Northwest Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Northwest Bancshares is a bank holding company operating Northwest Bank, with 170 community-banking offices across Pennsylvania, Western New York, Eastern Ohio, and Indiana. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and position
| Metric | Q3 2021 | Comparable period |
|---|---|---|
| Net interest income | $98.4 million | $103.5 million in Q3 2020 |
| Provision for credit losses | Credit of $4.4 million | Expense of $6.8 million in Q3 2020 |
| Noninterest income | $29.2 million | $36.7 million in Q3 2020 |
| Noninterest expense | $86.1 million | $86.9 million in Q3 2020 |
| Net income / diluted EPS | $35.1 million / $0.27 | $38.1 million / $0.30 in Q3 2020 |
| Net interest margin | 2.95% GAAP | 3.23% GAAP in Q3 2020 |
- For the first nine months, net income was $124.3 million and diluted EPS was $0.97, versus $39.8 million and $0.34 a year earlier. Net interest income rose 2.0% to $294.6 million; the credit-loss provision was a $10.0 million credit versus $86.2 million of expense in 2020.
- Nine-month noninterest income increased 15.7% to $115.8 million, including a $25.3 million pretax gain from the April 2021 sale of the insurance business. Noninterest expense rose 1.6% to $258.6 million.
- Nine-month GAAP net interest margin was 2.99%, down from 3.38%. Lower asset yields weighed on margins despite lower funding costs and growth in average interest-earning assets.
- Operating cash flow was $137.5 million for the first nine months, compared with $153.8 million in 2020. Cash and cash equivalents increased $354.2 million to $1.090 billion.
Balance sheet, funding, and capital at September 30, 2021
- Total assets were $14.389 billion, up 4.2% from year-end 2020. Total deposits were $12.222 billion, up 5.4%; management attributed deposit growth in part to stimulus payments and PPP funds. Time deposits declined 15.5% as customers shifted to checking and savings accounts.
- Total loans were $10.199 billion, down 3.6% from year-end, as repayments and PPP forgiveness exceeded new originations. Consumer loans, particularly indirect auto, increased.
- Shareholders’ equity was $1.562 billion. Regulatory capital ratios exceeded stated well-capitalized thresholds: company total capital 16.85%, Tier 1 14.71%, CET1 13.46%, and leverage 9.53%.
- The bank’s liquidity ratio was 20.4%. Additional borrowing capacity was reported as $3.511 billion with the FHLB, $79.5 million with the Federal Reserve, and $110.0 million with correspondent banks.
- Borrowed funds were $126.5 million; subordinated debt was $123.5 million and junior subordinated debentures were $129.0 million. The $125 million subordinated notes issued in 2020 carry a 4.00% fixed rate through 2025, then a floating rate.
Material changes and key developments
- Q3 net income declined 7.9% year over year. Lower noninterest income and net interest income outweighed the benefit from a credit provision release and slightly lower expenses.
- Mortgage banking income fell 64.4% in Q3 to $3.9 million, which management attributed to less favorable secondary-market pricing. Insurance commission income also fell following the business sale. Trust and financial services income increased.
- Nonaccrual loans rose to $176.9 million, or 1.73% of loans, from $102.8 million, or 0.97%, at year-end. Management linked the increase mainly to hospitality loans placed on nonaccrual after deferral periods ended.
- The allowance for credit losses declined to $109.8 million, or 1.08% of loans, from $134.4 million, or 1.27%, at year-end. Management cited improving economic forecasts and lower classified loans; it cautioned that actual losses may differ materially from estimates.
- Unrealized losses on available-for-sale securities were attributed primarily to interest-rate changes, not credit impairment. Accumulated other comprehensive loss widened to $52.4 million from $33.5 million at year-end.
- The company repurchased 1.43 million shares during Q3 and paid a $0.20-per-share dividend. The board declared another $0.20 dividend payable in November 2021.
Outlook, risks, and contingencies
- Management expected a 2021 effective tax rate of 22%–24%; the filing provides no specific earnings or revenue guidance. It anticipated a $4 million–$8 million pension-plan contribution for 2021.
- Interest-rate sensitivity modeling projected net interest income to increase 1.1%–1.4% for parallel rate increases of 100–300 basis points, and decline 2.7% for a 100-basis-point decrease. These are model estimates dependent on uncertain assumptions, not forecasts.
- Key stated risks include COVID-19-related economic disruption, credit deterioration, inflation and interest-rate changes, securities valuation, cybersecurity, competition, technology and third-party risks, and integration or growth execution.
- Standby letters of credit had a maximum potential payment exposure of $47.8 million, of which $38.4 million was fully collateralized. Management did not expect pending or threatened legal proceedings to create a material aggregate liability, but noted outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether rising nonaccrual loans—particularly hospitality and commercial real estate exposures—lead to additional charge-offs or reserve needs.
- How deposit balances and excess liquidity evolve, and whether asset yields and net interest margin stabilize as rates and funding mix change.
- Whether mortgage banking weakness and the loss of insurance-business income are offset by recurring fee businesses, including trust services.
- The sustainability of earnings excluding the insurance-sale gain and the unusually favorable credit-provision comparisons.
- Whether reported liquidity, capital buffers, dividends, and repurchases remain appropriate as credit and market conditions change.