To The Moon

$Northwest Bancshares(NWBI)$ 2Q24 Report – Financial Instability with EPS at $0.04?

NWBI reported its earnings for 2Q24 on July 23, and the share price increased by 4.5% immediately after.

You may be asking what caused such a positive response from the public and in short, they beat the Earnings Per Share (EPS) estimate by 21.8% at 0.27. However, it is important to note that the amount that beat expectations excludes a significant loss on the sale of investments of $28 million plus $1 million of restructuring expenses. This means that their actual EPS was $0.04.

If you look at the photograph rather than the video, you will think this was horrible for the bank, selling investments at a loss can mean that NWBI is signaling financial instability, such as capital erosion, liquidity issues, and potential regulatory and supervisory actions. When losses are realized the bank could also face the potential for a credit rating downgrade and decrease in investor confidence.

NWBI reported that the proceeds from the investment securities sold have already been reinvested at a higher yield and they expect to earn back the loss over the next three years. They have already seen positive results, with an increase of $23 million in interest income.

NWBI still has $294.5 million in gross unrealized losses ($173.6M are available for sale).

Compared to 2Q23, the company has experienced small increases in both loan receivables (2.7%) and deposits (5.8%), which are the two largest figures in their balance sheet. Additionally, their average borrowing has significantly decreased by 61.4%, which is excellent news. This reduction indicates that the company is relying less on external sources for borrowing, potentially leading to improved profitability. This positive change was made possible by repositioning their securities portfolio and the increase in deposits, thus boosting their cash reserves.

In comparison to 1Q24, the bank also reported a negative provision for credit losses, a change of a whopping 217.8%. This could indicate a few things, such as a decrease in expected losses, an improvement in the economy/markets, and better performance of the loan portfolio. In this instance, it appears to be an improved loan portfolio. We observe a 66.9% increase in the sale of SBA loans, a 745.4% gain on real estate owned, and a 99.3% increase in mortgage banking income.

The numbers may seem positive at first glance, but if you swap your magnifying glass with binoculars, it's evident that compared to last year, the situation is not as favorable. The gain on real estate owned decreased by 38%, and mortgage banking income dropped by 12.4%.

I believe that the bank significantly reduced the provision for credit losses this quarter to offset the impact of the investments sold at a loss. The market condition has not improved, and the unemployment rate has increased in the US by nearly 1% in the past year. This means more people are unable to pay their loans. The bank reported a 32% increase in non-performing loans compared to last year. The lower provision for credit losses means there is less cushion against future loan losses. If we don’t see that provision going up in the next year, there could be a severe impact on the bank’s financials.

On a more positive note, the market expects the Federal Reserve to drop interest rates by September, which can potentially reduce loan costs for the population. However, NWBI is walking on thin ice right now. Their decision to sell securities at a loss indicates that they are actively seeking solutions, which I view as a positive sign.

I am not a financial advisor and this is not financial advice.