Business context and reporting period
Northwest Bancshares, Inc. is a savings and loan holding company operating Northwest Bank and related financial businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; results include LNB Bancorp from its August 14 acquisition date. Northwest operated 182 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland at quarter-end.
Key financial metrics
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest income | $81.1 | $76.5 | $233.9 | $228.8 |
| Net interest income | $66.9 | $62.3 | $192.1 | $186.2 |
| Provision for loan losses | $3.2 | $3.5 | $5.1 | $19.2 |
| Noninterest income | $18.1 | $17.7 | $49.3 | $53.5 |
| Noninterest expense | $63.8 | $53.4 | $172.7 | $160.3 |
| Net income | $12.9 | $17.3 | $44.3 | $44.6 |
| Diluted earnings per share | $0.13 | $0.19 | $0.48 | $0.48 |
| GAAP net interest margin | 3.45% | 3.40% | 3.41% | 3.38% |
At September 30, 2015, total assets were $8.935 billion, loans $7.152 billion, deposits $6.645 billion, borrowed funds $927.2 million, junior subordinated debentures $119.3 million, and shareholders’ equity $1.161 billion. The allowance for loan losses was $60.5 million, or 0.85% of loans.
Nine-month cash flow: operating activities provided $88.4 million; investing activities used $124.9 million; financing activities used $108.6 million. Cash and cash equivalents declined $145.1 million to $95.6 million.
Northwest Bank’s liquidity ratio was 9.8%. Available additional borrowing capacity was reported as $1.853 billion at the FHLB, $154.1 million at the Federal Reserve Bank and $80.0 million at correspondent banks. At the holding company, total capital was 16.81%, Tier 1 capital 15.89%, CET1 capital 14.12%, and Tier 1 leverage 12.80%.
Material changes versus comparable periods
- Q3 net income fell 25.7% year over year, primarily as noninterest expense rose $10.4 million, including $7.6 million of LNB acquisition expense. Higher net interest income and lower loan-loss provision partly offset the expense increase.
- Nine-month net income declined 0.6%. Net interest income rose $5.9 million and provision expense fell $14.1 million, offset by higher noninterest expense and taxes and lower noninterest income.
- LNB added $928.1 million of loans, $1.017 billion of deposits and 21 Ohio branches. Total assets increased 14.9% from year-end 2014, and total loans rose 19.4%; these increases largely reflect the acquisition. Excluding acquired deposits, legacy deposits declined $4.4 million.
- Asset-quality indicators improved against year-end 2014: nonperforming assets declined to $79.0 million from $96.8 million; nonaccrual loans declined to $67.9 million from $79.8 million. The allowance declined to $60.5 million from $67.5 million.
- For the nine months, noninterest income decreased $4.2 million, mainly due to lower investment-sale gains and higher real-estate-owned losses. The prior-year period included a substantial gain on equity securities.
Outlook, management commentary and risks
- Management forecast a 2015 effective tax rate of 30%–32%; the filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management attributed improved net interest margin to loan growth and redeployment of cash and securities, while noting that historically low rates and lower-yielding acquired loans pressured loan yields.
- Management cited continued asset-quality improvement, but noted that estimates of loan losses depend on economic conditions, collateral values and borrower performance. Acquired loans past due 90 days or more were treated as accruing because management expected to collect their carrying value.
- Interest-rate simulation projected net interest income decreases of 1.0%, 1.6% and 2.9% for modeled upward shifts of 100, 200 and 300 basis points, respectively, and a 3.4% decrease for a 100-basis-point decline. These are model estimates subject to assumptions and actual results may differ.
- Key risks include successfully integrating LNB and realizing expected benefits, interest-rate and economic changes, credit losses, competition, regulatory changes, cybersecurity, and the performance of borrowers and securities. Acquisition and integration costs were $8.4 million for the nine months.
- The company reported $32.4 million of maximum potential standby-letter-of-credit payments, of which $23.6 million was fully collateralized. It had not accrued for legal proceedings; management said potential additional liability was not expected to have a material adverse effect, while noting future outcomes cannot be determined with certainty.
- The board declared a $0.14-per-share dividend payable November 19, 2015. The quarterly dividend payout ratio was 107.7% of net income. Management also anticipated a $4 million–$8 million pension contribution during 2015.
Most important facts for investors to verify
- Whether LNB integration, cost savings and revenue benefits develop as expected, and how much of future results reflects acquired versus legacy operations.
- Whether loan growth, credit quality and the $60.5 million allowance remain appropriate as acquired loans season; review delinquency, nonaccrual and charge-off trends.
- Whether margins and funding costs withstand changes in interest rates, given the modeled sensitivity and continued low-rate environment.
- Whether liquidity, borrowing capacity and capital remain adequate after acquisition funding, loan growth, dividends and share repurchases.
- Whether acquisition-related expenses, processing costs, tax rates and the dividend payout affect future profitability and capital generation.