Northwest Bancshares, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and nine months ended September 30, 2014, with comparisons to 2013. Northwest is a savings and loan holding company operating through Northwest Savings Bank, with 164 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland. It reports Community Banking and Consumer Finance segments.
Financial performance and position
Amounts below are in millions unless noted. The filing reports results for both the quarter and year-to-date period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $61.9 | $62.5 | $184.8 | $189.5 |
| Noninterest income | $18.2 | $16.1 | $55.0 | $45.9 |
| Provision for loan losses | $3.5 | $5.0 | $19.2 | $17.6 |
| Noninterest expense | $53.4 | $50.3 | $160.3 | $154.6 |
| Net income | $17.3 | $17.6 | $44.6 | $46.2 |
| Diluted EPS | $0.19 | $0.19 | $0.48 | $0.51 |
| Net interest margin, GAAP | 3.40% | 3.39% | 3.38% | 3.43% |
- Balance sheet at September 30: Total assets were $7.827 billion, down 0.7% from year-end 2013. Gross loans were $5.957 billion, up 2.6%; commercial real estate loans were a key source of growth. Deposits were $5.708 billion, up 0.7%, while borrowed funds were $878.4 million, down 0.4%. Junior subordinated debentures were $103.1 million.
- Liquidity and capital: Cash and cash equivalents were $293.8 million, compared with $391.9 million at December 31, 2013. The bank’s reported liquidity ratio was 9.1%; additional borrowing capacity was $2.078 billion at the FHLB, $192.6 million at the Federal Reserve and $80.0 million at correspondent banks. Northwest Savings Bank’s regulatory ratios were 17.78% total risk-based capital, 16.53% Tier 1 risk-based capital and 11.21% Tier 1 leverage, each above stated “well-capitalized” thresholds.
- Cash flow, nine months: Operating activities provided $75.6 million (versus $103.3 million); investing activities used $66.0 million (versus $63.6 million); financing activities used $107.7 million (versus $76.2 million). Cash and cash equivalents decreased $98.1 million. Financing use included $137.9 million of dividends paid.
- Credit quality: The allowance for loan losses was $71.7 million, or 1.20% of loans, versus $71.3 million, or 1.23%, at year-end 2013. Nonaccrual loans were $89.8 million, down from $107.2 million; total nonperforming assets were $105.2 million, down from $126.1 million. Nine-month net charge-offs were $18.9 million, and annualized net charge-offs were 0.43% of average loans versus 0.35% in 2013.
Material changes versus prior periods
- Quarterly net income fell 1.3%; nine-month net income fell 3.4%. Lower interest income and net interest income, together with higher noninterest expense, weighed on results. For nine months, noninterest income rose $9.1 million, partly offsetting those pressures.
- Quarterly noninterest income increased 12.9%, including higher investment-sale gains, service charges and trust income. Nine-month investment-sale gains were $4.5 million versus $0.2 million, largely reflecting sales of equity securities; trust income also benefited from the January 2014 acquisition of Evans Capital Management.
- Nine-month provision expense rose 9.6%, including provisions related to five business-banking loans. Management also reported improving classified loans, nonaccrual loans and delinquencies. Net charge-offs nevertheless increased year over year.
- Noninterest expense rose 6.1% in Q3 and 3.7% year to date. Marketing, compliance-related processing and professional-services expenses increased. The company said lower funding costs helped offset pressure on asset yields; nine-month net interest margin declined five basis points.
- Equity declined 6.8% from year-end to $1.077 billion, principally following $137.9 million of dividends, including a $1.00-per-share special dividend. The company also paid a $0.10-per-share special dividend in Q1.
Outlook, risks and unusual items
- Management gave no full-year earnings guidance. It anticipated a 25%–27% effective tax rate for 2014. The results for the interim periods are not necessarily indicative of full-year results.
- Interest-rate risk remains significant. The company’s model estimated that a 100-basis-point rate decrease could reduce net income 13.9% over the next 12 months; modeled increases of 100, 200 and 300 basis points reduced net income by 3.0%, 3.3% and 4.5%, respectively. Management cautioned that model assumptions and actual outcomes may differ.
- Basel III capital rules for the company and bank were scheduled to take effect January 1, 2015, with the capital conservation buffer phased in through 2019. The filing describes potential limits on distributions and discretionary bonuses if required buffers are not maintained.
- Standby letters of credit had a maximum potential payment obligation of $23.8 million, of which $22.9 million was fully collateralized. The company had accrued $2.4 million for legal proceedings. A proposed class-action settlement in Toth v. Northwest Savings Bank remained subject to court approval.
- The company disclosed corrections to certain comparative 2013 balances and income figures, which management concluded were not material to the financial statements as a whole. It reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and fee income can offset persistent pressure on asset yields, net interest income and margins.
- Commercial-loan credit performance, provision needs, charge-offs and the adequacy of the allowance, particularly given the large business-loan provisions during 2014.
- Liquidity and funding trends, including deposit mix, available borrowing capacity and the impact of future rate changes.
- The sustainability of ordinary dividends after the unusually large 2014 special dividends, and the effect of Basel III requirements on future capital distributions.
- The final cost and court approval status of the proposed Toth settlement, and whether the legal accrual adequately reflects potential exposure.