Northwest Bancshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. Northwest Bancshares is a savings and loan holding company operating Northwest Bank, with 172 community-banking offices in Pennsylvania, western New York, and eastern Ohio. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $85.8 | $83.2 | $251.8 | $246.5 |
| Provision for loan losses | $7.0 | $3.0 | $16.5 | $13.2 |
| Noninterest income | $22.6 | $24.6 | $68.5 | $87.6 |
| Noninterest expense | $66.6 | $68.8 | $203.8 | $213.7 |
| Income before taxes | $34.8 | $36.0 | $99.9 | $107.2 |
| Income tax expense | $7.0 | $12.4 | $20.9 | $34.9 |
| Net income | $27.7 | $23.6 | $79.0 | $72.3 |
| Diluted EPS | $0.27 | $0.23 | $0.76 | $0.71 |
- Q3 net income rose 17.6%; nine-month net income rose 9.3%. The nine-month increase reflects lower taxes and expenses and higher net interest income, partly offset by lower noninterest income and higher credit costs and interest expense.
- GAAP net interest margin was 3.90% in Q3 versus 3.82% a year earlier, and 3.84% for the nine months versus 3.74%. Q3 annualized returns on average assets and equity were 1.15% and 8.93%, respectively; nine-month returns were 1.11% and 8.67%.
- At September 30, total assets were $9.575 billion, up 2.3% since year-end. Total loans were $7.996 billion, up 2.6%; deposits were $7.954 billion, up 1.6%. Shareholders’ equity was $1.241 billion.
- Cash and cash equivalents were $73.9 million; cash, cash equivalents, and marketable securities totaled $909.7 million. The allowance for loan losses was $56.0 million, or 0.70% of loans, compared with $56.8 million, or 0.73%, at year-end.
- Borrowed funds were $179.1 million, up from $108.2 million at year-end; junior subordinated debentures were $111.2 million. The company reported a 9.6% liquidity ratio and $3.072 billion in additional FHLB borrowing capacity, plus $53.8 million at the Federal Reserve and $80.0 million at correspondent banks.
- For the nine months, operating cash flow was $106.4 million, investing cash outflow was $245.7 million, and financing cash inflow was $135.6 million. Cash and cash equivalents declined $3.8 million to $73.9 million.
Material changes and management commentary
- Loan growth came from personal banking, including indirect dealer lending, and commercial banking expansion. Management cited lower secondary-market sales of residential mortgages as a contributor to personal loan growth.
- Q3 interest income increased 6.0%, supported by loan growth and higher yields as market rates rose. Interest expense increased 39.9%, as deposit and borrowing costs rose; management also noted intensified competition for rate-sensitive customers. Deposit growth included a 7.1% increase in noninterest-bearing checking balances since year-end.
- Credit costs increased: Q3 provision rose to $7.0 million, primarily due to a $4.6 million write-down on one commercial real estate loan and updated allowance factors. Management said overall credit quality remained largely unchanged, while acknowledging higher nonaccrual balances and delinquency measures.
- Noninterest income fell 8.3% in Q3, principally because the prior-year quarter included a $1.5 million investment-sale gain. For the nine months, noninterest income declined 21.8%, mainly because 2017 included a $17.2 million gain on sale of Maryland offices; the retirement-services subsidiary sale also reduced trust income.
- Noninterest expense declined, in part due to lower restructuring and acquisition costs following 2017 business and office exits. Q3 bank-owned life insurance income included a death benefit; nine-month income included $1.7 million in death benefits.
- The effective tax rate was 20.2% in Q3 and 20.9% for the nine months, versus 34.5% and 32.5% a year earlier, primarily reflecting the Tax Cuts and Jobs Act. Management estimated a 21%–23% effective tax rate for full-year 2018.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue forecast. Management cautioned that interim results are not necessarily indicative of full-year results.
- Credit quality warrants attention: nonperforming loans were $74.4 million, up from $65.0 million at year-end; nonperforming assets were $76.9 million, up from $70.6 million. Impaired loans rose to $113.1 million from $84.6 million. Management attributed a significant portion of the nonaccrual increase to the downgrade of one $8.4 million commercial loan relationship. The allowance declined partly following payoff of two commercial loans with combined reserves of $3.5 million.
- Available-for-sale securities had $20.0 million of gross unrealized losses at September 30, versus $11.0 million at year-end. Management considered the losses temporary, stating it did not intend to sell and was more likely than not able to hold the securities until recovery.
- Interest-rate simulations estimated that a sustained 100-basis-point rate increase would reduce 12-month net interest income by 0.5%; a 100-basis-point decrease would reduce it by 3.5%. These are model-based estimates dependent on uncertain assumptions.
- The company anticipated a $4 million–$6 million pension contribution in 2018. It declared a $0.17-per-share dividend payable November 15, 2018. Nine-month dividends paid were $52.4 million.
- Standby letters of credit had a maximum potential payment exposure of $33.8 million, of which $27.3 million was fully collateralized. No legal-proceeding accrual was recorded; the company said ordinary-course claims were not expected to have a material adverse effect, while noting outcomes are uncertain.
- The company was preparing for the expected-credit-loss standard (CECL), effective for it in 2020, and was developing methods, systems, and data. Management had not quantified the adoption impact. It expected the new lease standard to add right-of-use assets and lease obligations to the balance sheet beginning in 2019.
- Other risks cited include economic and credit-market conditions, interest-rate and margin changes, competition, regulation, cybersecurity, third-party performance, and the ability to manage loan growth and integrate acquired businesses. Regulatory capital ratios exceeded the filing’s stated minimums and well-capitalized thresholds.
Most important facts for investors to verify
- Whether the $4.6 million commercial real estate write-down and the $8.4 million downgraded commercial relationship lead to further losses, delinquency, or additional provisioning.
- Trends in nonperforming loans, impaired loans, delinquencies, charge-offs, and allowance coverage as loan balances grow.
- Whether rising deposit and borrowing costs continue to outpace asset-yield increases and pressure net interest margin.
- The effect of securities unrealized losses, liquidity needs, and increased borrowings on funding flexibility and capital.
- Whether 2018 effective taxes fall within management’s 21%–23% estimate, and the eventual financial impact of CECL and lease accounting adoption.