Business context and reporting period
Northwest Bancshares, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company is a savings and loan holding company operating Northwest Savings Bank, with 165 community banking offices across Pennsylvania, western New York, eastern Ohio and Maryland. It reports Community Banking and Consumer Finance segments.
Financial performance and condition
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $62.1 | $63.3 | $123.0 | $127.3 |
| Noninterest income | $17.1 | $13.4 | $36.8 | $29.8 |
| Net income | $12.7 | $13.5 | $27.4 | $28.8 |
| Diluted EPS | $0.14 | $0.15 | $0.30 | $0.32 |
| Provision for loan losses | $8.3 | $5.4 | $15.8 | $12.6 |
| Noninterest expense | $53.8 | $52.8 | $107.0 | $104.3 |
- Q2 net interest margin was 3.39%, versus 3.40% a year earlier; first-half margin was 3.37%, versus 3.46%. Q2 return on average assets was 0.64% and return on average equity 4.77%; first-half figures were 0.70% and 4.97%.
- At June 30, total assets were $7.902 billion, loans net of allowance were $5.814 billion, and deposits were $5.774 billion. Total assets were up 0.3% and loans up 1.4% from year-end 2013. Business Banking loans grew 4.5%; Personal Banking loans declined 0.3%.
- Deposits increased 1.9% from year-end. Noninterest-bearing checking rose 10.6%; time deposits fell 5.2%. Borrowed funds declined 1.4% to $869.3 million; junior subordinated debentures were $103.1 million.
- Shareholders’ equity was $1.072 billion, down 7.3% from year-end, mainly reflecting $125.8 million in cash dividends, partly offset by earnings and improved unrealized securities gains.
- For the first half, operating cash flow was $50.1 million, compared with $78.0 million in 2013; investing used $38.4 million, versus $83.7 million; financing used $17.6 million, versus providing $2.2 million. Cash and cash equivalents ended at $386.0 million, down $5.9 million from year-end.
- The bank’s liquidity ratio was 11.7%. Additional borrowing capacity was $2.082 billion at the FHLB, $192.7 million at the Federal Reserve and $80.0 million with correspondent banks. Northwest Savings Bank’s reported capital ratios were well above stated “well-capitalized” thresholds: total risk-based 17.55%, Tier 1 risk-based 16.29%, and Tier 1 leverage 10.85%.
Material changes versus the prior comparable period
Q2 net income declined 5.7%; first-half net income declined 4.9%. Lower interest income and higher loan-loss provisions and operating expenses were the principal pressures. Noninterest income increased substantially, partly offsetting these declines: first-half gains on investment sales were $3.7 million versus $0.1 million, while trust and financial services income rose with the Evans Capital Management acquisition and higher assets under management. Lower losses on real estate owned also helped comparisons.
Management attributed weaker asset yields to historically low rates and competition. Loan growth and lower funding costs partly cushioned the effect. First-half net charge-offs increased to $15.7 million from $13.2 million; two commercial loan charge-offs totaling $8.1 million were a major factor. At June 30, nonperforming assets were $111.9 million, down from $126.1 million at year-end; loans 90 days or more delinquent were $51.3 million, down from $57.8 million.
Outlook, commentary, risks and unusual items
- No earnings or revenue guidance is provided. Management expected an effective tax rate of 26%–27% for 2014.
- The company paid a $1.00-per-share special dividend in Q2 in addition to its $0.13 regular dividend; first-half dividends totaled $1.36 per share. The unusually high Q2 payout ratio was 807.1%. The board declared another $0.13-per-share dividend payable August 14, 2014.
- The allowance for loan losses was $71.4 million, or 1.21% of loans, versus $71.3 million, or 1.23%, at year-end. Management cited seven business loans requiring $12.2 million of additional reserves, while noting improvement in classified loans, troubled debt restructurings and nonaccrual loans.
- Interest-rate simulations projected net income changes over 12 months of +0.4%, +2.0% and +2.6% for rate increases of 100, 200 and 300 basis points, respectively, and −12.6% for a 100-basis-point decrease. Management cautioned that assumptions and actual outcomes may differ materially.
- Basel III requirements begin applying to the company and bank January 1, 2015, with the capital conservation buffer phased in through 2019. Management did not expect the cited new accounting standards to have a material impact, except that the revenue standard was still being evaluated.
- The company had accrued $2.4 million for legal proceedings. A proposed class-action settlement in Toth v. Northwest Savings Bank, concerning overdraft fees and transaction posting, remained subject to court approval. Standby letters of credit had a maximum potential exposure of $23.6 million, of which $22.5 million was fully collateralized.
- Management identified regulatory change, economic conditions, competition, interest-rate and securities-market movements, borrower performance, loan growth and acquisition integration among risks. It reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the $12.2 million of additional reserves and the $8.1 million commercial-loan charge-offs indicate isolated exposures or broader credit deterioration.
- Whether loan growth, margins and earnings can stabilize amid low rates and the reported decline in net interest margin.
- The sustainability and capital impact of the special dividend, given the high payout ratio and year-to-date equity decline.
- Final court approval and ultimate cost of the Toth settlement, and whether legal accruals adequately reflect exposure.
- Actual liquidity and capital effects as Basel III requirements take effect, and the sensitivity of results to rate changes versus the company’s modeled assumptions.