Northwest Bancshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results. Northwest Bancshares is a savings and loan holding company; its bank operated 169 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland. Three Florida offices closed on June 30.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $66.7m | $63.7m | $133.7m | $123.8m |
| Provision for loan losses | $8.4m | $7.9m | $15.6m | $16.7m |
| Noninterest income | $15.3m | $15.5m | $29.6m | $31.4m |
| Noninterest expense | $52.5m | $48.2m | $101.9m | $96.8m |
| Net income | $15.0m | $16.1m | $32.3m | $29.3m |
| Diluted EPS | $0.15 | $0.15 | $0.31 | $0.27 |
- Margins: Net interest margin was 3.53% for Q2 and 3.54% for the first half, compared with 3.38% and 3.30% in the comparable 2010 periods. Q2 return on average assets/equity was 0.74%/4.81%; first-half figures were 0.79%/5.07%.
- Balance sheet at June 30: Assets were $8.087bn, down 0.7% from year-end 2010. Gross loans were $5.489bn, down 0.8%; deposits were $5.819bn, up 1.0%. Cash and investments totaled $2.035bn. Shareholders’ equity was $1.227bn, down 6.1%.
- Funding and debt: Borrowed funds were $847.5m, down from $891.3m at year-end, primarily following scheduled FHLB advance maturities. Junior subordinated debentures were $103.1m. Savings and checking balances grew while time deposits fell $92.4m.
- Cash flow, first half: Operating cash flow was $73.6m; investing activities provided $26.1m; financing activities used $105.4m. Cash and cash equivalents ended at $713.5m, a $5.6m decrease.
- Credit: The allowance for loan losses was $75.5m, or 1.37% of loans, versus $76.4m, or 1.38%, at year-end. Nonaccrual loans increased to $161.1m, or 2.94% of loans, from $148.4m, or 2.68%. Nonperforming assets rose to $182.5m, or 2.26% of assets, from $169.2m, or 2.08%. First-half net charge-offs were $16.6m versus $11.7m.
- Liquidity and capital: The bank’s liquidity ratio was 24.2%; additional borrowing capacity was $1.6bn at the FHLB, $203m at the Federal Reserve and $80m at correspondent banks. Reported bank capital ratios were 21.37% total capital to risk-weighted assets, 20.15% Tier 1 to risk-weighted assets and 12.67% Tier 1 leverage.
Material changes and management commentary
- Q2 net income fell 7.1% year over year, despite net interest income growth, as higher noninterest expense and lower interest income outweighed reduced funding costs. First-half net income increased 10.1%, driven mainly by higher net interest income and a lower loan-loss provision.
- Lower deposit and borrowing costs lifted first-half net interest income; the reported first-half net interest margin rose to 3.54%. Management attributed loan softness to weak demand and said loan originations were more than offset by repayments. Commercial real estate loans were the only major loan category to grow.
- First-half noninterest income declined partly because the prior-year period included a $2.1m gain on securities sales. Q2 service-charge income was also lower, principally due to reduced overdraft revenue.
- Compensation expense increased, including a $2.8m charge for initial vesting under stock benefit plans associated with the second-step conversion and stock offering; staffing increased by 42 full-time equivalents. The company repurchased 8.4m shares for $102.6m in the first half. Shareholders’ equity also reflected $22.1m of dividends.
- Management said nonperforming loans and charge-offs had increased, while criticized loans declined. It considered economic conditions, unemployment, bankruptcies and collateral values in setting the allowance and cautioned that actual losses may differ from estimates.
- The company reported no formal earnings or financial guidance. Management said results for the first half are not necessarily indicative of full-year results and did not expect a substantial change in the effective tax rate.
Risks, contingencies and unusual items
- Interest-rate changes, weak economic conditions, loan and securities credit deterioration, real-estate collateral values, funding availability, deposit competition and regulatory changes are identified risks. A 2% rate increase was modeled to raise net income 7.2% while reducing market value of equity 18.4%; a 2% decrease was modeled to reduce net income 8.2%. These are simulations based on assumptions, not forecasts.
- The filing highlights exposure to municipalities: $281.7m in municipal securities, $80.1m of municipal loans and $71.0m of unfunded commitments, open lines and letters of credit. Management judged identified municipal-security impairments to be temporary and noncredit-related.
- Seven trust-preferred corporate investments had $19.9m book value and $14.9m fair value; management concluded the unrealized loss was temporary. The company recorded $507,000 of Q2 impairment on two non-agency mortgage securities.
- Standby letters of credit had a maximum potential payment of $61.9m, of which $60.7m was fully collateralized. The company reported ordinary-course claims and litigation but did not expect them to have a material adverse effect.
- After quarter-end, S&P downgraded the U.S. sovereign rating and certain related agency instruments. The filing warned of possible adverse effects on security values, collateralized funding and economic conditions. The holding company regulator changed from the Office of Thrift Supervision to the Federal Reserve on July 21, 2011.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The June 30, 2011 goodwill impairment test found no impairment.
Important facts for investors to verify
- Whether rising nonaccrual loans, nonperforming assets and net charge-offs lead to further provision increases or allowance changes.
- The quality and valuation of municipal, trust-preferred and non-agency mortgage securities, including the effects of the U.S. rating downgrade.
- Whether loan demand, portfolio balances and net interest margin stabilize as asset yields and funding costs change.
- The sustainability of expense levels, including stock-based compensation, compliance costs and staffing, and the impact of continued share repurchases and dividends on capital.
- Regulatory capital and liquidity capacity, and any subsequent effects of the Federal Reserve’s assumption of holding-company oversight.