Northwest Bancshares, Inc. quarterly report, Q1 FY2020

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Northwest Bancshares, Inc. — Q1 2020 Form 10-Q

Reporting period: Quarter ended March 31, 2020. Unaudited consolidated results include Northwest Bank and subsidiaries. Amounts below are in millions of dollars except per-share data and ratios.

Business context and key financial metrics

  • Business: Savings and loan holding company operating 178 community-banking offices across Pennsylvania, western New York, and eastern Ohio.
  • Income and profitability: Interest income was $100.4 million and net interest income was $87.2 million, versus $100.3 million and $88.0 million, respectively, in Q1 2019. Noninterest income rose to $28.0 million from $21.7 million. Net income was $7.9 million, or $0.07 diluted EPS, down from $25.0 million, or $0.24 per diluted share. Annualized return on average assets was 0.30% and return on average equity was 2.37%.
  • Margins and expenses: GAAP net interest margin declined to 3.64% from 3.96%; interest-rate spread fell to 3.47% from 3.75%. Noninterest expense increased 10.1% to $78.6 million. Income before taxes was $9.0 million.
  • Credit costs: Provision for credit losses was $27.6 million versus $6.5 million. The allowance for credit losses was $92.9 million, or 1.05% of loans, at March 31, compared with $57.9 million, or 0.66%, at year-end. Management attributed approximately $23 million of the quarter’s provision to the estimated economic impact of COVID-19.
  • Balance sheet and liquidity: Total assets were $10.681 billion, up 1.8% from December 31, 2019. Gross loans were $8.837 billion, up 0.3%; deposits were $8.793 billion, up 2.3%. Cash and cash equivalents were $276.5 million, and cash plus marketable securities totaled $1.059 billion. Shareholders’ equity was $1.342 billion, or $12.55 per share.
  • Debt and funding: Borrowed funds totaled $191.6 million, down from $246.3 million at year-end; junior subordinated debentures were $121.8 million. Northwest reported a 10.4% liquidity ratio and additional borrowing capacity of $3.277 billion from the FHLB, $36.6 million from the Federal Reserve, and $110 million from correspondent banks.
  • Cash flow: Operating activities provided $50.3 million and investing activities provided $36.0 million; financing activities provided $129.3 million. Cash and cash equivalents increased $215.6 million during the quarter to $276.5 million.
  • Capital: At March 31, the Company’s total capital, Tier 1, CET1, and leverage ratios were 15.73%, 14.72%, 13.31%, and 11.70%, respectively. The Bank’s respective ratios were 14.14%, 13.13%, 13.13%, and 10.58%; each exceeded the stated well-capitalized thresholds.

Material changes versus comparable periods

  • Net income fell 68.3% year over year, chiefly reflecting the $21.2 million increase in provision, higher noninterest expense, and slightly lower net interest income. Higher noninterest income and lower income tax expense partially offset these effects.
  • Net interest income decreased 0.9% despite growth in average interest-earning assets; lower market rates reduced asset yields. The average yield on interest-earning assets declined to 4.19% from 4.51%.
  • Noninterest income increased 29.1%, supported by higher service charges following a fee-structure change, a $1.3 million loan-sale gain, higher mortgage banking income, and increased trust and financial services income.
  • Nonperforming loans increased to $85.5 million from $68.9 million at year-end; nonperforming assets rose to $86.5 million from $69.9 million. Loans 90 or more days delinquent increased to $61.8 million from $51.8 million.
  • Deposits grew while time deposits declined. Management linked growth in noninterest-bearing and money-market balances partly to reduced consumer spending and increased savings.

Outlook, management commentary, risks, and unusual items

  • COVID-19 and credit outlook: Management incorporated COVID-19 economic forecasts into its CECL allowance estimate and warned that prolonged unemployment or economic disruption could increase delinquencies, defaults, foreclosures, credit losses, and required reserves. The company said the full impact remained difficult to predict.
  • Accounting change: CECL was adopted January 1, 2020. Adoption increased the loan allowance by $10.8 million, the off-balance-sheet reserve by $2.3 million, and deferred tax assets by $2.9 million, and reduced retained earnings by $9.6 million after tax. The company elected to phase the estimated regulatory-capital impact in beginning in 2022.
  • Tax outlook: Management anticipated a 2020 effective tax rate of 21%–23%. The quarter included a $764,000 tax benefit related to expanded net operating loss carryback provisions under the CARES Act.
  • Dividend: The company paid $0.19 per share for the quarter. Its reported dividend payout ratio was 271.4%, reflecting low quarterly earnings. On April 22, the board declared another $0.19-per-share dividend, payable May 15, 2020.
  • Acquisition after quarter-end: On April 24, 2020, the company completed its merger with MutualFirst Financial for $213.4 million in stock consideration, issuing 20,659,087 shares. The combined bank was reported to have approximately $12.8 billion in assets, 214 branches, and 273 ATMs across four states; purchase accounting was still being finalized.
  • Other notable items: The company sold approximately $49.5 million of residential mortgage loans, recording a $1.3 million gain. It entered four pay-fixed swaps with $100 million aggregate notional to convert short-term funding to fixed-rate funding. COVID-19 triggered a goodwill impairment test; management concluded goodwill was not impaired. Pending legal matters were not expected to create a material aggregate liability, though the company had not accrued a potential award from a separate lawsuit verdict.
  • Key risks: The filing highlights pandemic-related economic and credit deterioration, margin pressure from low rates, falling collateral values, market and cybersecurity risks, third-party service disruptions, and the execution and integration of acquisitions. Interest-rate sensitivity simulations are estimates and actual outcomes may differ.

Important facts for investors to verify

  1. How borrower payment relief, economic reopening, unemployment, and commercial real-estate conditions affect delinquencies, nonperforming loans, charge-offs, and future CECL provisions.
  2. Whether reported margin and earnings stabilize after rate cuts, and whether deposit costs decline enough to offset lower asset yields.
  3. The sustainability of the $0.19 quarterly dividend given the 271.4% Q1 payout ratio and the company’s subsequent acquisition-related share issuance.
  4. Final purchase accounting, integration costs, and realized financial impact of the April 24 MutualFirst merger.
  5. Capital and liquidity after the merger, including the effect of CECL capital transition and future credit deterioration.