Northwest Bancshares, Inc. — Q2 2017 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Northwest is a bank holding company operating 173 community-banking offices across Pennsylvania, western New York, and eastern Ohio.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $82.7 million | $75.5 million | $163.3 million | $147.1 million |
| Provision for loan losses | $5.6 million | $4.2 million | $10.2 million | $5.9 million |
| Noninterest income | $41.5 million | $20.3 million | $63.0 million | $39.7 million |
| Noninterest expense | $73.3 million | $102.1 million | $144.9 million | $165.4 million |
| Net income (loss) | $31.0 million | $(7.0) million | $48.7 million | $11.0 million |
| Diluted EPS | $0.30 | $(0.07) | $0.48 | $0.11 |
| Net interest margin, GAAP | 3.75% | 3.72% | 3.70% | 3.61% |
- Q2 average assets were $9.55 billion; average interest-earning assets were $8.83 billion. Q2 annualized return on average assets was 1.30% and return on average equity was 10.48%.
- At June 30, total assets were $9.50 billion, down 1.3% from year-end 2016. Total loans were $7.69 billion, up 1.7%; deposits were $7.97 billion, up 1.1%; shareholders’ equity was $1.20 billion.
- Cash and cash equivalents were $156.8 million, versus $389.9 million at year-end. First-half operating cash flow was $72.7 million, investing cash flow was $(130.2) million, and financing cash flow was $(175.5) million.
- Borrowed funds were $110.4 million, down from $142.9 million at year-end; junior subordinated debentures were $111.2 million. The reported liquidity ratio was 11.7%, with $3.266 billion of additional FHLB borrowing capacity.
- Regulatory capital ratios at June 30: company CET1 12.66%, Tier 1 risk-based 14.18%, total risk-based 15.07%, and leverage 10.78%. Northwest Bank’s corresponding ratios were 13.36%, 13.36%, 14.24%, and 10.15%.
Material changes and unusual items
- Northwest sold three Maryland offices on May 19 for a stated 8% deposit premium, recognizing a $17.2 million gain. The transaction transferred $211.7 million of deposits and $131.6 million of assets; it materially boosted reported Q2 and first-half noninterest income.
- Prior-year comparisons include a $37.0 million FHLB prepayment penalty in Q2 and the first half of 2016. Its absence in 2017 significantly lowered reported noninterest expense and helped drive the earnings turnaround.
- Net interest income rose 9.5% in Q2 and 11.0% for the first half, aided by growth in earning assets and lower funding costs after repayment of FHLB advances. GAAP net interest margin improved to 3.75% for Q2 and 3.70% for the first half.
- On July 14, 2017, the company closed all remaining offices of its consumer finance subsidiary, NCDC, and transferred its loans to Northwest for servicing and collections. Northwest said it would continue direct consumer lending and indirect sales finance lending.
- Quarterly dividends were $0.16 per share, versus $0.15 a year earlier. The board declared another $0.16 dividend payable August 17, 2017.
Outlook, management commentary, and risks
- Management expected a 2017 effective tax rate of 31%–33%. No broader earnings or revenue guidance was provided.
- Credit quality indicators improved overall: nonaccrual loans were $72.8 million, down from $79.5 million at year-end; nonperforming assets were $79.0 million, down from $85.1 million. The allowance for loan losses was $62.9 million, or 0.82% of loans, compared with 0.81% at year-end. First-half annualized net charge-offs were 0.22%, versus 0.21% in 2016.
- The provision for loan losses increased, which management attributed mainly to indirect auto and commercial loan growth and the NCDC closure. Management cited economic conditions, unemployment, bankruptcy levels, and real estate values in assessing reserves; it reported no change to its allowance methodology.
- Interest-rate simulations estimated that a 100-basis-point rate increase would reduce net interest income by 0.7% and market value of equity by 3.1%; a 100-basis-point decrease would reduce net interest income by 3.9%. Management cautioned that results depend on uncertain assumptions and actual effects may differ.
- Key stated risks include economic and borrower conditions, interest-rate and securities-market changes, competition, cyber security, regulation and capital requirements, loan growth and credit losses, and integration or execution of growth opportunities.
- Standby letters of credit had a maximum potential payment exposure of $25.9 million, of which $17.2 million was fully collateralized. The company reported no accrued legal-proceeding loss contingency and no material updates to its previously disclosed risk factors.
Important facts for investors to verify
- Separate recurring operating performance from the $17.2 million branch-sale gain and the prior-year $37.0 million FHLB prepayment penalty when assessing earnings growth.
- Track the impact and costs of the NCDC closure, transferred loan servicing, and the exit from the consumer finance segment.
- Monitor commercial and indirect auto loan growth, the higher loan-loss provision, delinquency and nonaccrual trends, and allowance adequacy.
- Assess whether deposit mix, funding costs, liquidity, and net interest margin remain favorable as rates and customer preferences change.
- Review the full filing’s capital, asset-quality, interest-rate sensitivity, and fair-value disclosures; the reported interim results are not necessarily indicative of full-year results.