Northwest Bancshares, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2020. Northwest operates 213 community-banking offices across Pennsylvania, Western New York, Eastern Ohio, and Indiana. On April 24, it acquired MutualFirst Financial, adding 36 Indiana offices; acquired operations are included from that date. Comparisons with 2019 are therefore affected by the acquisition.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $103.5 million | $90.9 million | $288.8 million | $271.5 million |
| Provision for credit losses | $6.8 million | $3.3 million | $86.2 million | $14.4 million |
| Noninterest income | $36.7 million | $26.2 million | $100.1 million | $71.2 million |
| Noninterest expense | $86.9 million | $70.6 million | $254.6 million | $219.5 million |
| Net income | $38.1 million | $33.4 million | $39.8 million | $84.8 million |
| Diluted EPS | $0.30 | $0.31 | $0.34 | $0.80 |
- Q3 net interest margin was 3.23%, down from 3.77%; the nine-month margin was 3.38%, down from 3.86% (GAAP basis). Management attributed margin pressure to lower market rates, low-yielding deposit inflows, and approximately $500 million in PPP loans priced at 1%.
- At September 30, total assets were $13.79 billion; gross loans were $10.78 billion and deposits were $11.46 billion. Cash and cash equivalents were $656.7 million; available-for-sale securities were $1.41 billion.
- Allowance for credit losses was $140.2 million, or 1.30% of loans, versus $57.9 million, or 0.66%, at year-end 2019. Nonaccrual loans were $106.8 million, or 0.99% of loans; nonperforming assets totaled $109.9 million.
- For the nine months, operating cash flow was $153.8 million, investing cash outflow was $642.3 million, and financing cash flow was $1.08 billion. Cash increased $595.9 million to $656.7 million.
- Borrowed funds totaled $398.2 million and junior subordinated debentures $128.7 million. The company issued $125 million of 4.00% fixed-to-floating subordinated notes in September, maturing in 2030.
- The liquidity ratio was 16.2%. Additional borrowing capacity was $3.755 billion with the FHLB, $103 million with the Federal Reserve, and $110 million with correspondent banks.
- At September 30, Northwest Bancshares reported total capital of 16.607%, Tier 1 risk-based capital of 15.263%, CET1 of 12.776%, and a Tier 1 leverage ratio of 10.977%. Northwest Bank also exceeded the stated well-capitalized thresholds.
Material changes versus prior periods
- Q3 net income rose 13.9% year over year, supported by higher net interest income and noninterest income, partly offset by higher credit-loss provision and operating costs. Diluted EPS was lower at $0.30 versus $0.31, reflecting a larger share count.
- Nine-month net income fell 53.1%, primarily because the credit-loss provision increased by $71.8 million and noninterest expense rose by $35.1 million. Lower taxes and increased net interest and noninterest income partly offset the decline.
- MutualBank added $2.09 billion of fair-value assets, including $1.517 billion of loans, and $1.617 billion of deposits. The acquisition was funded with 20.66 million Northwest shares and generated $39.9 million of goodwill.
- Deposits grew $2.87 billion from year-end, comprising $1.62 billion from the acquisition and $1.25 billion of organic growth. Management linked organic inflows partly to PPP funds and consumer stimulus payments.
- Mortgage banking income increased to $11.1 million in Q3 from $1.9 million, attributed to expanded secondary-market capabilities and refinance activity. Acquisition and branch-optimization costs contributed to expense growth; the company said branch optimization was expected to be completed in December 2020.
Outlook, management commentary, risks, and unusual items
- Management expected a 2020 effective tax rate of 17%–21%. The filing provides no earnings or revenue guidance.
- Management reported that COVID-19’s estimated economic impact increased nine-month credit-loss provision by approximately $46.5 million. The allowance also reflected CECL adoption, acquired loans, portfolio trends, and forecasts. The CECL transition adjustment reduced retained earnings by $9.6 million at adoption; regulatory-capital effects are being phased in under the applicable rule.
- Classified loans increased, including downgrades in industries affected by the pandemic; management specifically cited hotel and hospitality loans. Nonaccrual loans and charge-offs also rose. A $9.1 million charge-off on one commercial loan materially affected net charge-offs.
- COVID-related short-term modifications to qualifying current borrowers generally were not treated as troubled debt restructurings under regulatory guidance. At September 30, TDRs totaled $34.8 million, including $17.1 million nonaccrual.
- Management identified risks from pandemic-related economic disruption, borrower defaults and collateral values, interest-rate changes and margin pressure, cybersecurity, competition, regulation, and successful integration of acquisitions. Interest-rate sensitivity simulations are assumption-dependent; actual outcomes may differ.
- The company reported no material expected aggregate liability from pending or threatened legal proceedings, but did not accrue potential awards from a continuing post-trial proceeding involving its insurance subsidiary.
- The board declared a $0.19-per-share dividend on October 26, payable November 16, 2020. The Q3 dividend payout ratio was 63.3%.
Important facts for investors to verify
- How credit quality, criticized/classified loans, delinquencies, deferrals, and realized charge-offs evolve as pandemic relief and borrower accommodations change.
- Whether the $140.2 million allowance adequately reflects expected losses, and how CECL assumptions and the acquired loan portfolio affect future provision expense.
- Whether deposit inflows and excess cash persist, and the effect of low asset yields and PPP forgiveness or repayment on net interest margin and earnings.
- Integration costs, branch-optimization execution, and realized synergies from the MutualBank acquisition.
- Capital and liquidity trends, subordinated-debt costs, and the sustainability of dividends relative to earnings and regulatory requirements.