Northwest Bancshares, Inc. quarterly report, Q2 FY2015

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Northwest Bancshares, Inc. — Q2 2015 Form 10-Q

Business context and reporting period. The unaudited filing covers the quarter and six months ended June 30, 2015, with comparisons to the same 2014 periods. Northwest is a savings and loan holding company operating community banking and consumer finance businesses, with 161 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland.

Financial performance and position

  • Profitability: Q2 net income was $15.3 million, up 20.8% from $12.7 million; diluted EPS was $0.17 versus $0.14. For the first half, net income was $31.5 million, up 15.4%, and diluted EPS was $0.34 versus $0.30. Q2 annualized return on average assets/equity was 0.78%/5.77%; first-half measures were 0.81%/5.97%.
  • Revenue and margins: Q2 net interest income was $62.2 million, down 0.9%; net interest margin was 3.39%, unchanged. First-half net interest income rose 1.0% to $125.2 million, and margin increased to 3.40% from 3.37%. Net interest income plus noninterest income was $78.7 million for Q2 and $156.3 million for the first half, down about 0.6% and 2.1%, respectively, year over year.
  • Expenses and credit provision: Q2 noninterest expense increased 2.5% to $55.1 million; first-half expense increased 1.8% to $108.8 million. Provision for loan losses fell 87.3% to $1.1 million in Q2 and 87.6% to $2.0 million for the first half.
  • Assets, lending and deposits: Total assets were $7.865 billion, up 1.2% from year-end 2014. Loans were $6.125 billion, up 2.2%; deposits were $5.694 billion, up 1.1%. Deposit growth was concentrated in noninterest-bearing checking, interest-bearing checking and savings, while time deposits declined 5.5%.
  • Asset quality: The allowance for loan losses was $59.1 million, or 0.96% of loans, versus $67.5 million, or 1.13%, at year-end. Nonperforming assets declined to $72.2 million from $96.8 million; loans 90 days or more delinquent fell to $37.5 million from $41.3 million. Management attributed the lower provision and allowance mainly to improved asset quality. The filing also reports $6.1 million in charge-offs on a seed wholesaler loan and $2.0 million on a hotel operator loan during the first half.
  • Cash flow and liquidity: First-half operating cash flow was $52.5 million; investing activities used $54.5 million and financing activities provided $54.3 million. Cash and cash equivalents rose $52.2 million to $292.9 million. Northwest’s liquidity ratio was 11.6%; additional stated borrowing capacity was $1.786 billion at the FHLB, $210.4 million at the Federal Reserve Bank and $80.0 million at correspondent banks.
  • Debt and capital: Borrowed funds were $899.1 million, up 1.2% from year-end; junior subordinated debentures were $103.1 million. Shareholders’ equity was $1.068 billion. At the holding-company level, actual total risk-based capital, Tier 1 risk-based capital and CET1 ratios were 20.28%, 19.17% and 17.30%, respectively; Northwest Bank’s corresponding ratios were 16.18%, 15.07% and 15.07%.

Material changes versus comparable periods

  • Higher earnings chiefly reflected substantially lower loan-loss provisions. Q2 net interest income edged down, while first-half net interest income increased modestly.
  • First-half noninterest income declined 13.0%, mainly because 2014 included larger investment-sale gains; real-estate-owned losses also increased in 2015, including a write-down of a commercial property.
  • Q2 noninterest income was nearly flat year over year. First-half loan and deposit service charges increased, partly offsetting lower investment gains and higher real-estate-owned losses.
  • Loan growth was funded in part by reducing securities holdings. The company also shifted funding toward more liquid deposit accounts and added $85 million of long-term FHLB advances in Q1, averaging 8.2 years and 2.40% interest, to replace maturing advances.
  • First-half cash dividends were $25.9 million, or $0.28 per share, and the company repurchased 497,800 shares for $6.0 million. The 2014 comparison included a special dividend, so reported year-over-year dividend cash totals are not directly comparable.

Outlook, commentary, risks and unusual items

  • Management expected the 2015 effective tax rate to be 31%–33%; it was 32.0% in Q2 and 30.8% for the first half. The filing gives no broader earnings guidance.
  • The announced LNB Bancorp merger had received board, shareholder and specified regulatory approvals, subject to customary closing conditions. Management anticipated closing and data conversion on the weekend of August 14, 2015. LNB reported $1.238 billion in assets and net income of $2.3 million for Q2 and $4.1 million for the first half; Northwest recorded $814,000 in first-half acquisition expenses.
  • Interest-rate simulation estimated that a 100-basis-point rate decrease could reduce net interest income 4.2% and net income 13.6% over 12 months. These are model estimates dependent on assumptions about prepayments and deposit behavior; actual results may differ.
  • Key stated risks include economic and borrower conditions, interest-rate changes, competition, regulatory and capital requirements, securities impairment, loan growth and credit performance, and successful integration of acquisitions. Management cautioned that allowance estimates may differ from actual losses.
  • Standby letters of credit had a maximum potential payment exposure of $25.0 million, of which $24.3 million was collateralized. No legal-proceeding accrual was recorded; management said potential litigation liabilities beyond amounts accrued were not expected to materially affect the financial statements, while noting outcomes remain uncertain.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting during the period. No material changes to the previously reported risk factors were disclosed.

Important facts for investors to verify

  • Whether the LNB transaction closed on the anticipated timetable and how its integration, costs and resulting financial contribution compare with expectations.
  • Whether loan growth is sustained without deterioration in criticized loans, delinquencies, nonaccrual loans or charge-offs, and whether the reduced allowance remains adequate.
  • How net interest margin, funding costs and deposit mix respond to changing rates; review the filing’s interest-rate sensitivity assumptions as well as its modeled outcomes.
  • Whether liquidity, borrowing capacity and regulatory capital remain strong after the merger, dividends, share repurchases and future funding needs.
  • Whether the expected 2015 tax-rate range is achieved and whether real-estate-owned losses, acquisition expenses or other unusual items affect subsequent results.