Northwest Bancshares, Inc. — Q2 2022 Form 10-Q
Business context and reporting period: Regional bank holding company operating 150 community-banking offices across Pennsylvania, western New York, eastern Ohio and Indiana. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Interest income | $105.9 | $102.6 | $202.3 | $210.6 |
| Net interest income | $100.3 | $95.7 | $190.9 | $196.2 |
| Net interest margin (GAAP) | 3.05% | 2.89% | 2.86% | 3.00% |
| Provision for credit losses | $2.6 | $0 | $1.1 | $(5.6) |
| Noninterest income | $30.4 | $54.7 | $56.2 | $86.7 |
| Noninterest expense | $84.8 | $86.3 | $166.8 | $172.5 |
| Net income | $33.4 | $49.0 | $61.7 | $89.2 |
| Diluted EPS | $0.26 | $0.38 | $0.49 | $0.70 |
- Balance sheet at June 30: Assets were $14.155 billion, down 2.4% from year-end 2021. Gross loans were $10.433 billion, up 4.2%; deposits were $12.067 billion, down 1.9%. Net loans were $10.334 billion.
- Liquidity and funding: Cash and cash equivalents were $504.5 million, down from $1.279 billion at year-end, reflecting loan growth and loan-pool purchases. Cash, cash equivalents and marketable securities totaled $2.792 billion. The Bank’s liquidity ratio was 13.6%; reported additional borrowing capacity was $3.582 billion with the FHLB, $91.2 million with the Federal Reserve and $110 million with correspondent banks.
- Debt: Borrowed funds were $130.5 million; subordinated debt was $113.7 million and junior subordinated debentures were $129.2 million.
- Credit quality: Allowance for credit losses was $98.4 million, or 0.94% of loans, versus $102.2 million, or 1.02%, at year-end. Nonperforming assets were $100.0 million, down from $159.7 million; nonaccrual loans were 0.94% of loans versus 1.59% at year-end. Six-month annualized net charge-offs were 0.10%.
- Capital and equity: Northwest Bank’s actual ratios included 14.25% total capital, 13.39% Tier 1 risk-based capital, 13.39% CET1 and 9.88% leverage. Shareholders’ equity was $1.495 billion, down 5.6%; accumulated other comprehensive loss increased to $142.6 million. The company paid $50.7 million in dividends during the first half.
- Cash flow: For the first half, operating activities provided $26.8 million; investing activities used $512.1 million and financing activities used $289.4 million. Cash and cash equivalents declined $774.7 million.
Material changes versus prior comparable periods
- Q2 net income fell 31.7%, and first-half net income fell 30.8%. Prior-year comparisons included a $25.3 million pretax gain from the insurance-business sale, completed in 2021; the business sale also eliminated subsequent insurance commission income.
- Q2 net interest income rose 4.7% and GAAP net interest margin increased to 3.05%, supported by higher asset yields and lower deposit costs. For the first half, net interest income declined 2.7% and margin fell to 2.86%, primarily as loan yields remained lower year over year.
- Mortgage banking income declined to $2.2 million in Q2 and $3.6 million in the first half, attributed to less favorable secondary-market pricing amid rate volatility. Service charges and fees increased with customer activity.
- Noninterest expense declined 1.8% in Q2 and 3.3% for the first half, including lower processing and professional-services costs and savings from branch consolidations. Q2 other expenses included a higher reserve for unfunded loan commitments; compensation included approximately $1.4 million related to accelerated compensation and stock benefits following Mr. Seiffert’s passing.
- Rising rates reduced the fair value of available-for-sale securities: their net unrealized loss was $152.0 million at June 30, versus $16.4 million at December 31, 2021. First-half other comprehensive loss was $105.0 million. Management attributed securities losses primarily to interest rates, not credit impairment, and said it did not intend or expect to be required to sell the securities before recovery.
- During the quarter, the Bank implemented a new vehicle-loan allowance model and reassessed loan segmentation, moving certain loans from consumer to vehicle portfolios.
Outlook, risks and unusual items
- No earnings, revenue or margin guidance is provided. Management expects a 2022 effective tax rate of 21%–23% and anticipates a pension-plan contribution of $0–$2 million.
- Interest-rate sensitivity modeling projected that a 100-basis-point rate decline could reduce 12-month net interest income by 8.0% and net income by 18.0%; modeled increases of 100–300 basis points had relatively small projected net-income effects. Management cautions that assumptions and actual outcomes may differ materially.
- Key stated risks include inflation and interest-rate changes, economic weakness and borrower credit deterioration, securities-market declines, funding access and deposit behavior, cybersecurity and technology risks, competition, regulatory changes, and execution or integration risks.
- Standby letters of credit had a maximum potential payment obligation of $46.5 million, of which $36.8 million was fully collateralized. Management did not expect aggregate liability from pending or threatened legal proceedings to be material. The company had not accrued any award relating to a prior insurance-related lawsuit verdict; post-trial proceedings remained ongoing.
- The Board declared a $0.20-per-share dividend payable August 15, 2022. The filing reported no material updates to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit trends and cash usage stabilize as loan growth and customer spending continue, and how management maintains liquidity.
- Whether rising rates improve future net interest income and margin, given the first-half margin decline and modeled sensitivity to falling rates.
- Whether securities valuation losses, including the effect on accumulated other comprehensive loss and equity, persist or recover.
- Whether loan growth, the vehicle-loan model change and economic forecasts affect future provisions, charge-offs and nonperforming loans.
- How much earnings comparability is affected by the prior-year insurance-sale gain, lower mortgage banking income, branch consolidation benefits and unusual compensation costs.