Northwest Bancshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results cover the bank holding company and subsidiaries. Northwest Savings Bank operated 165 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland.
Financial performance and condition
- Q3 earnings: Net income was $17.6 million, up 12.2% from $15.7 million a year earlier; diluted EPS was $0.19 versus $0.17. Pretax income was $23.4 million.
- Nine-month earnings: Net income was $46.4 million, down 1.8% from $47.2 million; diluted EPS was $0.51 versus $0.50.
- Revenue and margins: Q3 net interest income fell 4.8% to $62.5 million, while noninterest income rose 5.5% to $16.1 million. Q3 GAAP net interest margin declined to 3.40% from 3.54%. For nine months, net interest income declined 3.4% to $189.8 million and noninterest income increased 3.8% to $45.9 million; GAAP net interest margin was 3.44% versus 3.54%.
- Expenses and credit provision: Q3 noninterest expense decreased 2.9% to $50.3 million and provision for loan losses decreased 27.8% to $5.0 million. For nine months, noninterest expense decreased 0.3% to $154.6 million and provision decreased 3.4% to $17.6 million.
- Balance sheet: Total assets were $7.91 billion, down 0.4% from year-end 2012. Gross loans were $5.73 billion, up 0.5%; deposits were $5.73 billion, down 0.7%. Shareholders’ equity was $1.14 billion, up 0.9%.
- Funding and liquidity: Borrowed funds were $865.1 million and junior subordinated debentures were $103.1 million. Cash and cash equivalents were $415.3 million at quarter-end. The bank’s liquidity ratio was 13.9%; disclosed additional borrowing capacity was $2.11 billion at FHLB, $192.4 million at the Federal Reserve and $80.0 million at correspondent banks.
- Cash flow, nine months: Operating activities provided $103.3 million; investing activities used $63.6 million; financing activities used $76.2 million. Cash and cash equivalents declined $36.4 million to $415.3 million.
- Capital: Northwest Savings Bank reported total risk-based capital of 18.26%, Tier 1 risk-based capital of 17.00% and Tier 1 leverage of 11.15%, above the filing’s respective “well-capitalized” thresholds of 10%, 6% and 5%.
Changes versus comparable periods
- Quarterly earnings improved despite lower interest income: deposit and borrowing costs fell, provision expense declined, noninterest income increased and expenses decreased. Lower loan and securities yields nevertheless compressed net interest margin.
- Nine-month earnings slipped as the $6.8 million decline in net interest income outweighed higher noninterest income and lower provision, expense and tax costs.
- Deposit composition shifted away from time deposits, which fell $167.3 million from year-end, toward noninterest-bearing demand and savings accounts, which increased $48.1 million and $77.5 million, respectively.
- Nonperforming assets decreased to $143.9 million from $148.1 million at year-end, while nonperforming loans increased to $123.7 million from $121.9 million. Loans 90 or more days past due declined to $59.3 million from $70.0 million.
- The allowance for loan losses rose to $75.9 million, or 1.32% of loans, from $73.2 million, or 1.28%. Management attributed the increase primarily to additional reserves on two commercial real estate loans. Troubled debt restructurings decreased to $79.4 million from $89.4 million.
Outlook, commentary and risks
- Management gave no specific earnings or revenue guidance. It anticipated an effective tax rate of approximately 28.5% for 2013. The board declared a regular $0.13-per-share dividend payable November 14, 2013.
- Management cited historically low rates and competitive loan pricing as pressures on asset yields and margins. It described efforts to manage interest-rate exposure through core deposits, longer-term fixed-rate borrowings, shorter-duration investments and loan mix.
- Rate-sensitivity simulations estimated that a 100-basis-point rate increase would raise net income 3.1% over 12 months, while a 100-basis-point decrease would lower it 8.1%. The filing cautions that results depend on uncertain assumptions and actual outcomes may differ.
- Basel III capital rules were scheduled to take effect for the bank on January 1, 2015, with the capital conservation buffer phased in through 2019. Management identified regulatory change, economic conditions, competition, interest rates, securities values, credit quality and growth execution as risks.
- Available-for-sale securities had $15.3 million of gross unrealized losses at September 30, versus $4.3 million at year-end 2012. Management considered identified impairments noncredit-related and stated it did not intend, and was not likely to be required, to sell the affected securities before recovery. Nine-month other comprehensive loss was $7.6 million, primarily reflecting securities valuation changes.
- Legal proceedings included an accrued $2.2 million for legal matters. A debit-card overdraft-fee class action and other claims remained unresolved; management said potential outcomes could not be predicted, while not anticipating material adverse effects on financial position or cash flows from the described claims. A separate borrower dispute was settled in September 2013 without material adverse effect on financial position or cash flows.
- Standby letters of credit had a maximum potential payment obligation of $28.8 million, of which $28.1 million was fully collateralized. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether continued loan-yield pressure and margin compression are offset by lower funding costs and growth in fee income.
- Trends in nonperforming loans, criticized commercial credits, charge-offs and the adequacy of the $75.9 million loan-loss allowance.
- Deposit mix, liquidity and reliance on borrowed funding, including the cost and maturity profile of borrowings.
- Interest-rate exposure and the assumptions underlying management’s sensitivity simulations, particularly the larger modeled earnings decline under falling rates.
- The valuation and recovery prospects of securities with unrealized losses, and developments in unresolved litigation and related accruals.
- Implementation of Basel III requirements and the effect on capital, distributions and regulatory costs.