Northwest Bancshares, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited consolidated results for the quarter ended March 31, 2018, compared with Q1 2017 unless otherwise noted. Northwest Bancshares is a savings and loan holding company operating Northwest Bank, with 172 community banking offices in Pennsylvania, western New York and eastern Ohio. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless indicated.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / change |
|---|---|---|
| Net interest income | $81.8 million | $80.6 million, up 1.5% |
| Net interest margin | 3.84% GAAP | 3.71% GAAP |
| Provision for loan losses | $4.2 million | $4.6 million, down 9.2% |
| Noninterest income | $21.8 million | $21.5 million, up 1.3% |
| Noninterest expense | $67.4 million | $71.6 million, down 5.9% |
| Income before taxes | $31.9 million | $25.8 million |
| Income tax expense | $6.9 million; effective rate 21.7% | $8.1 million; effective rate 31.2% |
| Net income / diluted EPS | $25.0 million / $0.24 | $17.7 million / $0.17; net income up 40.8% |
| Operating cash flow | $33.3 million | $44.0 million |
| Cash and cash equivalents | $192.2 million | $77.7 million at December 31, 2017 |
| Total assets | $9.521 billion | $9.364 billion at December 31, 2017 |
| Total loans / deposits | $7.882 billion / $7.985 billion | Loans up 1.1%; deposits up 2.0% from year-end |
| Borrowed funds / subordinated debentures | $104.6 million / $111.2 million | Borrowed funds were $108.2 million at year-end |
| Shareholders’ equity | $1.215 billion | $1.208 billion at December 31, 2017 |
Cash flow was also affected by $61.5 million of net cash used in investing activities and $142.6 million of net cash provided by financing activities, including $158.5 million of deposit growth and $17.4 million of dividends paid. The company reported a 9.9% liquidity ratio and additional borrowing capacity of $3.227 billion at the FHLB, $61.2 million at the Federal Reserve and $80.0 million with correspondent banks. The FHLB’s $150 million revolving line was undrawn.
At March 31, Northwest Bank’s reported regulatory capital ratios included 14.44% total capital, 13.68% Tier 1 capital, 13.68% CET1 and a 10.76% leverage ratio. The company stated that its capital levels exceeded the applicable minimum requirements.
Material changes and asset quality
- Commercial banking loans grew $100.3 million, or 3.3%, from year-end, led by commercial real estate and commercial lending. Personal banking loans declined $11.4 million, principally in residential mortgages and home equity; consumer loans rose $14.6 million, primarily from indirect auto growth.
- Deposit growth included $69.4 million in noninterest-bearing checking. Management attributed deposit growth to efforts to attract lower-cost accounts and, for some products, recent increases in rates paid.
- Net interest income increased as loan yields and mortgage-backed securities income rose. The average cost of interest-bearing liabilities also increased, to 0.49% from 0.40%, as deposit and borrowing rates adjusted to market rates.
- Expense reduction reflected prior-year restructuring, including closure of the consumer finance subsidiary and sales of three Maryland offices and the retirement services business. Lower deposit insurance premiums also contributed.
- Nonperforming assets fell to $59.6 million from $70.6 million at year-end; nonperforming loans were $55.5 million. The allowance for loan losses was $55.2 million, or 0.70% of loans, versus $56.8 million, or 0.73%, at year-end. Management attributed the allowance decrease mainly to improved historical commercial loan loss rates. Annualized net charge-offs were 0.30% of average loans.
- Total other comprehensive loss was $3.4 million for the quarter, and accumulated other comprehensive loss increased to $42.2 million. Available-for-sale securities had $16.0 million of gross unrealized losses at quarter-end; management characterized the losses as temporary and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
Outlook, risks and unusual items
- Management expected a 2018 effective tax rate of 21.5%–23.5%, following the reduction in the federal corporate tax rate under the Tax Cuts and Jobs Act. This is the filing’s principal quantified outlook; it provides no earnings or revenue guidance.
- Interest-rate simulation projected net interest income increases of 0.6%, 1.6% and 2.0% under parallel rate increases of 100, 200 and 300 basis points, respectively, and a 6.6% decline under a 100-basis-point decrease. Management cautioned that model assumptions make actual outcomes uncertain.
- The allowance for loan losses depends on estimates of borrower performance, economic conditions and collateral values; management warned actual losses may differ materially from estimates. The company was preparing for the expected-credit-loss standard (CECL), effective for it in 2020, and was still assessing its impact.
- Q1 included a $546,000 net loss on real estate owned, primarily associated with the write-down and sale of one commercial property. The quarter’s provision for loan losses was $4.2 million.
- The company early adopted several accounting standards in 2018. Adoption of ASU 2018-02 reclassified $6.7 million from accumulated other comprehensive loss to retained earnings, with no effect on total equity. Other described adoption impacts were immaterial or not significant.
- Standby letters of credit had a maximum potential payment exposure of $23.8 million, of which $15.1 million was fully collateralized. The company reported no accrued liability for legal proceedings and said it could not determine whether claims might affect future results. No material risk-factor updates were reported.
The board declared a $0.17-per-share dividend on April 18, 2018, payable May 17 to shareholders of record May 3. The quarterly payout ratio was 70.8%. No shares were repurchased during the quarter.
Most important facts for investors to verify
- Whether commercial loan growth and deposit mix can sustain net interest income as funding costs rise.
- Whether reported asset-quality improvements persist, especially in commercial credit, and whether the allowance remains adequate as conditions and loan mix change.
- Whether the expected 2018 tax rate and the earnings benefit from lower expenses are sustainable.
- How market-rate movements affect net interest income, securities values and accumulated other comprehensive loss; simulation results are assumption-dependent.
- The eventual CECL transition impact, which management had not yet quantified.
- The status and potential financial effect of legal claims and contingent standby-letter-of-credit exposures.