Northwest Bancshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. Northwest is a savings and loan holding company operating community banking and consumer finance businesses, with 157 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland.
Financial results and position
- Q2 earnings: Net loss of $7.0 million, or $0.07 per diluted share, versus net income of $15.3 million, or $0.17 per diluted share, in Q2 2015. The loss was primarily driven by a $37.0 million FHLB prepayment penalty.
- Six-month earnings: Net income was $11.0 million, or $0.11 per diluted share, down from $31.5 million, or $0.34 per diluted share, in the first half of 2015.
- Interest income and margins: Q2 net interest income increased 23.3% to $76.7 million; six-month net interest income increased 18.4% to $148.2 million. GAAP net interest margin was 3.77% for Q2 (3.39% prior year) and 3.64% for the half (3.40% prior year).
- Other income and costs: Q2 noninterest income rose 22.7% to $20.3 million, while noninterest expense rose 87.3% to $103.3 million. For the first half, noninterest income was $39.7 million, up 27.5%, and noninterest expense was $166.5 million, up 53.0%.
- Credit costs and quality: Provision for loan losses was $4.2 million in Q2 and $5.9 million for the first half, versus $1.1 million and $2.0 million, respectively, in 2015. The allowance was $60.8 million, or 0.83% of loans, at June 30, down from $62.7 million, or 0.87%, at year-end. Nonperforming assets were $81.3 million; nonaccrual loans were $75.9 million, or 1.05% of loans.
- Cash flow: First-half operating cash flow was $34.8 million, compared with $52.4 million in 2015. Investing activities provided $140.7 million, versus $54.5 million used in 2015; financing activities used $31.5 million, versus $54.3 million provided. Cash and cash equivalents ended at $311.4 million, up from $167.4 million at year-end.
- Balance sheet and funding: Assets were $9.0 billion, broadly flat from year-end. Gross loans increased 1.0% to $7.295 billion; deposits rose 0.4% to $6.636 billion. Borrowed funds were $960.0 million, down from $975.0 million. Shareholders’ equity was $1.155 billion, down 0.7%.
- Liquidity and capital: The reported liquidity ratio was 11.1%. Northwest Bancshares’ actual regulatory ratios included total capital of 16.325%, Tier 1 risk-based capital of 15.409%, CET1 of 13.787%, and Tier 1 leverage of 11.844%; each exceeded the filing’s stated well-capitalized threshold.
Material changes and management commentary
- Net interest income benefited from loan growth, the LNB acquisition, and lower funding costs after replacing about $715 million of long-term FHLB advances with lower-cost short-term advances. The refinancing generated the $37.0 million prepayment penalty, taken in anticipation of the First Niagara branch transaction.
- Management attributed higher loan-loss provision chiefly to downgrades of commercial loans and added reserves for oil and gas and indirect auto lending. Annualized net charge-offs were lower year over year for both the quarter and six-month period.
- Management cited LNB-related staffing and operating costs, technology upgrades, and $4.0 million of first-half restructuring and acquisition costs, including consolidation of 24 banking offices. Loan growth included commercial lending and indirect automobile lending.
- The company reported correcting a prior-period deferred-loan-fee amortization error, concluding the adjustments were not material. It recognized $1.1 million of deferred loan fees in 2016 interest income; the filing gives smaller 2015 income adjustments.
Outlook, risks and contingencies
- Northwest agreed to acquire 18 Western New York branches from First Niagara, including approximately $1.7 billion of deposits and $511 million of performing loans, for a 4.5% deposit premium. The transaction was expected to close September 9, 2016, subject to customary closing conditions.
- Management anticipated a 2016 effective tax rate of 28%–30%. The filing provides no broader earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Interest-rate sensitivity modeling projected net interest income declines of 2.5%, 4.9% and 7.1% under modeled upward shifts of 100, 200 and 300 basis points, respectively; assumptions make actual results uncertain.
- The filing identifies economic conditions, interest rates, credit quality, competition, cybersecurity, regulatory changes, and acquisition integration as risks. It also flags the future CECL standard, effective for the company after December 15, 2019, as potentially increasing loan-loss allowances and affecting results.
- Standby letters of credit had a maximum potential payment obligation of $33.4 million, of which $24.7 million was fully collateralized. No legal-proceeding accrual was recorded; management said currently known claims were not expected to have a material adverse effect, while noting outcomes are uncertain.
- The board declared a $0.15-per-share dividend payable August 18, 2016. The filing reports no unrecognized tax-benefit liability and an accrued $219,000 for interest and penalties related to a New York state tax audit.
Most important facts for investors to verify
- Whether the First Niagara branch and deposit acquisition closed as expected, and its actual funding, integration and earnings effects.
- How quickly the $37.0 million FHLB prepayment cost is offset by lower borrowing costs and the acquired deposits.
- Whether commercial, oil-and-gas and indirect-auto credit performance leads to further provision increases, and how nonaccrual loans and criticized credits develop.
- Whether the reported liquidity and capital buffers remain adequate as the acquisition and associated funding needs proceed.
- Whether the loan-fee correction, restructuring expenses and other unusual items have any further effect on reported or comparable earnings.