Northwest Bancshares, Inc. — Q1 2017 10-Q
Reporting period: Quarter ended March 31, 2017. Northwest Bancshares is a savings and loan holding company operating through Northwest Bank and subsidiaries, with 176 community-banking offices. Results are unaudited.
Financial performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net interest income | $80.6 million | $71.6 million; up 12.6% |
| Net interest margin (GAAP) | 3.71% | 3.55% |
| Noninterest income | $21.5 million | $19.4 million; up 10.6% |
| Noninterest expense | $71.6 million | $63.3 million; up 13.2% |
| Provision for loan losses | $4.6 million | $1.7 million |
| Net income | $17.7 million | $18.0 million; down 1.3% |
| Diluted EPS | $0.17 | $0.18 |
| Operating revenue (net interest income plus noninterest income) | $102.1 million | $91.0 million |
Net interest income benefited from lower funding costs, including the payoff of FHLB advances, and growth in acquired and other deposits and loans. Higher expenses and loan-loss provisions more than offset revenue growth. Annualized returns on average equity and assets were 6.15% and 0.75%, respectively, versus 6.21% and 0.81% a year earlier. The filing also reports fully tax-equivalent net interest margin of 3.75% versus 3.57%.
Cash flow: Operating activities provided $44.0 million; investing activities used $90.3 million; financing activities provided $88.4 million based on the reported cash-flow components. Cash and cash equivalents increased $42.1 million to $431.9 million. The cash-flow statement labels financing cash flow “used” despite presenting a positive amount and components that net to a source; verify this presentation.
Balance sheet and liquidity: Total assets were $9.73 billion, up 1.1% from year-end 2016. Loans were $7.56 billion, approximately flat, as commercial loans grew $37.7 million and personal loans declined $31.9 million. Deposits rose 1.3% to $7.99 billion. Borrowed funds declined to $137.2 million; junior subordinated debentures were $111.2 million. Shareholders’ equity was $1.18 billion. The bank’s liquidity ratio was 13.5%, with reported additional borrowing capacity of $3.278 billion at the FHLB, $90.5 million at the Federal Reserve, and $80.0 million at correspondent banks.
At March 31, the company reported total capital ratios of 14.817% at the holding company and 13.753% at the bank; Tier 1 leverage ratios were 10.583% and 9.783%, respectively. These exceeded the filing’s stated well-capitalized thresholds.
Material changes and asset quality
- Nonperforming assets declined to $79.8 million from $85.1 million at year-end; nonperforming loans were $73.6 million. Loans 90 or more days past due were $48.0 million, and real estate owned was $6.2 million.
- The allowance for loan losses was $61.1 million, or 0.81% of loans, essentially unchanged as a percentage from year-end. The quarterly provision increased to $4.6 million, including additional reserves following downgrades of two commercial relationships and growth in indirect auto and commercial finance portfolios. Annualized net charge-offs were 0.23%, versus 0.11% in Q1 2016.
- The FNFG branch acquisition completed in 2016 contributed to higher average earning assets, deposits, fee income, staffing and operating costs. Management attributed much of the year-over-year expense growth to the acquired 18 branches.
- Cash dividends were $0.16 per share, versus $0.15 a year earlier. The reported quarterly payout ratio was 94.1%, versus 83.3%.
Outlook, transactions and risks
- Northwest expects to close its 44-office consumer finance subsidiary, NCDC, in July 2017. Loans will transfer to Northwest for servicing and collections; the bank plans to continue direct consumer lending to qualified customers and indirect dealer lending. Management expects about $3.0 million in pretax closure expenses over the next two quarters and a gradual reduction in net interest income as an approximately $40 million high-rate loan portfolio runs off. The filing gives two different effective closure dates: July 14 in MD&A and July 19 in the segment note.
- The planned sale of three Baltimore-area branches includes approximately $220 million of deposits, $145 million of performing loans and $50 million of cash. The agreement specifies an 8% deposit premium; management estimated a gain of approximately $17 million based on agreement-date balances. Closing was expected May 19, 2017.
- Management projected a 2017 effective tax rate of 31%–33% and pension-plan contributions of $4 million–$5 million. No broader earnings guidance is provided.
- Key stated risks include economic and borrower deterioration, interest-rate and securities-market changes, competition, regulatory changes, cybersecurity, acquisition integration and the ability to grow lending. The company’s modeled scenarios showed net interest income down 4.4% under a 100-basis-point rate decrease; management cautioned that actual results may differ materially from simulations.
- The company reported no accrued legal-proceeding losses at quarter-end; it stated that ordinary-course claims are not expected to have a material adverse effect, while noting future outcomes remain uncertain. Management said disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the stated NCDC closure dates of July 14 and July 19, and confirm final closure costs and loan-transfer plans.
- Track completion and final economics of the Baltimore branch sale, including the realized gain versus the approximately $17 million estimate.
- Assess whether elevated provision expense, charge-offs and criticized commercial credits stabilize, and monitor acquired-loan credit quality.
- Evaluate whether operating costs from the FNFG acquisition and the NCDC closure are offset by ongoing revenue and cost savings.
- Confirm the cash-flow statement’s financing-activities label and the dividend record date: the filing states May 4, 2016 for a dividend payable May 18, 2017.
- Monitor the high dividend payout, interest-rate sensitivity, liquidity and capital ratios, and the expected runoff of NCDC’s high-rate loans.