Northwest Bancshares, Inc. - Quarter Report: 2015 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2015

 

or

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                   to                  

 

Commission File Number 001-34582

 

NORTHWEST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(814) 726-2140

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o

Smaller reporting company o

 

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Common Stock ($0.01 par value) 94,461,849 shares outstanding as of April 30, 2015

 

 

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NORTHWEST BANCSHARES, INC.

INDEX

 

			PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014		1
	Consolidated Statements of Income for the quarter ended March 31, 2015 and 2014		2
	Consolidated Statements of Comprehensive Income for the quarter ended March 31, 2015 and 2014		3
	Consolidated Statements of Changes in Shareholders’ Equity for the quarter ended March 31, 2015 and 2014		4
	Consolidated Statements of Cash Flows for the quarter ended March 31, 2015 and 2014		5
	Notes to Consolidated Financial Statements -Unaudited		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		55
Item 4.	Controls and Procedures		56
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		56
Item 1A.	Risk Factors		56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3.	Defaults Upon Senior Securities		57
Item 4.	Mine Safety Disclosures		57
Item 5.	Other information		57
Item 6.	Exhibits		57
	Signature		59
	Certifications

 

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ITEM 1. FINANCIAL STATEMENTS

 

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

 

		(Unaudited)
		March 31,			December 31,
		2015			2014
Assets
Cash and due from banks		$	83,970		87,401
Interest-earning deposits in other financial institutions		212,496			152,671
Federal funds sold and other short-term investments		635			634
Marketable securities available-for-sale (amortized cost of $906,028 and $906,702)		916,423			912,371
Marketable securities held-to-maturity (fair value of $92,989 and $106,292)		90,825			103,695
Total cash and investments		1,304,349			1,256,772
Personal Banking:
Residential mortgage loans		2,543,870			2,521,456
Home equity loans		1,055,739			1,066,131
Other consumer loans		239,956			242,744
Total Personal Banking		3,839,565			3,830,331
Business Banking:
Commercial real estate loans		1,856,574			1,801,184
Commercial loans		368,725			358,376
Total Business Banking		2,225,299			2,159,560
Total loans		6,064,864			5,989,891
Allowance for loan losses		(67,298		)	(67,518	)
Total loans, net		5,997,566			5,922,373
Federal Home Loan Bank stock, at cost		36,292			33,293
Accrued interest receivable		19,753			18,623
Real estate owned, net		15,346			16,759
Premises and equipment, net		142,481			143,909
Bank owned life insurance		145,275			144,362
Goodwill		175,498			175,323
Other intangible assets		3,027			3,033
Other assets		50,772			60,586
Total assets		$	7,890,359		7,775,033
Liabilities and Shareholders’ equity
Liabilities:
Noninterest-bearing checking deposits		$	944,937		891,248
Interest-bearing checking deposits		898,945			874,623
Money market deposit accounts		1,151,971			1,179,070
Savings deposits		1,257,446			1,209,287
Time deposits		1,428,768			1,478,314
Total deposits		5,682,067			5,632,542
Borrowed funds		943,842			888,109
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities		103,094			103,094
Advances by borrowers for taxes and insurance		34,998			30,507
Accrued interest payable		1,336			936
Other liabilities		57,506			57,198
Total liabilities		6,822,843			6,712,386
Shareholders’ equity:
Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued		—			—
Common stock, $0.01 par value: 500,000,000 shares authorized, 94,553,350 and 94,721,453 shares issued, respectively		946			947
Paid-in capital		624,584			626,134
Retained earnings		484,774			481,577
Unallocated common stock of employee stock ownership plan		(21,565		)	(21,641	)
Accumulated other comprehensive loss		(21,223		)	(24,370	)
Total shareholders’ equity		1,067,516			1,062,647
Total liabilities and shareholders’ equity		$	7,890,359		7,775,033

 

See accompanying notes to unaudited consolidated financial statements

 

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

 

