Northwest Bancshares, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Northwest is a savings and loan holding company operating 173 community-banking offices in Pennsylvania, western New York, and eastern Ohio. It sold three Maryland offices in May and closed its consumer finance subsidiary on July 14; its loans were transferred to Northwest for servicing and collections.
Financial performance and position
| Metric | Q3 2017 | Prior comparable period | Nine months 2017 | Prior comparable period |
|---|---|---|---|---|
| Net interest income | $83.2 million | $77.3 million | $246.5 million | $224.4 million |
| Net interest margin (GAAP) | 3.82% | 3.77% | 3.74% | 3.67% |
| Provision for loan losses | $3.0 million | $5.5 million | $13.2 million | $11.4 million |
| Noninterest income | $24.6 million | $20.8 million | $87.6 million | $60.5 million |
| Noninterest expense | $68.8 million | $73.7 million | $213.7 million | $239.1 million |
| Net income | $23.6 million | $14.2 million | $72.3 million | $25.2 million |
| Diluted EPS | $0.23 | $0.14 | $0.71 | $0.25 |
Q3 net income rose 66.2%; nine-month income increased $47.1 million. Nine-month returns on average assets and equity were 1.01% and 8.16%, respectively (0.38% and 2.90% in 2016). The nine-month effective tax rate was 32.5%, versus 27.0%; management expected a 32%–34% rate for full-year 2017.
Balance sheet at September 30: Total assets were $9.460 billion, down 1.7% from year-end, principally reflecting the Maryland office sale. Loans were $7.726 billion, up 2.2%; commercial loans grew 4.3%. Deposits were $7.942 billion, up 0.8%, with more noninterest-bearing checking and lower time and money-market balances. Shareholders’ equity was $1.206 billion, up 3.0%.
Cash flow, debt, and liquidity: Nine-month operating cash flow was $117.0 million; investing activities used $99.5 million and financing activities used $241.7 million. Cash and cash equivalents fell $224.2 million to $165.7 million. Borrowed funds were $115.4 million and junior subordinated debentures were $111.2 million. The reported liquidity ratio was 11.2%; available borrowing capacity was $3.248 billion at the FHLB, $70.4 million at the Federal Reserve, and $80.0 million at correspondent banks.
Capital and credit: Northwest Bancshares reported total risk-based capital of 15.15%, CET1 of 12.83%, and a leverage ratio of 10.99%, above the stated well-capitalized thresholds. The allowance for loan losses was $56.9 million, or 0.74% of loans, down from $60.9 million, or 0.81%, at year-end. Nonperforming loans were $73.7 million and nonperforming assets $79.2 million, both lower than year-end. Nine-month annualized net charge-offs were 0.30% of loans, with management noting concentration in the discontinued consumer finance business.
Material changes and unusual items
- Q3 earnings benefited from higher net interest income, increased fee and trust income, lower provision, and lower expense. The prior-year quarter included $7.2 million of restructuring/acquisition expense, including costs from the 2016 western New York office acquisition.
- Nine-month noninterest income included a $17.2 million gain on the Maryland office sale. Lower expense also reflected the absence of the $37.0 million FHLB prepayment penalty recorded in 2016.
- Management attributed improved net interest income and margin partly to the 2016 payoff of FHLB advances, funded with acquired deposits. Deposit mix shifted toward more liquid products despite modest rate increases.
- Asset quality improved on several measures, but the allowance and provision remain sensitive to loan growth, charge-offs, economic conditions, collateral values, and management estimates.
Outlook, risks, and contingencies
Management provided no earnings or growth guidance; it forecast a 32%–34% effective tax rate for 2017. It said adoption of the new revenue standard was expected not to materially change recognition for assessed revenue streams, while CECL implementation work was underway and its impact remained uncertain. Interest-rate simulations projected that a 100-basis-point decrease could reduce net interest income by 4.6% and net income by 11.0% over 12 months; results depend on assumptions and actual outcomes may differ. Key disclosed risks include economic and borrower conditions, interest-rate and securities-market changes, regulation, competition, cybersecurity, loan growth, and integration of acquired businesses. No legal-proceeding accrual was recorded; the company said potential claims could not be assured to have no future-period effect.
Investor verification priorities
- Separate recurring earnings from the $17.2 million office-sale gain and the impact of prior-year FHLB penalty and acquisition costs.
- Track consumer-credit charge-offs after NCDC’s closure and trends in nonaccrual loans, TDRs, and the allowance.
- Assess whether loan and deposit growth, deposit pricing, and interest-rate changes sustain net interest margin.
- Review liquidity and capital ratios alongside the decline in cash and the company’s borrowing capacity.
- Monitor the stated tax-rate outlook, CECL implementation, and interest-rate sensitivity assumptions.