Business context and reporting period
Northwest Bancshares, Inc. is a savings and loan holding company operating Northwest Bank, with 182 community banking offices in Pennsylvania, western New York and eastern Ohio. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018.
Results include Union Community Bank (UCB) from its March 8, 2019 acquisition. The transaction added 12 offices in Lancaster County, Pennsylvania.
Financial performance and condition
| Metric | Q3 2019 | Comparison |
|---|---|---|
| Net interest income | $90.9 million | Up 6.0% from Q3 2018 |
| Provision for loan losses | $3.3 million | Down 52.7% from Q3 2018 |
| Noninterest income | $26.2 million | Up 16.0% from Q3 2018 |
| Noninterest expense | $70.6 million | Up 6.0% from Q3 2018 |
| Net income | $33.4 million | Up 20.5%; diluted EPS $0.31 versus $0.27 |
| Net interest margin (GAAP) | 3.77% | 3.90% in Q3 2018 |
For the nine months, net income was $84.8 million, up 7.4%, and diluted EPS was $0.80 versus $0.76. Net interest income was $271.5 million, up 7.8%; noninterest income was $71.2 million, up 4.0%; and noninterest expense was $219.5 million, up 7.7%. The GAAP net interest margin was 3.86%, compared with 3.84% a year earlier. Annualized return on average assets and equity was 1.10% and 8.65%, respectively, versus 1.11% and 8.67% for the first nine months of 2018.
At September 30, total assets were $10.58 billion, up 10.1% from year-end 2018. Total loans were $8.85 billion, up 9.9%, and deposits were $8.68 billion, up 10.0%. Management attributed much of the balance-sheet growth to UCB, alongside organic loan growth. Shareholders’ equity was $1.35 billion.
Nine-month cash from operating activities was $110.7 million, compared with $106.4 million in 2018. Investing activities used $331.5 million, including $25.8 million net cash for acquisitions; financing activities provided $259.6 million. Cash and cash equivalents increased $38.8 million to $107.6 million.
At quarter-end, borrowed funds were $255.3 million and junior subordinated debentures were $121.8 million. The bank reported a 9.2% liquidity ratio and $3.19 billion of additional FHLB borrowing capacity, plus $43.9 million at the Federal Reserve and $80.0 million at correspondent banks. Regulatory capital ratios exceeded the stated well-capitalized thresholds; the bank’s CET1 ratio was 14.03% and leverage ratio was 11.27%.
Material changes and notable items
- UCB acquisition consideration was $85.8 million, comprising $42.5 million cash and 2.46 million Northwest shares valued at $43.3 million. The company recorded $37.3 million of acquisition goodwill and incurred $3.1 million of restructuring and acquisition expense during the nine months.
- Loan growth and the acquisition supported higher interest income, but rising deposit and borrowing costs weighed on spreads. Q3 interest-rate spread fell to 3.50% from 3.71% a year earlier; management cited an inverted yield curve and margin compression.
- Q3 noninterest income benefited from expanded mortgage banking activity and an $826,000 gain on sale of $46.0 million of residential mortgage loans. Management said the loans were sold because they were considered more likely to refinance as rates declined.
- The Q3 provision was lower partly because Q3 2018 included a $4.6 million land-development loan write-down. The allowance for loan losses was $52.9 million, or 0.60% of loans, versus $55.2 million, or 0.69%, at year-end. Management attributed the decline primarily to a $4.0 million write-down of a previously fully reserved residential land-development loan.
- Nonperforming loans were $65.7 million, down from $72.3 million at year-end, and nonperforming assets were $67.0 million, down from $74.9 million. However, classified substandard loans increased to $205.6 million from $183.8 million.
- Cash dividends were $0.18 per share for the quarter and $0.54 per share for the nine months. The board declared another $0.18 dividend payable November 15, 2019.
Outlook, risks and contingencies
Management expected the 2019 effective tax rate to be 21%–23%; the filing provides no quantified full-year earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
The company had agreed to acquire MutualFirst Financial in an all-stock transaction valued at approximately $346 million, subject to regulatory approvals, MutualFirst shareholder approval and other customary closing conditions. The filing reports MutualFirst’s unaudited assets of $2.074 billion and nine-month net income of $17.1 million.
Management identified interest-rate and margin sensitivity, credit quality and collateral values, economic conditions, competition, cybersecurity and technology, third-party providers, and the ability to integrate acquired businesses as risks. Its September 30 interest-rate simulation projected net interest income declines of 1.6%, 2.7% and 4.2% under immediate rate increases of 100, 200 and 300 basis points, respectively, and a 4.9% decline under a 100-basis-point decrease; actual outcomes may differ.
Northwest reported no accrued legal-proceeding losses at quarter-end. An appeal was pending in a lawsuit in which its insurance subsidiary had received a favorable verdict and attorneys’ fees award; the company had not recognized the award. Management was preparing for adoption of the expected-credit-loss standard (CECL), but the impact had not yet been determined.
Important facts for investors to verify
- Whether deposit costs continue to rise faster than asset yields, and the effect on net interest margin.
- Credit trends in commercial real estate and other criticized loans, including the increase in substandard balances and the adequacy of the allowance.
- UCB integration progress, realized costs and benefits, and the status and terms of the proposed MutualFirst transaction.
- The eventual financial and capital impact of CECL adoption and any changes in credit-loss estimates.
- Whether cash generation, borrowing capacity and capital remain sufficient to support loan growth, dividends and planned transactions.