Northwest Bancshares, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are identified separately. Northwest Bancshares is a community-oriented banking holding company operating Northwest Savings Bank and a consumer-finance subsidiary, primarily in Pennsylvania, New York, Ohio and Maryland.
Key financial results
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total assets at year-end | $7.958 billion | $8.148 billion |
| Net interest income | $267.3 million | $257.6 million |
| Provision for loan losses | $34.2 million | $40.5 million |
| Noninterest income | $58.1 million | $60.4 million |
| Noninterest expense | $200.2 million | $196.5 million |
| Net income | $64.2 million | $57.5 million |
| Diluted EPS | $0.64 | $0.53 |
| Net interest margin (GAAP) | 3.57% | 3.42% |
| Net interest rate spread (GAAP) | 3.29% | 3.09% |
| Efficiency ratio | 61.53% | 61.79% |
| Operating cash flow | $118.7 million | $70.3 million |
- Net income rose 11.5%, supported by higher net interest income and a lower loan-loss provision. Interest income fell 2.8%, but interest expense declined 17.8% as deposit and borrowing costs fell.
- Year-end net loans were $5.480 billion, up 0.4%; gross commercial real estate loans increased 4.1%, while most other loan categories declined. Deposits increased 0.3% to $5.780 billion.
- Cash and cash equivalents ended at $688.3 million, down from $719.1 million. Investing activities provided $111.5 million and financing activities used $261.0 million, including $172.7 million of share repurchases and $43.6 million of dividends.
- Borrowed funds were $827.9 million, down 7.1%; junior subordinated debentures were $103.1 million. Shareholders’ equity was $1.155 billion, down 11.7%, principally reflecting repurchases, dividends and other comprehensive loss.
- The bank reported a 22.1% liquidity ratio and $2.015 billion of additional borrowing capacity across FHLB, Federal Reserve and correspondent-bank facilities. It was classified as well-capitalized: total risk-based capital ratio 19.78%, Tier 1 risk-based ratio 18.52%, and leverage ratio 11.81%.
Material changes and credit quality
- Net interest income increased 3.7% year over year, while net interest margin improved 15 basis points. Lower rates on deposits and borrowings more than offset lower yields on loans and securities.
- Provision expense decreased 15.6%, but net charge-offs increased 14.4% to $39.4 million, or 0.72% of average loans. The allowance declined to $71.1 million, 1.30% of net loans, from $76.4 million.
- Total loans 30 or more days delinquent fell to $174.9 million from $201.7 million, and nonperforming loans to net loans improved to 2.39% from 2.72%. However, loans 90 days or more delinquent were $95.8 million, versus $100.4 million, and real estate owned increased to $26.9 million from $20.8 million. Troubled debt restructurings rose to $69.4 million from $52.6 million.
- Noninterest income declined 3.7%, including lower deposit fees and mortgage banking income; insurance commissions and trust/financial-services income increased. Compensation and benefits and professional-services costs increased.
- The company repurchased 14.44 million shares for $172.7 million during 2011. It closed three Florida banking offices effective June 30, 2011.
Outlook, risks and unusual items
- Management described loan demand as weak for much of 2011, with increased demand in the fourth quarter. The filing provides no specific earnings or growth guidance. Management cited expectations for weak economic conditions to continue through 2012 and Federal Reserve indications that rates would remain low through at least late 2014.
- On July 20, 2011, the company agreed to an FDIC Consent Order concerning compliance programs. It requires, among other actions, enhanced consumer-compliance systems, monitoring, training, audits and reporting; restitution of up to $375,000; and a $325,000 civil money penalty. Management said expansion approvals could be difficult until the FDIC is satisfied with compliance.
- Key exposures include a real-estate-concentrated loan book (76% of loans secured by Pennsylvania properties), commercial real estate and business credit risk, continuing economic weakness, and sensitivity to interest rates. A modeled immediate 200-basis-point rate increase reduced market value of equity by 14.7%; a 200-basis-point decrease reduced modeled net income by 16.4%.
- The securities portfolio recorded $937,000 of credit-related other-than-temporary impairment in earnings during 2011. Corporate debt securities had $4.6 million of unrealized losses; management considered identified unrealized losses temporary, but further deterioration could cause additional impairment.
- A $52.2 million penalty from the 2010 restructuring of $695 million of FHLB advances remains partly unamortized: $43.0 million at year-end 2011, to be expensed over the borrowings’ remaining lives. Pension funded status also weakened, with a $26.8 million deficit versus $17.9 million in 2010.
- Fourth-quarter 2011 net income was $15.2 million, or $0.16 per diluted share, compared with $12.7 million, or $0.12, in fourth-quarter 2010. It was below third-quarter 2011 net income of $16.7 million.
Most important facts for investors to verify
- Progress, remaining requirements, and potential business restrictions under the FDIC Consent Order; confirm payment of the penalty and restitution.
- Whether delinquency, nonperforming loans, TDRs, charge-offs and real estate owned continue to improve, and whether the allowance remains adequate.
- Credit quality and valuation of commercial real estate exposures, municipal obligations, trust-preferred securities and non-agency mortgage securities.
- Effects of persistently low or changing interest rates on net interest income, deposit costs and securities values.
- Liquidity and capital after substantial share repurchases and dividends, including the bank’s capital distributions to the holding company.
- How the $43.0 million unamortized FHLB restructuring penalty and the pension funding deficit affect future expense and cash requirements.