Northwest Bancshares, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2011; comparative income and cash-flow results cover the three and nine months ended September 30, 2011 and 2010. Northwest Bancshares is a savings and loan holding company operating Northwest Savings Bank, with 169 community-banking offices and a consumer-finance business with 52 offices. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $67.0 | $66.7 | $200.7 | $190.4 |
| Provision for loan losses | $8.1 | $9.9 | $23.7 | $26.6 |
| Noninterest income | $14.5 | $13.8 | $44.1 | $45.2 |
| Noninterest expense | $49.9 | $49.0 | $151.8 | $145.8 |
| Net income | $16.7 | $15.5 | $49.0 | $44.8 |
| Diluted earnings per share | $0.17 | $0.14 | $0.48 | $0.41 |
| Net interest margin (GAAP) | 3.59% | 3.52% | 3.56% | 3.37% |
Quarterly net income rose 7.9%; nine-month net income rose 9.4%. Management attributed the nine-month improvement mainly to higher net interest income and lower loan-loss provision. Lower funding costs and a shift toward lower-cost deposits supported margin expansion. Quarterly return on average assets/equity was 0.83%/5.62%; nine-month figures were 0.81%/5.25%.
Financial position, cash flow and liquidity
- At September 30, total assets were $7.989 billion, down 1.9% from year-end 2010. Gross loans were $5.518 billion, down 0.3%; commercial real estate loans grew 5.2% to $1.421 billion, while personal banking loans and commercial loans declined.
- Deposits were $5.813 billion, up 0.8% from year-end. Noninterest demand, interest-bearing demand and savings deposits increased; time deposits fell 5.1% to $2.331 billion. Borrowed funds declined 7.0% to $828.7 million, principally following scheduled FHLB advance maturities.
- Shareholders’ equity was $1.167 billion, down $140.7 million from year-end, reflecting $170.7 million of share repurchases and $33.2 million of dividends, partly offset by $49.0 million of net income. The company repurchased 14.3 million shares during the first nine months.
- Nine-month operating cash flow was $112.8 million, versus $26.1 million in 2010; investing activities provided $66.7 million versus $523.0 million used; financing activities used $227.6 million versus $64.9 million provided. Cash and cash equivalents decreased $48.1 million to $671.0 million.
- The bank reported a 23.1% liquidity ratio and additional borrowing capacity of $1.672 billion at the FHLB, $205.4 million at the Federal Reserve and $80.0 million with correspondent banks. Bank regulatory capital ratios were well above stated “well capitalized” thresholds: total risk-based 22.31%, Tier 1 risk-based 21.06%, and Tier 1 leverage 13.24%.
Material changes, risks and unusual items
- Credit quality weakened on key measures: nonaccrual loans increased to $161.4 million, or 2.92% of loans, from $148.4 million, or 2.68%, at year-end; nonperforming assets rose to $182.0 million, or 2.28% of assets. Total delinquent loans were $157.7 million, down from $201.7 million at year-end, while nonaccrual loans increased.
- The allowance for loan losses fell to $73.2 million, or 1.33% of loans, from $76.4 million, or 1.38%. Nine-month net charge-offs increased to $26.9 million from $19.7 million; annualized net charge-offs rose to 0.65% from 0.48%. Management cited reserve releases on certain commercial loans and lower personal-loan balances, while acknowledging higher charge-offs and nonperforming loans.
- Q3 noninterest income included $1.9 million of bank-owned life insurance income, partly driven by two death-benefit claims. Nine-month BOLI income rose to $4.8 million, including benefits from three policies. Service-charge income declined amid lower overdraft revenue and refunds of incorrectly charged fees; expense included accruals for potential customer refunds.
- Investment securities had $6.8 million of gross unrealized losses at quarter-end, versus $23.9 million at year-end 2010. Management judged identified impairments temporary; corporate trust-preferred and non-agency mortgage securities remain areas to monitor. The filing recorded $0.5 million of nine-month securities impairment losses.
- Newly highlighted risks include the company’s municipal exposure: $264.7 million in municipal bonds, $88.7 million in municipal loans, and $68.7 million in related unfunded commitments, lines and letters of credit. The filing also discusses uncertainty following U.S. sovereign and related agency rating downgrades, including possible valuation and funding effects.
- Management gave no specific earnings or growth guidance. It cautioned that results are not necessarily indicative of full-year results. Interest-rate simulations estimated net income up 9.1% under a 2% rate increase and down 10.4% under a 2% decrease over 12 months; these are model estimates dependent on assumptions. The company declared a $0.11-per-share dividend payable November 17, 2011.
- Standby letters of credit had a maximum potential payment of $64.4 million, of which $63.3 million was collateralized. Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Most important facts for investors to verify
- Whether rising nonaccrual loans, nonperforming assets and charge-offs are consistent with the allowance level and management’s reserve assumptions.
- The credit quality and valuation of municipal, corporate trust-preferred and non-agency mortgage securities, including any subsequent deterioration or impairment.
- Whether deposit-mix changes and lower funding costs can continue to offset declining asset yields and modest loan demand.
- The effect of the substantial share repurchases on capital, liquidity, per-share results and the sustainability of the dividend.
- Potential customer fee refunds, municipal commitments, contingent letter-of-credit exposure and any developments in litigation or regulatory requirements.