Northwest Bancshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; balance-sheet comparisons are to December 31, 2012. Unaudited. Northwest is a savings and loan holding company operating Northwest Savings Bank, with 166 community-banking offices across Pennsylvania, western New York, eastern Ohio and Maryland, and a consumer-finance business with 52 Pennsylvania offices.
Financial performance and condition
Unless otherwise noted, amounts are in millions. Quarter comparisons are with Q2 2012; six-month comparisons are with the first half of 2012.
| Metric | Q2 2013 | Six months 2013 | Change versus prior comparable period |
|---|---|---|---|
| Interest income | $78.8 | $158.4 | Down 7.1% and 7.3%, respectively |
| Net interest income | $63.3 | $127.3 | Down 3.6% and 2.7% |
| Noninterest income | $13.4 | $29.8 | Down 11.1% for the quarter; up 2.9% for six months |
| Provision for loan losses | $5.4 | $12.6 | Up 8.9% and 11.7% |
| Noninterest expense | $52.8 | $104.3 | Up 1.6% and 1.0% |
| Net income | $13.5 | $28.8 | Down 17.6% and 8.8% |
| Diluted earnings per share | $0.15 | $0.32 | Versus $0.17 and $0.33 |
| Net interest margin, GAAP | 3.40% | 3.46% | Versus 3.54% for both comparable periods |
Q2 return on average assets was 0.68% and return on average equity 4.79%, compared with 0.82% and 5.63%, respectively, a year earlier. For the first half, those returns were 0.73% and 5.12%, versus 0.79% and 5.44%.
- Balance sheet: Total assets were $7.964 billion, up 0.3% from year-end. Net loans were $5.619 billion, down 0.2%; total deposits were $5.783 billion, up 0.3%; shareholders’ equity was $1.128 billion, essentially unchanged.
- Funding and debt: Borrowed funds were $857.3 million, down $2.7 million from year-end; junior subordinated debentures were $103.1 million. The company obtained $30 million of FHLB funding during the half, with an average maturity of 8.5 years and an average rate of about 2.00%.
- Liquidity: Cash and cash equivalents were $448.2 million at June 30, down $3.5 million during the half. The bank’s liquidity ratio was 14.7%. Additional stated borrowing capacity was $1.805 billion at the FHLB, $200.1 million at the Federal Reserve and $80 million with correspondent banks.
- Cash flow, first half: Operating activities provided $78.0 million; investing activities used $83.7 million; financing activities provided $2.2 million. Cash and cash equivalents ended at $448.2 million, versus $721.9 million at June 30, 2012.
- Capital: Northwest Savings Bank reported total risk-based capital of 17.90%, Tier 1 risk-based capital of 16.64% and Tier 1 leverage of 10.83% at June 30, above the filing’s “well-capitalized” benchmarks of 10%, 6% and 5%, respectively.
Material changes and management commentary
- Lower asset yields—especially on loans and mortgage-backed securities—outpaced the benefit from lower funding costs, compressing margins. Q2 average yield on interest-earning assets fell to 4.23% from 4.57%; the average cost of interest-bearing liabilities declined to 1.04% from 1.27%.
- Management attributed weaker quarterly earnings mainly to lower net interest income and noninterest income, a higher loan-loss provision and higher expenses. Lower income-tax expense partially offset these pressures. The first-half decline also reflected lower net interest income, higher provision and expenses, partly offset by stronger noninterest income and lower taxes.
- Deposit balances shifted toward demand and savings accounts: time deposits fell $123.7 million from year-end, while noninterest-bearing demand, interest-bearing demand and savings balances increased. Management said customers appeared reluctant to lock in time-deposit rates and were positioning for potentially higher rates.
- Business Banking loans rose 0.7% from year-end, while Personal Banking loans declined 0.7%. Management cited mortgage sales and sluggish consumer demand, including the effect of higher long-term rates.
- Available-for-sale securities increased to $1.145 billion from $1.079 billion at year-end. Gross unrealized losses on that portfolio rose to $18.6 million from $4.3 million; the filing reports a $11.5 million Q2 after-tax unrealized securities loss in other comprehensive income. Management characterized specified securities impairments as noncredit-related and stated it did not expect to sell those securities before recovery.
- Nonperforming loans were $120.6 million, or 2.12% of loans, versus $120.2 million at year-end. Loans 90 or more days past due declined to $63.5 million from $70.0 million, and real estate owned declined to $21.3 million from $26.2 million. The allowance for loan losses was $72.6 million, or 1.28% of loans, versus $73.2 million, also 1.28%, at year-end. First-half net charge-offs were $13.2 million versus $12.3 million.
- Provision increases reflected higher historical loss factors, TDR levels and certain commercial real estate loan downgrades; management also cited lower classified loans as an offset. Total troubled debt restructurings were $86.5 million, including $42.0 million on nonaccrual.
- Noninterest income in Q2 was pressured by a $2.3 million net loss on real estate owned, including a decline in the appraised value of the largest REO property, and lower mortgage banking income. First-half insurance commission growth reflected the December 2012 acquisition of The Bert Company. Processing costs rose in part from ATM-network upgrades.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management anticipated an effective tax rate of approximately 29% for the year; it did not expect the rate to change significantly during the year.
- The Board declared a regular dividend of $0.13 per share payable August 15, 2013. Q2 dividends were $0.24 per share, including a special dividend; the quarterly payout ratio was 160.0%. The company repurchased 368,800 shares during the quarter at an average $12.09 per share.
- The filing describes Basel III capital rules finalized in July 2013, with Northwest implementation beginning January 1, 2015 and a capital-conservation buffer phased in through 2019. The rules may affect capital calculations, distributions and discretionary compensation.
- Interest-rate sensitivity modeling projected net income changes over 12 months of +2.8%, +7.0% and +6.7% for upward nonparallel shifts of 100, 200 and 300 basis points, respectively, and −7.9% for a 100-basis-point decline. Management cautioned that the model depends on uncertain assumptions and actual results could differ.
- Legal proceedings included an accrued $2.2 million for legal matters. The Daly case was dismissed with prejudice on July 19, 2013. Potential losses in several other cases could not be estimated; management did not anticipate a material adverse effect on financial position or cash flows, but could not determine effects on future quarterly results.
- Other risks include credit quality and collateral values, competition, economic and regulatory changes, securities-market and interest-rate movements, and the ability to maintain loan growth and margins. Management reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material changes to the risk factors in its 2012 Form 10-K.
Important facts for investors to verify
- Whether net interest margin and earnings stabilize as assets reprice and time deposits mature, and how future rate movements affect funding costs and securities values.
- Trends in nonperforming loans, TDRs, classified commercial exposures, charge-offs and allowance adequacy, particularly given higher first-half net charge-offs.
- The drivers, valuation and duration of unrealized securities losses, including management’s ability and intent to hold affected securities until recovery.
- Liquidity and capital headroom under the Basel III rules, including the effect of accumulated other comprehensive losses on regulatory capital.
- Whether dividends and repurchases remain supported by recurring earnings; Q2’s payout ratio exceeded quarterly net income because of the special dividend.
- Updates on the remaining legal proceedings, accrued litigation costs and any subsequent developments after the June 30 reporting date.