Northwest Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results. Northwest Bancshares is a bank holding company whose subsidiary, Northwest Bank, operated 150 community-banking offices across Pennsylvania, Western New York, Eastern Ohio, and Indiana. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2022 / Sep. 30, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $112.7; up 14.6% year over year | $98.4 in Q3 2021 |
| Net interest margin | 3.40% GAAP | 2.95% in Q3 2021 |
| Provision for credit losses | $7.7 expense | $4.4 benefit in Q3 2021 |
| Noninterest income | $26.8 | $29.2 in Q3 2021 |
| Noninterest expense | $82.6 | $86.1 in Q3 2021 |
| Net income / diluted EPS | $37.3 / $0.29 | $35.1 / $0.27 in Q3 2021 |
| Annualized return on average assets / equity | 1.05% / 9.84% | 0.97% / 8.86% in Q3 2021 |
| Nine-month net income / diluted EPS | $99.0 / $0.78 | $124.3 / $0.97 in 2021 |
| Nine-month net interest margin | 3.05% GAAP | 2.99% in 2021 |
| Total assets | $13,953 | $14,502 at Dec. 31, 2021 |
| Loans held for investment, gross | $10,726 | $9,991 at Dec. 31, 2021 |
| Deposits | $11,878 | $12,301 at Dec. 31, 2021 |
| Shareholders’ equity | $1,460 | $1,584 at Dec. 31, 2021 |
| Allowance for credit losses | $109.8; 1.02% of loans | $102.2; 1.02% at Dec. 31, 2021 |
For the nine months, net cash provided by operating activities was $110.1; investing activities used $761.6 and financing activities used $509.2. Cash and cash equivalents fell by $1,160.7 to $118.5, reflecting loan growth and purchases of loan pools as well as deposit outflows.
At September 30, total borrowed funds were $150.0, subordinated debt was $113.8, and junior subordinated debentures were $129.2. Northwest Bank’s liquidity ratio was 9.74%. The company reported $3.502 billion of additional FHLB borrowing capacity, $98.9 million at the Federal Reserve Bank, and $105.0 million at correspondent banks. Regulatory capital ratios remained above stated minimum and well-capitalized thresholds; the holding company’s total capital ratio was 16.29% and the Bank’s was 14.37%.
Material changes versus prior periods
- Quarterly earnings improved: Q3 net income rose 6.4%, mainly from higher net interest income and lower expenses, partly offset by a higher credit-loss provision and weaker noninterest income.
- Year-to-date earnings declined: Nine-month net income fell 20.3%. The prior-year period included a $25.3 million pretax gain on the sale of the insurance business; 2022 also had lower mortgage banking income and higher credit-loss provision.
- Balance sheet shifted toward loans: Loans rose 7.2% from year-end, supported by organic growth and purchases of $182.8 million in small-business equipment finance loans and $188.3 million in jumbo mortgage loans. Deposits declined 3.4%, and cash and cash equivalents decreased substantially.
- Rate-driven securities losses reduced equity: Accumulated other comprehensive loss widened to $191.1 million from $37.6 million at year-end, primarily due to unrealized losses on available-for-sale securities amid rising rates. Available-for-sale securities had $215.2 million of gross unrealized losses at September 30; management attributed losses primarily to interest rates, not credit quality, and stated it did not intend to sell and did not expect to be required to sell before recovery.
- Asset quality indicators were mixed: Nonperforming assets decreased to $84.4 million from $159.7 million at year-end, and nonaccrual loans fell to 0.78% of loans from 1.59%. TDR loans increased to $46.8 million from $30.3 million, including $30.4 million on nonaccrual status.
Management commentary, outlook, and risks
- Management attributed stronger quarterly net interest income and margin to higher yields as market rates rose and a shift in asset mix. It reported that deposit costs remained stable during the period, while noting interest-rate changes can affect margins and securities values.
- The Q3 provision reflected loan growth and deterioration in economic forecasts. Management considered unemployment, economic growth, bankruptcy filings, real estate values, portfolio trends, and collateral valuations in estimating expected credit losses.
- Management anticipated a 2022 effective tax rate of 22%–24%. No broader earnings or revenue guidance is provided in the supplied filing text. The company cautions that quarterly results are not necessarily indicative of full-year results.
- Interest-rate sensitivity modeling estimated that a 300-basis-point increase could reduce net interest income by 1.6% over 12 months, while a 300-basis-point decrease could reduce it by 21.0%. These are model estimates based on assumptions, not forecasts; actual outcomes may differ.
- Risks cited include inflation and interest-rate changes, economic conditions, credit deterioration, securities-market declines, funding access, competition, cybersecurity and technology risks, third-party performance, and regulatory or accounting changes.
- The company reported no expected material aggregate liability from pending or threatened legal proceedings, but noted uncertainty in litigation outcomes. It had not accrued any award related to a prior insurance-business lawsuit verdict. Standby letters of credit had a maximum potential payment of $47.8 million, of which $37.6 million was fully collateralized.
- The Board declared a $0.20-per-share dividend payable November 14, 2022. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit outflows persist and how the company funds continued loan growth, including use of available borrowing capacity.
- How rising rates, deposit repricing, and securities fair-value losses affect net interest margin, liquidity, and capital.
- Whether the allowance for credit losses remains adequate as economic forecasts change, and whether TDRs or commercial real estate credit quality deteriorate.
- How much of the year-over-year earnings decline reflects the nonrecurring 2021 insurance-sale gain versus continuing changes in mortgage banking and core operations.
- Actual results relative to the stated 2022 effective tax-rate range and the assumptions underlying management’s interest-rate sensitivity estimates.