Northwest Bancshares, Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are with December 31, 2011. Northwest is a savings and loan holding company operating Northwest Savings Bank, with 168 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland. It reports Community Banking and Consumer Finance segments.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparison |
|---|---|---|
| Net income | $15.2 million; diluted EPS $0.16 | Down 12.0% from $17.3 million; diluted EPS unchanged at $0.16 |
| Interest income | $86.2 million | Down 5.3% from $91.1 million |
| Net interest income | $65.4 million | Down 2.4% from $67.0 million |
| Net interest margin | 3.55% GAAP; 3.65% fully tax-equivalent | 3.56% GAAP; 3.66% fully tax-equivalent in Q1 2011 |
| Noninterest income / expense | $13.6 million / $51.3 million | Income down 4.8%; expense up 3.8% |
| Provision for loan losses | $6.3 million | Down 13.2% from $7.2 million |
| Total assets | $8.069 billion | Up 1.4% from year-end 2011 |
| Total loans / deposits | $5.608 billion / $5.870 billion | Loans up 1.0%; deposits up 1.5% from year-end |
| Borrowed funds / shareholders’ equity | $836.4 million / $1.162 billion | Borrowings up $8.5 million; equity up 0.7% from year-end |
| Cash and cash equivalents | $758.9 million at quarter-end | Cash increased $70.6 million during Q1; quarter-end cash was $769.7 million in Q1 2011 |
Operating cash flow was $26.2 million, compared with $42.3 million in Q1 2011. Investing activities used $47.0 million, versus providing $49.9 million in the prior-year quarter; financing activities provided $91.4 million, versus using $41.6 million.
Asset quality improved on several measures: nonaccrual loans were $125.0 million, or 2.23% of loans, versus $131.1 million, or 2.36%, at year-end. Nonperforming assets were $153.9 million, or 1.91% of assets, versus $158.0 million, or 1.99%. The allowance for loan losses was $72.9 million, or 1.30% of loans, compared with $71.1 million, or 1.28%, at year-end. Annualized net charge-offs were 0.32% of average loans, down from 0.52% in Q1 2011.
Regulatory capital ratios at March 31, 2012 were reported well above stated minimums: the company’s total capital ratio was 23.16%, Tier 1 risk-based ratio 21.90%, and Tier 1 leverage ratio 14.03%. The bank’s corresponding ratios were 20.01%, 18.76%, and 12.01%. Northwest reported a 23.3% liquidity ratio and additional borrowing capacity of $1.795 billion at the FHLB, $193.6 million at the Federal Reserve Bank, and $80.0 million at correspondent banks.
Material changes and management commentary
- Net income fell primarily because net interest income declined $1.6 million, noninterest income declined $686,000, and noninterest expense rose $1.9 million; lower loan-loss provision and income taxes partly offset these pressures.
- Business Banking loans increased $60.8 million, or 3.3%, during the quarter, while Personal Banking loans decreased $4.4 million. Management cited strong loan demand and growth in commercial relationships.
- Deposits grew in demand and savings categories, while time deposits declined $105.0 million. Management attributed the shift toward more liquid accounts to depositors’ concerns about potentially higher interest rates.
- Lower asset yields weighed on income: the average yield on interest-earning assets declined to 4.70% from 4.83%; the cost of interest-bearing liabilities fell to 1.38% from 1.59%. Management reported the GAAP interest-rate spread improved to 3.31% from 3.24%, but margin edged down.
- Foreclosed-property losses rose to $1.1 million from $27,000. Compensation expense increased $2.3 million, partly reflecting 77 additional full-time-equivalent employees, including hires in lending, servicing, credit review and compliance. Professional-services expense also rose as the company worked to improve compliance and satisfy conditions of an FDIC Consent Order.
- The company recorded a $238,000 credit-related impairment charge on one non-agency mortgage security. Management considered other disclosed security impairments noncredit-related and temporary and stated it did not intend, and was not likely to be required, to sell the identified impaired investments before recovery.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said the effective tax rate was 29.3% and was not expected to change substantially during the year; it cautioned that quarterly results are not necessarily indicative of full-year results. Interest-rate exposure, credit deterioration, allowance adequacy, real-estate values, economic conditions, deposit competition, liquidity and regulatory requirements are identified as key risks. A modeled immediate rate increase of 2% projected a 7.4% increase in net income but a 15.1% decrease in market value of equity; management cautioned that model assumptions are uncertain and actual outcomes may differ.
Standby letters of credit had a maximum potential payment obligation of $63.2 million, of which $62.0 million was fully collateralized. Management stated that routine asserted and unasserted claims were not expected to have a material adverse effect. No material changes to the 2011 Form 10-K risk factors were reported. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate and commercial lending, is being achieved without weakening underwriting or asset quality.
- Trends in nonaccrual loans, delinquencies, criticized/classified loans, foreclosed-property losses and the adequacy of the $72.9 million loan-loss allowance.
- Whether falling asset yields and changing deposit mix continue to pressure net interest income and margin, and how rate changes affect earnings and equity value.
- Progress on the FDIC Consent Order and related compliance costs, as well as the sustainability of higher staffing and compensation expense.
- The valuation and credit performance of impaired securities, particularly trust-preferred and non-agency mortgage investments, and the company’s ability to maintain liquidity and capital.