Northwest Bancshares, Inc. quarterly report, Q1 FY2016

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Business context and reporting period

Northwest Bancshares, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2016. The company is a savings and loan holding company operating through Northwest Bank and subsidiaries, with Community Banking and Consumer Finance segments. Northwest Bank operated 157 community-banking offices; its consumer-finance subsidiary operated 51 offices.

Financial performance and condition

Unless otherwise noted, dollar amounts are in millions. Quarter comparisons are against the three months ended March 31, 2015; balance-sheet comparisons are against December 31, 2015.

  • Earnings: Net income was $18.0 million, up 11.2% from $16.2 million. Basic and diluted EPS were both $0.18, unchanged year over year. Annualized return on average assets was 0.81% and return on average equity was 6.21%.
  • Revenue and margins: Net interest income rose 13.6% to $71.6 million; noninterest income rose 33.0% to $19.4 million. Together these totaled $91.0 million, versus $77.6 million a year earlier. GAAP net interest margin increased to 3.55% from 3.44%; net interest rate spread increased to 3.34% from 3.24%.
  • Costs and credit provision: Noninterest expense increased 17.8% to $63.3 million, including higher compensation, processing and other expenses. Provision for loan losses increased to $1.7 million from $0.9 million. Income tax expense was $8.1 million; the effective tax rate was 31.0%.
  • Cash flow: The cash-flow statements report operating cash flow of $24.7 million versus $27.8 million and a $4.1 million decrease in cash and cash equivalents versus a $56.4 million increase in the prior-year comparison. Investing cash flow was positive $41.3 million versus negative $65.9 million. The cash-flow section’s comparative-period heading is inconsistent with the filing period; verify the underlying statements.
  • Balance sheet and funding: Total assets were $8.916 billion, down 0.4%; net loans were $7.232 billion, up $72.3 million; and deposits were $6.670 billion, up 0.9%. Borrowed funds declined $117.3 million to $857.8 million. Shareholders’ equity was $1.171 billion, or $11.49 per share.
  • Liquidity and capital: Cash and cash equivalents totaled $163.3 million; cash and investments totaled $975.0 million. The reported liquidity ratio was 8.5%, with additional stated borrowing capacity of $2.337 billion at the FHLB, $134.6 million at the Federal Reserve Bank and $80.0 million with correspondent banks. Northwest Bank’s reported CET1, Tier 1 risk-based and total risk-based capital ratios were 14.43%, 14.43% and 15.37%, respectively.
  • Credit quality: Nonperforming loans were $75.0 million and nonperforming assets were $81.9 million. Loans 90 or more days delinquent totaled $42.2 million, down from $47.0 million at year-end; total loan delinquencies were $114.0 million, down from $135.2 million. The allowance was $62.3 million, or 0.85% of loans, compared with $62.7 million, or 0.87%, at year-end.

Material changes versus the prior comparable period

  • Net interest income growth reflected a larger average earning-asset base, including assets from the LNB acquisition and organic loan growth. Average loan yield declined to 4.53% on a fully tax-equivalent basis from 4.80%; lower funding costs helped offset this pressure.
  • Noninterest income benefited from service charges and fees, a swing to a gain on real estate owned, and bank-owned life insurance income that included death benefits. Noninterest expense growth included LNB-related staffing and processing costs, technology and debit-card work, and higher charitable contributions.
  • Loan balances grew 1.0% from year-end, led by Business Banking. Deposits increased, while time deposits and investment securities declined; management said security cash flows were redirected toward loan growth and repayment of borrowings.
  • Quarterly dividends were $0.15 per share versus $0.14 a year earlier. The company repurchased 145,900 shares for $1.8 million during the quarter.

Outlook, risks, contingencies and unusual items

  • Management expected a 30%–32% effective tax rate for 2016. No full-year earnings or revenue guidance was provided.
  • After quarter-end, the company consolidated 24 offices and converted two others to drive-up-only facilities; related expenses were expected to be approximately $5.0 million in the first half of 2016.
  • Northwest signed an agreement to acquire 18 Western New York branches, subject to closing of the KeyCorp/First Niagara merger and other conditions. The branches had approximately $1.7 billion in deposits; the stated deposit premium was 4.5%. Northwest expected to receive about $1.0 billion in cash and acquire about $511 million of performing loans. Closing was expected in the third quarter of 2016.
  • On May 6, 2016, Northwest replaced $675 million of long-term FHLB advances costing 3.56% with overnight borrowings costing 0.54%. A $37 million penalty was expected to be expensed in the second quarter. Management had also disclosed its intention to replace $715 million of advances.
  • Management identified exposure to interest-rate changes, economic conditions, competition, cybersecurity, borrower and collateral performance, securities impairment, regulatory approvals, and integration or execution of growth initiatives. Its model projected that a 100-basis-point rate decrease would reduce net interest income 3.9% and net income 11.6%; management cautioned that actual results could differ from modeled estimates.
  • Standby letters of credit had a maximum potential payment amount of $33.0 million, of which $24.3 million was fully collateralized. No legal-proceeding accrual was recorded; management said any additional liability was not expected to have a material adverse effect, while noting uncertainty over future outcomes.

Important facts for investors to verify

  1. Reconcile the cash-flow statement’s apparent comparative-period heading inconsistency and confirm the reported cash-flow comparisons.
  2. Assess whether the increase in earnings can be sustained given faster expense growth, lower loan yields, acquisition-related costs and the nonrecurring life-insurance death benefits.
  3. Monitor credit trends, including nonperforming loans, delinquency, commercial real estate exposures, allowance adequacy and charge-offs.
  4. Confirm regulatory approvals, closing conditions, funding effects and expected economics of the proposed branch acquisition.
  5. Track the timing and total impact of the office-consolidation costs and the $37 million borrowing-replacement penalty, as well as subsequent funding costs.
  6. Review interest-rate sensitivity assumptions, liquidity availability and capital levels alongside planned dividends and any further repurchases.