Northwest Bancshares, Inc. — Q1 2021 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the quarter ended March 31, 2021, compared with Q1 2020 for operating results and December 31, 2020 for balance-sheet changes. Northwest Bank operates 170 community-banking offices across Pennsylvania, western New York, eastern Ohio, and Indiana.
Key financial metrics
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Net income; diluted EPS | $40.2 million; $0.32 | Q1 2020: $7.9 million; $0.07 |
| Net interest income | $100.5 million | Up 15.2% from $87.2 million |
| Net interest margin | 3.16% GAAP; 3.18% fully taxable equivalent | Q1 2020: 3.64% GAAP; 3.66% fully taxable equivalent |
| Noninterest income / expense | $32.0 million / $86.2 million | Q1 2020: $28.0 million / $78.6 million |
| Provision for credit losses | $5.6 million credit (negative provision) | Q1 2020: $27.6 million expense |
| Total assets | $14.270 billion | Up 3.4% from year-end 2020 |
| Loans, gross; allowance | $10.368 billion; $124.0 million | Loans down 2.0%; allowance down from $134.4 million |
| Deposits; borrowed funds | $12.113 billion; $253.6 million | Deposits up 4.4%; borrowed funds down from $283.0 million |
| Cash and cash equivalents | $979.3 million | Up $243.0 million from year-end 2020 |
| Shareholders’ equity | $1.541 billion | Up $2.3 million from year-end 2020 |
Operating cash flow was $68.0 million, investing cash outflow was $286.4 million, and financing cash inflow was $461.4 million. Cash and cash equivalents increased by $243.0 million during the quarter. The company paid $24.1 million in dividends, or $0.19 per share.
At March 31, the bank’s liquidity ratio was 18.3%. It reported $3.867 billion of additional FHLB borrowing capacity, plus $84.0 million at the Federal Reserve and $110.0 million at correspondent banks. Northwest Bancshares’ total capital ratio was 16.83%, CET1 ratio 13.30%, and leverage ratio 10.25%; the bank also exceeded the stated well-capitalized thresholds.
Material changes versus comparable periods
- Net income rose $32.3 million year over year, primarily because the credit-loss provision moved from a $27.6 million expense to a $5.6 million credit. Higher net interest income and noninterest income also contributed; higher noninterest expense partly offset the gains.
- Net interest income increased with balance-sheet growth, including the MutualBank acquisition and $4.8 million of net PPP fee accretion. However, lower asset yields reduced the GAAP net interest margin to 3.16% from 3.64%.
- Deposits increased $513.9 million from year-end, largely reflecting PPP funds and consumer stimulus payments. Cash rose accordingly, while loans declined $212.8 million as paydowns and payoffs exceeded originations.
- Nonperforming assets increased to $225.9 million from $105.6 million at year-end. Nonaccrual loans less than 90 days past due rose to $169.4 million from $41.8 million, while total nonaccrual loans reached $224.0 million. Management reported that classified loans declined $21.6 million, partly due to upgrades in commercial real estate and commercial portfolios.
- Noninterest income growth included higher mortgage banking income ($6.0 million versus $1.2 million), partly offset by lower service charges and fees. Expenses increased, particularly compensation, processing, professional services, premises costs, and FDIC premiums.
- Unrealized securities losses increased, contributing to a $17.2 million other comprehensive loss for the quarter and reducing the reported equity benefit from earnings.
Outlook, risks, contingencies, and unusual items
- Management estimated a 2021 effective tax rate of 20%–23%; the filing gives no earnings or revenue guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Credit-loss estimates incorporate economic forecasts and COVID-19 effects. Management states actual losses could differ substantially from estimates. The allowance was 1.20% of total loans at quarter-end; annualized net charge-offs were 0.19% of average loans for Q1.
- Management identifies COVID-19 and economic conditions, borrower credit quality, interest rates and inflation, securities markets, cybersecurity, competition, technology execution, third-party providers, acquisitions, and regulatory changes among the risks that could affect results.
- Interest-rate simulations projected net interest income up 1.3% under a 100-basis-point increase and down 3.7% under a 100-basis-point decrease; the filing warns results depend on uncertain assumptions. A 300-basis-point increase projected a 14.6% decrease in market value of equity.
- After quarter-end, the company completed the sale of Northwest Insurance Services (NWIS). The buyer paid $31.8 million in cash, subject to approximately $2.8 million of closing adjustments. The quarter-end statements do not include this subsequent transaction.
- The company reported no expectation that aggregate liability from pending or threatened legal proceedings would be material. It recorded no award from a previously disclosed insurance-related lawsuit verdict because post-trial proceedings remained uncertain.
- The board declared a $0.20-per-share dividend on April 26, payable May 17, 2021. The company repurchased 353,552 shares during Q1.
Most important facts for investors to verify
- Whether the large Q1 earnings increase is sustainable, given its substantial dependence on the credit-loss provision reversal and PPP fee accretion.
- The cause, composition, and subsequent performance of the sharp increase in nonaccrual loans, particularly commercial real estate loans.
- Loan growth and credit quality trends as stimulus-related deposit inflows and PPP activity change, and as COVID-19 relief measures expire.
- Net interest margin sensitivity to rates and the effect of high, low-yielding cash balances on profitability.
- Final proceeds and financial effects of the NWIS sale, including closing adjustments and any related gain or tax impact.
- Capital, liquidity, and dividend capacity, including whether deposit balances and borrowing availability remain consistent with reported levels.