		Quarter ended
		March 31,
		2015			2014
Interest income:
Loans receivable		$	70,711		69,322
Mortgage-backed securities		2,234			2,793
Taxable investment securities		1,045			1,080
Tax-free investment securities		1,348			1,655
Interest-earning deposits		139			200
Total interest income		75,477			75,050
Interest expense:
Deposits		5,766			6,490
Borrowed funds		8,133			7,714
Total interest expense		13,899			14,204
Net interest income		61,578			60,846
Provision for loan losses		900			7,485
Net interest income after provision for loan losses		60,678			53,361
Noninterest income:
Gain on sale of investments		95			3,348
Service charges and fees		8,659			8,408
Trust and other financial services income		2,776			3,047
Insurance commission income		2,428			2,564
Loss on real estate owned, net		(1,046		)	(135	)
Income from bank owned life insurance		913			1,001
Mortgage banking income		240			249
Other operating income		1,963			1,175
Total noninterest income		16,028			19,657
Noninterest expense:
Compensation and employee benefits		27,895			27,972
Premises and occupancy costs		6,267			6,557
Office operations		3,680			3,757
Processing expenses		7,205			6,589
Marketing expenses		1,976			1,637
Federal deposit insurance premiums		1,347			1,297
Professional services		1,792			2,062
Amortization of other intangible assets		268			331
Real estate owned expense		692			639
Acquisition expense		347			—
Other expenses		2,242			2,322
Total noninterest expense		53,711			53,163
Income before income taxes		22,995			19,855
Federal and state income taxes		6,825			5,244
Net income		$	16,170		14,611
Basic earnings per share		$	0.18		0.16
Diluted earnings per share		$	0.18		0.16

 

See accompanying notes to unaudited consolidated financial statements

 

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)

 

		Quarter ended
		March 31,
		2015			2014
Net Income		$	16,170		14,611
Other comprehensive income net of tax:
Net unrealized holding gains/ (losses) on marketable securities:
Unrealized holding gains net of tax of $(1,885) and $(3,579), respectively		2,952			5,596
Reclassification adjustment for gains included in net income, net of tax of $43 and $1,218 respectively		(68		)	(1,904	)
Net unrealized holding gains on marketable securities		2,884			3,692
Change in fair value of interest rate swaps, net of tax of $(24) and $(135), respectively		44			251
Defined benefit plan:
Reclassification adjustment for prior period service costs included in net income, net of tax of $(140) and $75, respectively		219			(138	)
Other comprehensive income		3,147			3,805
Total comprehensive income		$	19,317		18,416

 

See accompanying notes to unaudited consolidated financial statements

 

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(dollars in thousands, expect share data)

 

Quarter ended March 31, 2014

 

											Accumulated
											Other		Unallocated		Total
		Common Stock					Paid-in		Retained		Comprehensive		common stock		Shareholders’
		Shares		Amount			Capital		Earnings		Income/ (loss)		of ESOP		Equity
Beginning balance at December 31, 2013		94,243,713		$	943		619,678		569,547		(11,900	)	(23,083	)	1,155,185
Comprehensive income:
Net income		—		—			—		14,611		—		—		14,611
Other comprehensive income, net of tax of $(2,421)		—		—			—		—		3,805		—		3,805
Total comprehensive income		—		—			—		14,611		3,805		—		18,416
Exercise of stock options		220,717		2			2,292		—		—		—		2,294
Stock compensation expense		—		—			788		—		—		451		1,239
Dividends paid ($0.23 per share)		—		—			—		(21,225	)	—		—		(21,225	)
Ending balance at March 31, 2014		94,464,430		$	945		622,758		562,933		(8,095	)	(22,632	)	1,155,909

 

Quarter ended March 31, 2015

 

											Accumulated
											Other		Unallocated		Total
		Common Stock					Paid-in		Retained		Comprehensive		common stock		Shareholders’
		Shares		Amount			Capital		Earnings		Income/ (loss)		of ESOP		Equity
Beginning balance at December 31, 2014		94,721,453		$	947		626,134		481,577		(24,370	)	(21,641	)	1,062,647
Comprehensive income:
Net income		—		—			—		16,170		—		—		16,170
Other comprehensive income, net of tax of $(2,006)		—		—			—		—		3,147		—		3,147
Total comprehensive income		—		—			—		16,170		3,147		—		19,317
Exercise of stock options		149,897		2			1,433		—		—		—		1,435
Stock-based compensation expense		—		—			804		—		—		76		880
Share repurchases		(318,000	)	(3		)	(3,787	)	—		—		—		(3,790	)
Dividends paid ($0.14 per share)		—		—			—		(12,973	)	—		—		(12,973	)
Ending balance at March 31, 2015		94,553,350		$	946		624,584		484,774		(21,223	)	(21,565	)	1,067,516

 

See accompanying notes to unaudited consolidated financial statements

 

