Northwest Bancshares, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Northwest Bancshares is a bank holding company operating Northwest Bank, with 142 community-banking offices across Pennsylvania, western New York, eastern Ohio and Indiana. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Net interest income | $108.5 | $100.3 in Q2 2022 |
| Net interest margin | 3.25% GAAP | 3.05% in Q2 2022 |
| Provision for credit losses | $8.9 | $6.0 in Q2 2022 |
| Net income | $33.0 | $33.4 in Q2 2022 |
| Diluted earnings per share | $0.26 | $0.26 in Q2 2022 |
- For the first six months, net income was $66.7 million, up 8.1% from $61.7 million; diluted EPS was $0.52 versus $0.49. Net interest income rose 15.8% to $221.0 million, while the GAAP net interest margin increased to 3.35% from 2.86%.
- Q2 interest income increased 36.0% to $144.0 million, but interest expense rose 529.5% to $35.4 million as funding costs and the use of higher-cost funding increased. The average cost of interest-bearing liabilities was 1.47%, versus 0.24% a year earlier.
- At June 30, total assets were $14.291 billion; gross loans were $11.271 billion and deposits were $11.662 billion. Since year-end, gross loans grew 3.2% and deposits grew 1.7%. Total borrowed funds were $632.3 million; subordinated debt was $114.0 million and junior subordinated debentures were $129.4 million.
- Six-month cash flow was $52.8 million provided by operations, $172.7 million used in investing and $108.2 million provided by financing. Cash and cash equivalents ended at $127.6 million, down $11.7 million from year-end.
- Northwest Bank reported a 9.91% liquidity ratio. Additional stated borrowing capacity was $3.154 billion at the FHLB, $308.6 million at the Federal Reserve and $105.0 million at two correspondent banks.
- Regulatory capital ratios remained above stated well-capitalized thresholds: the Bank’s total capital ratio was 13.839%, CET1 ratio 12.650% and leverage ratio 9.700%.
Material changes versus prior periods
- Loan growth included a $271.8 million increase in commercial loans since year-end, which management attributed largely to recently introduced lending verticals. Commercial real estate loans also increased.
- Deposit balances shifted toward time deposits, which rose $937.4 million since year-end, while savings and money-market deposits declined $458.1 million and demand deposits declined $281.5 million. Management cited customer preference for higher-yielding alternatives and use of funds amid inflation.
- Q2 net income declined 1.1% year over year as higher noninterest expense and credit-loss provision partly offset higher net interest income. For the first six months, stronger net interest income drove higher earnings, despite increased expenses and provision.
- The allowance for credit losses rose to $124.4 million, or 1.10% of loans, from $118.0 million, or 1.08%, at year-end. Nonaccrual loans decreased to $78.6 million, or 0.70% of loans, from $81.2 million, or 0.74%.
Outlook, management commentary, risks and unusual items
- Management expects a 2023 effective tax rate of 22.5%–24.5%; the filing provides no broader earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- During Q2, the company sold mortgage servicing rights on approximately $1.3 billion of residential mortgages, recording an $8.3 million gain, and sold approximately $110 million of available-for-sale securities, recording an approximately $8.3 million loss. Management said the transactions had no impact on tangible capital and allowed reinvestment from securities yielding about 2% into commercial loans yielding over 7%.
- Q2 noninterest expense increased 5.5%, including $1.6 million of restructuring expense related to personnel changes. Six-month merger, asset-disposition and restructuring expense was $4.4 million, including severance and fixed-asset charges associated with branch optimization and personnel reductions. Processing costs and FDIC insurance premiums also increased.
- Available-for-sale and held-to-maturity securities had $342.4 million of gross unrealized losses at June 30. Management attributed these primarily to interest rates, stated it did not expect to need to sell before recovery, and recorded no credit-loss allowance on the securities.
- Interest-rate modeling showed projected net income declines of 17.4% and 31.1% under parallel rate decreases of 200 and 300 basis points, respectively. Management notes that model assumptions are uncertain and actual results may differ.
- Key risks identified include interest-rate and funding-cost changes, deposit outflows and mix, credit deterioration and charge-offs, securities values, economic conditions, regulatory changes, cybersecurity and operational risks. Management said pending legal matters were not expected to create a material aggregate liability; outcomes remain uncertain.
- The company completed its LIBOR transition to SOFR for affected contracts during Q2, with no material financial-statement impact. Adoption of ASU 2022-02 also had no material effect.
Important facts for investors to verify
- Whether deposit migration and rising funding costs continue to pressure net interest margin, liquidity and reliance on borrowings.
- Commercial-loan and commercial-real-estate credit performance, including criticized/classified exposures, delinquency trends, charge-offs and reserve adequacy.
- The effect of large unrealized securities losses and interest-rate movements on capital, liquidity and earnings, including the assumptions behind management’s rate-sensitivity model.
- Whether the mortgage-servicing-rights and securities sales, and reinvestment into higher-yielding commercial loans, produce durable returns rather than one-time gains and losses.
- Progress and costs of branch optimization, personnel reductions, software implementation and other restructuring initiatives.