Northwest Bancshares, Inc. — Q2 2020 Form 10-Q
Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2020. Northwest Bancshares is a savings and loan holding company operating Northwest Bank, with 213 community-banking offices across Pennsylvania, western New York, eastern Ohio and Indiana. Results include MutualBank from its April 24, 2020 acquisition.
Key financial results
| Metric | Q2 2020 | Comparable period / balance |
|---|---|---|
| Net interest income | $98.1 million | Up 5.9% from $92.6 million in Q2 2019 |
| Provision for credit losses | $51.8 million | Up from $4.7 million in Q2 2019 |
| Noninterest income | $35.5 million | Up 51.9% from $23.4 million; mortgage banking income was $12.0 million versus $0.2 million |
| Noninterest expense | $89.2 million | Up 15.0% from $77.5 million |
| Net income/(loss) | $(6.2) million; $(0.05) per diluted share | Net income of $26.4 million; $0.25 per diluted share in Q2 2019 |
| Six-month net income | $1.7 million; $0.02 per diluted share | $51.4 million; $0.49 per diluted share in first-half 2019 |
| Net interest margin | 3.34% GAAP | 3.90% in Q2 2019; first-half 2020 was 3.47% versus 3.90% |
Management attributed the Q2 loss principally to increased credit-loss provisioning and acquisition-related and other expenses. Lower funding costs and higher noninterest income partly offset these pressures. Falling market rates, large low-yield cash balances and approximately $450 million of Paycheck Protection Program (PPP) loans earning 1% weighed on asset yields and margins.
Financial condition, cash flow and capital
- At June 30, 2020, total assets were $13.845 billion, loans receivable gross were $10.859 billion, deposits were $11.463 billion and shareholders’ equity was $1.531 billion. Assets grew 31.9% and deposits 33.4% from December 31, 2019, substantially reflecting the MutualBank acquisition and deposit inflows.
- Cash and cash equivalents were $837.2 million, compared with $60.8 million at year-end. For the six months, operating cash flow was $87.4 million, investing cash outflow was $495.4 million, financing cash flow was $1.184 billion, and cash increased by $776.4 million.
- Borrowed funds were $440.1 million and junior subordinated debentures were $128.6 million. The reported liquidity ratio was 15.9%; additional borrowing capacity was $3.079 billion at the FHLB, $110.1 million at the Federal Reserve and $110.0 million at correspondent banks.
- At the holding company, actual capital ratios were 14.454% total capital, 13.141% Tier 1 risk-based capital, 11.957% CET1 and 10.488% Tier 1 leverage. The bank also reported ratios above the stated well-capitalized thresholds.
- The allowance for credit losses was $140.6 million, or 1.29% of gross loans, versus $57.9 million, or 0.66%, at year-end. Nonaccrual loans were $115.5 million (1.06% of loans); nonperforming assets were $117.5 million. Loans 90 days or more delinquent were $70.6 million.
Material changes, outlook and risks
- MutualBank acquisition: Completed April 24 for $213.4 million in Northwest shares; added 36 Indiana offices, approximately $1.517 billion in acquired loans at fair value and $1.617 billion in deposits. Acquisition expenses were $12.1 million for the first six months; goodwill increased by $39.9 million.
- Credit losses and COVID-19: First-half provision was $79.4 million, up from $11.1 million. Management attributed approximately $45 million of the increase to estimated COVID-19 impacts and approximately $18.2 million to the acquired loan portfolio. It cautioned that actual losses may differ materially from estimates. Nonaccrual loans and classified loans increased; one large commercial credit was downgraded, and a $9.1 million charge-off on a commercial loan affected net charge-offs.
- CECL adoption: The new expected-credit-loss standard was adopted January 1, 2020. It increased the loan allowance by $10.8 million and reduced retained earnings by $9.6 million after tax through a cumulative-effect adjustment. The filing says the estimated CECL capital impact will be phased into regulatory capital beginning in 2022.
- Guidance and shareholder returns: Management anticipated a 2020 effective tax rate of 19%–22%; it provided no earnings guidance. The quarterly dividend was $0.19 per share, and the board declared another $0.19 dividend payable August 14, 2020. The filing notes that sustained losses could lead to a dividend reduction.
- Other risks and contingencies: COVID-19 could increase delinquencies, credit losses and collateral impairment, pressure margins and fee income, and create operational, cybersecurity and vendor risks. Interest-rate sensitivity estimates are assumption-dependent. Management reported no material expected aggregate liability from pending or threatened legal proceedings, but did not accrue an award relating to ongoing post-trial proceedings in a subsidiary’s lawsuit.
Important facts for investors to verify
- Reconcile the reported noninterest-bearing demand deposit balance: the balance sheet reports $2.686 billion at June 30, while MD&A states $2.353 billion. Confirm the correct figure and related growth calculation.
- Track subsequent credit performance, COVID-related borrower relief, nonaccrual and delinquency trends, classified loans, charge-offs and the assumptions underlying the $140.6 million allowance.
- Assess whether acquired MutualBank operations integrate as expected and whether acquisition costs, loan marks and goodwill remain appropriate.
- Monitor deposit levels and composition, excess cash deployment, borrowing needs, net interest margin and the sustainability of the dividend.
- Confirm the impact of continuing low rates and economic conditions on earnings, capital and liquidity; management’s forward-looking estimates are not guarantees.