Northwest Bancshares, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the quarter ended March 31, 2019. Northwest is a savings and loan holding company operating 182 community-banking offices in Pennsylvania, western New York and eastern Ohio. Results include Union Community Bank from its March 8 acquisition.
Financial performance and position
- Net income: $25.0 million, up 0.2% year over year; diluted EPS was $0.24, compared with $0.24. Annualized return on average assets was 1.03% and return on average equity was 7.96%.
- Interest and margins: Net interest income rose 7.6% to $88.0 million. GAAP net interest margin increased to 3.96% from 3.84%; net interest spread was 3.75% versus 3.72%.
- Other income and expenses: Noninterest income was $21.7 million, down 0.6%. Noninterest expense rose 5.9% to $71.4 million, including $1.9 million of restructuring/acquisition costs.
- Credit costs: Loan-loss provision increased 53.6% to $6.5 million. The allowance was $55.7 million, or 0.65% of loans, versus $55.2 million, or 0.69%, at year-end.
- Cash flow: Operating cash flow was $30.0 million, compared with $33.3 million a year earlier; investing used $92.1 million and financing provided $86.3 million. Cash and cash equivalents ended at $92.9 million, up $24.1 million during the quarter.
- Balance sheet and funding: Total assets were $10.30 billion, loans $8.57 billion and deposits $8.59 billion. Total shareholders’ equity was $1.32 billion. Borrowed funds were $114.1 million, down from $234.4 million at December 31; junior subordinated debentures were $121.8 million.
- Liquidity and capital: The liquidity ratio was 9.4%. Management reported additional borrowing capacity of $3.146 billion at the FHLB, $49.4 million at the Federal Reserve and $80 million at correspondent banks. The company and bank exceeded stated well-capitalized regulatory thresholds; company total capital and CET1 ratios were 14.85% and 12.71%, respectively.
Material changes versus comparable periods
- Interest income rose 12.0%, reflecting higher average asset balances and yields. Interest expense increased 58.5% as deposit and borrowing costs rose; management attributed net interest margin improvement partly to growth in noninterest-bearing checking deposits.
- Net income was nearly flat despite higher net interest income: increased interest expense, provision expense and noninterest expense offset much of the gain.
- Provision expense increased partly because of a $2.6 million charge-off on one commercial business loan. Nonaccrual loans were $72.8 million, up from $58.7 million a year earlier; total loan delinquency was $133.8 million, or 1.6% of loans, versus $116.4 million, or 1.5%.
- Insurance commission income fell 20.8%, principally because of lost contingent bonus commissions following changes in related laws.
- On March 8, Northwest acquired Donegal Financial Services Corporation, parent of Union Community Bank, for $85.8 million in cash and stock. The transaction added 12 Lancaster County offices, $407.8 million of loans and $479.4 million of deposits at fair value, and $37.3 million of goodwill. Balance-sheet growth comparisons with year-end therefore include acquisition effects.
Outlook, risks and unusual items
- Management expected a 2019 effective tax rate of 21%–23%. The filing provides no specific earnings or revenue guidance and cautions that first-quarter results are not necessarily indicative of full-year results.
- Interest-rate simulations projected that a 100-basis-point rate increase would reduce net interest income 0.5%, while a 100-basis-point decrease would reduce it 4.0% over 12 months. These are model estimates dependent on assumptions about borrower prepayments and deposit behavior.
- Management cited economic conditions, interest rates, credit and securities markets, competition, cybersecurity, third-party performance and the ability to integrate acquisitions and manage loan growth among risks. Expected-credit-loss standard CECL was under implementation; the impact remained under evaluation.
- Standby letters of credit had a maximum potential payment exposure of $39.3 million, of which $32.5 million was fully collateralized. No legal-proceeding accrual was recorded; post-trial proceedings continued on an insurance-agency lawsuit in which a subsidiary had received a favorable verdict, and no award was recognized.
- The board declared a $0.18-per-share dividend payable May 16, 2019. The quarter’s dividend payout ratio was 75.0%.
Important facts for investors to verify
- How much of future loan, deposit and earnings growth comes from the UCB acquisition versus organic growth, and what integration costs remain?
- Whether commercial credit quality, nonaccrual loans and delinquencies improve or deteriorate, particularly after the large commercial charge-off.
- Whether deposit-cost increases continue to outpace asset-yield gains and affect net interest margin.
- The eventual CECL adoption impact on the allowance, earnings and capital, and the resolution and possible value of the unrecognized litigation award.
- Whether liquidity, capital ratios and dividend capacity remain resilient as the enlarged balance sheet is integrated.