Northwest Bancshares, Inc. — Q2 2018 Form 10-Q
Unaudited results for the quarter and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017. Northwest is a savings and loan holding company operating 172 community-banking offices in Pennsylvania, western New York, and eastern Ohio. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $84.2 | $82.7 | $166.0 | $163.3 |
| Provision for loan losses | $5.3 | $5.6 | $9.6 | $10.2 |
| Noninterest income | $24.1 | $41.5 | $45.9 | $63.0 |
| Noninterest expense | $69.8 | $73.3 | $137.2 | $144.9 |
| Net income | $26.3 | $31.0 | $51.3 | $48.7 |
| Diluted EPS | $0.25 | $0.30 | $0.50 | $0.48 |
| Net interest margin (GAAP) | 3.84% | 3.75% | 3.82% | 3.70% |
- Q2 net income declined 15.1%; six-month net income increased 5.3%. Q2 2017 included a $17.2 million gain on the sale of Maryland offices. Excluding that gain, noninterest income was down 0.7% for the quarter and up 0.2% for the six-month period.
- Interest income increased as loan balances and yields rose, while higher deposit and borrowing costs increased interest expense. Management attributed improved net interest margins to loan growth, asset mix, and a shift toward lower-cost deposits.
- Q2 annualized returns on average assets and average equity were 1.11% and 8.67%, respectively, versus 1.30% and 10.48% a year earlier. For the six months, the corresponding returns were 1.09% and 8.54%, versus 1.03% and 8.34%.
Financial position, cash flow, and liquidity
- Total assets were $9.56 billion, up 2.1% since year-end. Loans were $7.94 billion, up 1.9%; commercial banking loans grew 4.3% to $3.16 billion. Deposits rose 2.3% to $8.01 billion, including growth in noninterest-bearing checking deposits.
- Cash and cash equivalents were $133.0 million. For the six months, operating cash flow was $66.7 million, investing cash flow was negative $165.1 million, and financing cash flow was positive $153.7 million; cash increased $55.3 million.
- Borrowed funds were $99.9 million and junior subordinated debentures were $111.2 million. The $150 million FHLB revolving line was undrawn. Management reported $3.152 billion of additional FHLB capacity, $58 million at the Federal Reserve, and $80 million at correspondent banks. The liquidity ratio was 9.8%.
- Shareholders’ equity was $1.229 billion. At Northwest Bank, actual capital ratios were 14.741% total capital, 13.958% Tier 1 risk-based capital, 13.958% CET1, and 10.962% Tier 1 leverage; each exceeded the reported well-capitalized threshold.
- The quarterly dividend was $0.17 per share; the payout ratio was 68.0%. The board declared another $0.17 dividend payable August 16, 2018.
Asset quality, risks, and outlook
- The allowance for loan losses was $57.3 million, or 0.72% of loans, versus $56.8 million, or 0.73%, at year-end. Nonaccrual loans were $62.7 million (0.79% of loans), down from $64.5 million. Nonperforming assets were $65.5 million, versus $70.6 million at year-end.
- Loans classified as substandard increased to $252.4 million, or 3.2% of loans, from $237.8 million, or 3.1%, at year-end. Management said overall credit quality remained strong, but noted that actual portfolio losses may differ from allowance estimates.
- Management expected a 2018 effective tax rate of 21%–23%, compared with 20.8% in Q2 and 21.3% for the first half. No broader earnings or revenue guidance was provided.
- Interest-rate simulation projected net interest income increases of 0.3%, 1.3%, and 1.5% under immediate parallel rate increases of 100, 200, and 300 basis points, respectively, and a 5.8% decline under a 100-basis-point decrease. Results depend on assumptions and may differ materially from actual outcomes.
- Key disclosed risks include interest-rate and market movements, credit deterioration and collateral values, economic conditions, competition, regulatory changes, cybersecurity, technology and third-party risks, and execution of growth or integration plans. Standby letters of credit had a maximum potential exposure of $30.2 million, of which $15.8 million was fully collateralized. No legal-proceeding accrual was recorded; management said additional litigation liability was not expected to materially affect the financial statements.
- Accounting changes adopted in 2018 were generally reported as immaterial. The company was preparing for the expected-credit-loss standard (CECL), effective for it in 2020, and was still evaluating its impact.
Most important facts for investors to verify
- Whether loan growth—particularly commercial real estate and consumer lending—continues without further deterioration in substandard classifications or credit losses.
- Whether deposit costs rise faster than asset yields and compress net interest margin as rates and competition change.
- How much of the Q2 earnings decline reflects the prior-year office-sale gain versus ongoing operating trends, and whether the expected tax-rate range holds.
- Whether unrealized securities losses, liquidity levels, capital ratios, dividend coverage, and CECL implementation remain manageable.