Northwest Bancshares, Inc. — Q1 2015 Form 10-Q
Reporting period: Quarter ended March 31, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. Northwest Bancshares is a savings and loan holding company operating Northwest Bank, with 161 community-banking offices and a consumer finance business.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $75.5 | $75.1 in Q1 2014 |
| Net interest income | $61.6 | $60.8 in Q1 2014 |
| Noninterest income | $16.0 | $19.7 in Q1 2014 |
| Net income | $16.2; diluted EPS $0.18 | $14.6; diluted EPS $0.16 in Q1 2014 |
| Noninterest expense | $53.7 | $53.2 in Q1 2014 |
| Total assets | $7,890.4 | $7,775.0 at December 31, 2014 |
| Total loans, net | $5,997.6 | $5,922.4 at December 31, 2014 |
| Total deposits | $5,682.1 | $5,632.5 at December 31, 2014 |
| Borrowed funds | $943.8 | $888.1 at December 31, 2014 |
| Shareholders’ equity | $1,067.5 | $1,062.6 at December 31, 2014 |
Net interest margin was 3.44% on a GAAP basis, versus 3.37% in Q1 2014; net interest rate spread was 3.24%, versus 3.17%. Average interest-earning asset yield was 4.21%, compared with 4.15%, while average interest-bearing liability cost eased to 0.97% from 0.98%. Annualized return on average assets was 0.83% and return on average equity was 6.17%.
Operating cash flow was $27.9; investing activities used $65.9 and financing activities provided $94.4. Cash and cash equivalents ended the quarter at $297.1, up $56.4 from year-end. The bank reported a 9.0% liquidity ratio and $2.292 billion of additional borrowing capacity across the FHLB, Federal Reserve and correspondent banks. Regulatory capital ratios were above stated minimums; Northwest Bank’s total risk-based capital ratio was 16.03%, Tier 1 risk-based ratio 14.78%, CET1 ratio 14.78%, and Tier 1 leverage ratio 10.14%.
Changes and asset quality
- Net income rose 10.7% year over year, primarily as the provision for loan losses fell to $0.9 from $7.5 and net interest income increased 1.2%.
- Noninterest income declined 18.5%, mainly because investment-sale gains fell to $0.1 from $3.3; Q1 2014 included a sale of equity securities. A $1.0 FHLB special dividend partly offset the decline, recorded in other operating income.
- Loans grew 1.3% from year-end, with business banking loans up 3.0%. Deposits rose 0.9%; noninterest-bearing checking and savings increased, while time deposits declined 3.4%.
- Nonperforming assets decreased to $89.0 from $96.8 at year-end. Loans at least 90 days delinquent fell to $32.9 from $41.3; nonaccrual loans were $73.3, down from $79.8. The allowance for loan losses was $67.3, or 1.11% of loans, versus $67.5, or 1.13%, at year-end.
- Commercial real estate and commercial loans represented $2.225 billion of loans. Pennsylvania accounted for 75.5% of the loan portfolio and New York 16.6%.
Outlook, risks and unusual items
- The company anticipated completing its announced LNB Bancorp acquisition in Q3 2015, subject to customary closing conditions, including LNB shareholder approval. The proposed transaction provides for a 50% stock and 50% cash exchange; Q1 acquisition expense was $0.347. LNB reported $1.256 billion in assets and $1.8 million in Q1 net income.
- Management anticipated an approximately 29% effective tax rate for 2015. It expected to contribute $4–$8 million to its defined benefit pension plan during 2015.
- Management cited continued low market interest rates, competitive conditions, economic and borrower performance, regulatory changes, asset quality, securities valuation and acquisition integration among risks. A modeled 100-basis-point rate decline reduced projected 12-month net income 14.6%; modeled increases of 100, 200 and 300 basis points produced net income changes of -0.9%, +1.5% and +2.5%, respectively. These are simulations based on assumptions, not forecasts.
- Real estate owned loss was $1.0, primarily from a write-down of one commercial property. The company reported $15.3 of REO. Standby letters of credit had a maximum potential payment obligation of $23.8, of which $23.2 was fully collateralized.
- The Toth overdraft-fee class action settlement had received preliminary and final court approval. No legal-proceeding accrual was recorded at March 31; the filing notes that litigation outcomes remain uncertain.
- The board declared a $0.14-per-share dividend payable in May. The company repurchased 318,000 shares for $3.8 during the quarter.
Key facts for investors to verify
- Whether the LNB merger closed as anticipated, and the final consideration, integration costs and effects on capital and earnings.
- Whether credit-quality improvement continued, particularly in commercial real estate, nonaccrual loans, delinquencies, REO and the allowance for loan losses.
- Whether loan growth and deposit mix support net interest income as rates and funding costs change; assess the assumptions behind management’s interest-rate sensitivity model.
- How recurring earnings compare with reported earnings, given the prior-year investment-sale gain, the 2015 FHLB special dividend, REO write-down and merger expenses.
- Whether liquidity, regulatory capital, dividend payments and planned pension contributions remain consistent with the company’s funding and capital needs.