Northwest Bancshares, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Northwest Bancshares is a savings and loan holding company operating community banking offices across Pennsylvania, western New York, eastern Ohio and Maryland, as well as a consumer finance business.
Financial performance and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $78.6 | $66.9 | $226.9 | $192.1 |
| Noninterest income | $20.8 | $18.1 | $60.5 | $49.3 |
| Provision for loan losses | $5.5 | $3.2 | $11.4 | $5.1 |
| Noninterest expense | $75.0 | $63.8 | $241.6 | $172.7 |
| Net income | $14.2 | $12.9 | $25.2 | $44.3 |
| Diluted EPS | $0.14 | $0.13 | $0.25 | $0.48 |
- Q3 net income rose 10.3% year over year, supported by higher net interest income and fee income. The quarterly net interest margin was 3.84%, versus 3.45% a year earlier; net interest spread was 3.71%, versus 3.28%.
- Nine-month net income declined 43.2%. Results included a $37.0 million FHLB prepayment penalty and higher acquisition, integration and compensation costs. Net interest income and noninterest income increased, but did not offset the higher expenses and credit-loss provision.
- At September 30, total assets were $9.715 billion, loans $7.799 billion, deposits $8.203 billion and shareholders’ equity $1.163 billion. Borrowed funds fell to $135.9 million from $975.0 million at year-end 2015, largely after repaying FHLB advances.
- For the first nine months, operating cash flow was $82.3 million; investing activities provided $1.043 billion, including acquisition-related cash; financing activities used $971.7 million. Cash and cash equivalents ended at $320.6 million.
- Regulatory capital ratios exceeded stated minimum and well-capitalized thresholds. Northwest Bank’s CET1 ratio was 12.86%, Tier 1 risk-based ratio 12.86%, total capital ratio 13.74%, and Tier 1 leverage ratio 10.64%.
Changes versus comparable periods
- On September 9, Northwest acquired 18 First Niagara branches in New York, assuming $1.643 billion of deposits and acquiring $455.9 million of loans at fair value. The transaction included approximately $450 million of wealth-management assets under management and a $76.6 million deposit premium. The filing recorded preliminary goodwill of $45.6 million.
- The acquisition materially expanded the balance sheet: total assets increased 8.5% from December 31, 2015; loans rose 8.0% and deposits rose 24.0%. Management attributed much of the growth to the acquisition, while also reporting organic loan growth.
- Quarterly net interest income benefited from lower funding costs after the FHLB repayment and from acquired low-cost deposits. For the first nine months, net interest margin increased to 3.71% from 3.41%.
- Asset-quality measures were mixed. Nonperforming loans increased to $86.4 million from $73.0 million at year-end 2015, and nonperforming assets rose to $91.2 million from $81.7 million. The allowance for loan losses was $63.2 million, or 0.81% of loans, versus $62.7 million, or 0.87%, at year-end.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or revenue guidance. It expected a 2016 effective tax rate of 28%–30%; the nine-month rate was 27.0% and Q3 rate 24.9%.
- The company terminated its ESOP on September 30. The related distribution and share treatment generated $5.5 million of Q3 stock-compensation expense and $6.3 million for the nine-month period. The filing also reports $6.4 million of total Q3 stock-based compensation expense.
- Management cited five commercial-loan downgrades requiring combined reserves of $2.9 million during the year; four Q3 commercial loans accounted for $1.9 million of additional reserves. Nine-month provision expense more than doubled year over year.
- The company consolidated 24 branches into existing offices in April, incurring $3.0 million of related costs. Direct costs for the First Niagara acquisition were $8.2 million for the nine months.
- Liquidity ratio was 12.6%. Additional borrowing capacity was reported as $3.299 billion with the FHLB, $111 million with the Federal Reserve Bank and $80 million with correspondent banks.
- The board declared a $0.15 per-share dividend payable November 17, 2016. Nine-month dividends of $45.0 million exceeded reported net income for the period; the stated payout ratio was 180%.
- Management’s principal risks include economic and borrower deterioration, interest-rate and securities-market changes, competition, cybersecurity, regulation, and successful integration of acquired businesses. Its interest-rate simulation projected net income declines of 0.8%–2.6% for rate increases of 100–300 basis points and a 9.1% decline for a 100-basis-point decrease; actual results may differ.
- The company reported no accrued legal-proceeding losses as of September 30 and no material updates to previously disclosed risk factors. Management said disclosure controls were effective.
Investor verification priorities
- Confirm how much of loan, deposit and earnings growth came from the First Niagara branches versus organic activity, and track subsequent integration costs and deposit retention.
- Assess the $37.0 million FHLB prepayment penalty and other unusual expenses when comparing underlying earnings; verify the period and accounting treatment against the detailed statements and notes.
- Monitor nonperforming loans, criticized commercial credits, charge-offs and allowance adequacy, particularly given rising nonperforming balances and higher provisions.
- Review the sustainability of dividends relative to earnings and capital generation, given the reported 180% nine-month payout ratio.
- Compare reported cash-flow movements with acquisition funding and debt repayments, and track liquidity and regulatory capital after the acquisition.