Northwest Bancshares, Inc. quarterly report, Q3 FY2012

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Northwest Bancshares, Inc. — Q3 2012 Form 10-Q

Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2012. Northwest is a savings and loan holding company operating Northwest Savings Bank and related subsidiaries, with community-banking and consumer-finance segments and 166 banking offices across Pennsylvania, western New York, eastern Ohio and Maryland.

Financial performance and position

  • Q3 earnings: Net income was $15.7 million, down 6.1% from $16.7 million; diluted EPS was $0.17, unchanged. Return on average assets was 0.78% and return on average equity was 5.37%.
  • Nine-month earnings: Net income was $47.2 million, down 3.6% from $49.0 million. Diluted EPS increased to $0.50 from $0.48, reflecting fewer weighted-average shares.
  • Net interest: Q3 net interest income was $66.0 million, down 1.5%; nine-month net interest income was $197.4 million, down 1.7%. GAAP net interest margin was 3.56% for Q3 (3.59% prior year) and 3.55% for the nine months (3.56% prior year). Lower asset yields were partly offset by lower deposit funding costs and a shift toward loans and lower-cost deposits.
  • Other income and expenses: Q3 noninterest income rose 2.9% to $14.9 million, while noninterest expense rose 3.8% to $51.8 million. For nine months, noninterest income fell 1.6% to $43.4 million and expense rose 2.1% to $155.0 million. Q3 mortgage banking income increased to $1.5 million from $0.4 million; nine-month income increased to $2.8 million from $0.9 million.
  • Assets and lending: Total assets were $8.048 billion, up 1.1% from year-end 2011. Loans were $5.729 billion, up 3.2%; business-banking loans grew 7.9% to $1.968 billion. Cash and investments totaled $1.758 billion, down $70.3 million from year-end.
  • Deposits and borrowings: Deposits were $5.825 billion, up 0.8%. Savings and noninterest-bearing demand deposits grew, while time deposits declined 14.1% to $1.962 billion. Borrowed funds increased 3.3% to $855.6 million; junior subordinated debentures were $103.1 million.
  • Credit quality: The allowance for loan losses was $71.2 million, or 1.24% of loans, broadly unchanged from year-end. Nonaccrual loans declined to $120.8 million, or 2.11% of loans, from $131.1 million, or 2.36%. Nonperforming assets were $150.1 million, or 1.86% of assets, versus $158.0 million, or 1.99%. Nine-month net charge-offs were $18.1 million, with an annualized rate of 0.43% versus 0.65% in 2011. Impaired loans increased to $201.6 million from $179.4 million at year-end.
  • Cash flow: For the nine months, operating cash flow was $92.6 million, investing cash outflow was $168.3 million and financing cash inflow was $25.4 million. Cash and cash equivalents declined $50.2 million to $638.1 million.
  • Capital and liquidity: Shareholders’ equity was $1.175 billion. Northwest Savings Bank’s regulatory capital ratios were 20.30% total risk-based, 19.04% Tier 1 risk-based and 12.36% Tier 1 leverage, above stated “well-capitalized” thresholds. The bank’s liquidity ratio was 16.4%; reported additional borrowing capacity was $1.918 billion from FHLB, $194 million from the Federal Reserve and $80 million from correspondent banks.

Material changes and management commentary

  • Management attributed lower interest income to reduced yields on loans and securities in a low-rate environment; funding-cost reductions helped offset the pressure. Nine-month provision for loan losses fell 23.3% to $18.2 million, reflecting improved credit indicators, partly offset by additional reserves on large downgraded commercial loans.
  • Compensation expense rose with higher health and pension costs and added staff; management cited 101 additional full-time-equivalent employees year over year, primarily to strengthen credit and compliance oversight. Professional-services costs also increased from compliance work, audit outsourcing and legal fees.
  • Management reported that time-deposit balances continued to migrate toward more liquid deposit products. The filing provides no formal earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
  • Interest-rate simulation estimated that an immediate, sustained 1%, 2% or 3% rate increase would raise net income by 8.6%, 15.3% or 17.7%, respectively, over 12 months; a 1% decrease would reduce it by 5.1%. These are model estimates subject to assumptions and may differ materially from actual results.

Risks, contingencies and unusual items

  • Key stated risks include interest-rate changes, loan and securities credit losses or valuation changes, economic conditions and collateral values, allowance adequacy, regulatory and legislative changes, deposit competition and liquidity availability.
  • The securities portfolio included $4.9 million of unrealized losses on corporate issues, substantially related to trust-preferred securities. Management considered the cited impairments noncredit-related and stated it did not intend, and was not likely required, to sell before recovery. The company recorded $331,000 of nine-month credit-related impairment on one non-agency mortgage security.
  • Two alleged class actions remain pending: one concerning debit-card overdraft fees and transaction posting order, and another concerning mortgage credit disclosures and application practices. Potential losses could not be estimated; management did not anticipate a material effect on financial position or cash flows, but could not determine possible future-period effects on results.
  • Standby letters of credit had a maximum potential payment of $70.2 million, of which $69.2 million was fully collateralized. The company reported no liability for unrecognized tax benefits.
  • The board declared a $0.12-per-share dividend payable November 15, 2012. Northwest Savings Bank paid a $175 million dividend to the holding company on October 19, 2012 as part of capital management.

Most important facts for investors to verify

  1. Whether loan growth—particularly commercial real estate and commercial lending—continues without deterioration in criticized, impaired or nonperforming loans.
  2. Whether the $71.2 million allowance remains adequate as credit conditions, collateral values and charge-offs evolve.
  3. Whether falling asset yields continue to pressure net interest income and margin despite lower deposit costs and favorable rate-simulation estimates.
  4. Whether expense growth, including staffing, compliance, technology and legal costs, is contained and whether mortgage banking gains are sustainable.
  5. Developments in the two class-action cases, the securities impairment portfolio, and the effect of the $175 million bank dividend on subsidiary capital and liquidity.