$Northwest Bancshares(NWBI)$ released their 3Q24 report with an extraordinary increase in EPS of 550% compared to 2Q24.
Don’t be fooled by these numbers, their EPS in 2Q24 was impacted by a significant loss on the sale of investments, and now the 3Q numbers are back to a more typical level. You can find more info about 2Q in my previous article. Their EPS dropped by 16.12% compared to 3Q23 primarily driven by an increase in provision expense for credit losses.
Why would they expect more missed loan payments when the economy seems to be recovering relatively well and interest rates are going down? Let’s investigate!
The bank reported an increase of 0.3% in loans receivable and a 3.2% increase in average deposits compared to 3Q23, these numbers are the two largest figures in their balance sheet.
Management said their growth was muted in the quarter because they chose a more conservative approach, reinvesting the cashflows generated from their personal banking portfolios into their commercial portfolios (which is where they see more potential for returns since they tend to be higher-yielding loans).
The approach of relying on cash from personal loans helps them avoid taking more debt to fund commercial lending, but the downside is that it doesn’t give them strong overall growth since they’re just reallocating resources rather than expanding both portfolios. This means we will continue to see a decline in their personal banking numbers.
They are focused on profitability (operations generating sustainable margins rather than expanding loan or deposit volumes), and credit discipline (avoiding taking high-risk loans to reduce the risk of defaults).
Increase in commercial banking but a decrease in personal baking
NWBI has once again reduced their average borrowed funds by 31.7% compared to the last quarter and 65.7% compared to 3Q23, which will help improve profitability even further (this essentially means paying down debt to save on interest expenses). The interest expense on borrowed funds has been reduced by 71.45% since 3Q23, that’s what I call savings!
Non Performing Loans
One of the most important topics for a bank with revenues heavily reliant on loans receivable is the non performing loans number.
NWBI reported a decrease in non performing loans of about 25% compared to 2Q24, which is a very positive result. It indicates that their credit discipline strategy is working as intended, which will also reduce the need to set aside money for loan losses and improve profitability.
However, the bank reported an intense increase of 164% in their provision for credit losses for loans compared to 2Q24, anticipating the need to prepare for potential defaults in their growing commercial portfolio which tends to be riskier (highest quarterly provision in the last 12 months). This answers our question at the beginning of this article, it shows that management is taking strong safety measures for their longer-term goals.
Analysis of Loan Portfolio by State
83% of NWBI’s commercial portfolio is concentrated in three states: New York (33.9%), Pennsylvania (29.3%) and Ohio (19.8%). The unemployment rate in these states has remained relatively stable over the past year, except for Ohio, where it has increased by 0.9%. It is important to monitor these figures, as a rise in unemployment could lead to an increase in missed loan payments.
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