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

		Quarter ended
		March 31,
		2015			2014
OPERATING ACTIVITIES:
Net Income		$	16,170		14,611
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		900			7,485
Net (gain)/ loss on sale of assets		274			(3,602	)
Net depreciation, amortization and accretion		1,549			2,845
Decrease in other assets		5,685			10,032
Increase/ (decrease) in other liabilities		1,136			(6,534	)
Net amortization on marketable securities		87			105
Noncash write-down of real estate owned		1,181			648
Origination of loans held for sale		(221		)	(660	)
Proceeds from sale of loans held for sale		224			907
Noncash compensation expense related to stock benefit plans		880			1,239
Net cash provided by operating activities		27,865			27,076
INVESTING ACTIVITIES:
Purchase of marketable securities available-for-sale		(29,985		)	(22,805	)
Proceeds from maturities and principal reductions of marketable securities available-for-sale		30,329			33,414
Proceeds from maturities and principal reductions of marketable securities held-to-maturity		12,914			3,643
Proceeds from sale of marketable securities available-for-sale		293			5,735
Loan originations		(496,009		)	(447,423	)
Proceeds from loan maturities and principal reductions		419,198			398,726
(Purchase)/ redemption of Federal Home Loan Bank stock		(2,999		)	1
Proceeds from sale of real estate owned		2,729			2,866
Sale of real estate owned for investment, net		152			152
Purchase of premises and equipment		(2,075		)	(3,607	)
Acquistions, net of cash received		(438		)	(2,792	)
Net cash used in investing activities		(65,891		)	(32,090	)

 

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

(in thousands)

 

		Quarter ended
		March 31,
		2015			2014
FINANCING ACTIVITIES:
Increase in deposits, net		$	49,525		105,984
Proceeds from long-term borrowings		85,000			—
Repayments of long-term borrowings		(10,013		)	(15	)
Net decrease in short-term borrowings		(19,254		)	(16,009	)
Increase in advances by borrowers for taxes and insurance		4,491			4,405
Cash dividends paid		(12,973		)	(21,224	)
Purchase of common stock for retirement		(3,790		)	—
Proceeds from stock options exercised		1,435			2,294
Net provided by in financing activities		94,421			75,435
Net increase in cash and cash equivalents		$	56,395		70,421
Cash and cash equivalents at beginning of period		$	240,706		391,905
Net increase in cash and cash equivalents		56,395			70,421
Cash and cash equivalents at end of period		$	297,101		462,326
Cash and cash equivalents:
Cash and due from banks		$	83,970		81,927
Interest-earning deposits in other financial institutions		212,496			379,765
Federal funds sold and other short-term investments		635			634
Total cash and cash equivalents		$	297,101		462,326
Cash paid during the period for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $5,256 and $5,819, respectively)		$	13,499		14,232
Income taxes		$	1,027		5,016
Business acquistions:
Fair value of assets acquired		$	438		2,798
Cash paid		(438		)	(2,792	)
Liabilities assumed		$	—		6
Non-cash activities:
Loans foreclosures and repossessions		$	2,623		1,839
Sale of real estate owned financed by the Company		$	114		88

 

See accompanying notes to unaudited consolidated financial statements

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

 

(1)                                 Basis of Presentation and Informational Disclosures

 

Northwest Bancshares, Inc. (the “Company”) or (“NWBI”), a Maryland corporation headquartered in Warren, Pennsylvania, is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System.  The Company was incorporated to be the successor to Northwest Bancorp, Inc. upon the completion of the mutual-to-stock conversion of Northwest Bancorp, MHC in December 2009.  The primary activity of the Company is the ownership of all of the issued and outstanding common stock of Northwest Bank, a Pennsylvania-chartered savings bank (“Northwest”).  Northwest is regulated by the FDIC and the Pennsylvania Department of Banking.  At March 31, 2015, Northwest operated 161 community-banking offices throughout Pennsylvania, western New York, eastern Ohio and Maryland.

 

The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Northwest, and Northwest’s subsidiaries Northwest Settlement Agency, LLC, Northwest Consumer Discount Company, Northwest Financial Services, Inc., Northwest Advisors, Inc., Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, Boetger & Associates, Inc. and The Bert Company. The unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information or footnotes required for complete annual financial statements.  In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position and results of operations have been included.  The consolidated statements have been prepared using the accounting policies described in the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 updated, as required, for any new pronouncements or changes.

