity 3.7 % 6.0 % 8.1 % (4.5) % Projected increase/(decrease) in earnings per share$ 0.04 $ 0.06 $ 0.09 $ (0.04) Projected percentage decrease in market value of equity - % (2.1) % (4.9) % (8.3) %
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.
67--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