 

Certain items previously reported have been reclassified to conform with the current year’s reporting format.

 

The results of operations for the quarter ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, or any other period.

 

Stock-Based Compensation

 

Stock-based compensation expense of $880,000 and $1.2 million for the quarters ended March 31, 2015 and 2014, respectively, was recognized in compensation expense relating to our stock benefit plans.  At March 31, 2015 there was compensation expense of $4.4 million to be recognized for awarded but unvested stock options and $13.5 million for unvested common shares.

 

Income Taxes- Uncertain Tax Positions

 

Accounting standards prescribe a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.  A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.  The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.  At March 31, 2015 we had no liability for unrecognized tax benefits.

 

We recognize interest accrued related to: (1) unrecognized tax benefits in federal and state income taxes and (2) refund claims in other operating income.  We recognize penalties (if any) in federal and state income taxes.  There is no amount accrued for the payment of interest or penalties at March 31, 2015.  We

 

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are subject to audit by the Internal Revenue Service and any state in which we conduct business for the tax periods ended December 31, 2013, 2012 and 2011.

 

Recent Accounting Pronouncements

 

In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of this guidance requires an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and provides five steps to be analyzed to accomplish the core principle. This guidance is effective retrospectively for annual reporting periods beginning after December 15, 2016, including interim periods within those years and early adoption is not permitted.  We are currently evaluating the impact this standard will have on our results of operations and financial position.

 

In June 2014 the FASB issued ASU 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. This guidance requires repurchase-to-maturity transactions to be recorded and accounted for as secured borrowings and also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  Additionally, an entity is required to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements, and provide increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The guidance related to repurchase-to-maturity and repurchase financing transactions, and disclosures for certain transactions accounted for as a sale is effective for annual reporting periods beginning after December 15, 2014, including interim periods within those years. The disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings are required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015.  We do not expect that this standard will have a material impact on our results of operations or financial position.

 

In June 2014 the FASB issued ASU 2014-12, “Compensation—Stock Compensation”. This guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Specifically, if the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. Further, the total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. This guidance is effective for annual periods beginning after December 15, 2015, including interim periods within those years and early adoption is permitted.  We do not expect that this standard will have a material impact on our results of operations or financial position.

 

(2)                                 Business Segments

 

We operate in two reportable business segments: Community Banking and Consumer Finance.  The Community Banking segment provides services traditionally offered by full-service community banks, including business and personal deposit accounts and business and personal loans, as well as insurance, brokerage and investment management and trust services.  The Consumer Finance segment, which is comprised of Northwest Consumer Discount Company, a subsidiary of Northwest, operates 51 offices in Pennsylvania and offers personal installment loans for a variety of consumer and real estate products.  This activity is funded primarily through an intercompany borrowing relationship with Allegheny Services, Inc., a

 

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subsidiary of Northwest.  Net income is the primary measure used by management to measure segment performance.  The following tables provide financial information for these reportable segments.  The “All Other” column represents the parent company and elimination entries necessary to reconcile to the consolidated amounts presented in the financial statements.

 

At or for the quarter ended:

 

		Community			Consumer
March 31, 2015 ($ in 000’s)		Banking			Finance		All other (1)		Consolidated
External interest income		$	70,928		4,330		219		75,477
Intersegment interest income		575			—		(575	)	—
Interest expense		12,888			575		436		13,899
Provision for loan losses		250			650		—		900
Noninterest income		15,729			270		29		16,028
Noninterest expense		50,440			2,953		318		53,711
Income tax expense (benefit)		7,035			175		(385	)	6,825
Net income		16,619			247		(696	)	16,170
Total assets		$	7,769,901		102,913		17,545		7,890,359

 

		Community			Consumer
March 31, 2014 ($ in 000’s)		Banking			Finance		All other (1)		Consolidated
External interest income		$	70,068		4,659		323		75,050
Intersegment interest income		606			—		(606	)	—
Interest expense		13,169			606		429		14,204
Provision for loan losses		6,850			635		—		7,485
Noninterest income		17,033			288		2,336		19,657
Noninterest expense		49,862			2,921		380		53,163
Income tax expense (benefit)		4,513			326		405		5,244
Net income		13,313			459		839		14,611
Total assets		$	7,849,806		103,677		19,830		7,973,313

 

(1)  Eliminations consist of intercompany loans, interest income and interest expense.

 

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