Northwest Bancshares, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Northwest is a savings and loan holding company operating through Northwest Savings Bank and a consumer-finance subsidiary, with 172 community-banking offices and 52 consumer-finance offices.
Financial performance and position
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q1 2011 / March 31, 2011 | Comparable / prior date |
|---|---|---|
| Net interest income | $67.0 | $60.0 in Q1 2010; up 11.7% |
| Noninterest income | $14.3 | $15.9 in Q1 2010; down 9.7% |
| Net interest income plus noninterest income | $81.4 | $75.9 in Q1 2010 |
| Net income / diluted EPS | $17.3 / $0.16 | $13.2 / $0.12 in Q1 2010; net income up 31.2% |
| Net interest margin / spread | 3.56% / 3.24% (GAAP) | 3.22% / 2.87% in Q1 2010 |
| Return on average assets / equity | 0.86% / 5.39% | 0.65% / 4.05% in Q1 2010 |
| Total assets | $8,122 | $8,148 at Dec. 31, 2010 |
| Total loans / allowance for loan losses | $5,487 / $76.5 | $5,534 / $76.4 at Dec. 31, 2010 |
| Deposits / borrowed funds | $5,821 / $832 | $5,764 / $891 at Dec. 31, 2010 |
| Shareholders’ equity | $1,287 | $1,307 at Dec. 31, 2010 |
- Income drivers: Interest income was nearly unchanged at $91.1 million, while interest expense declined 22.7% to $24.1 million as the average cost of interest-bearing liabilities fell to 1.59% from 2.05%. Provision for loan losses declined to $7.2 million from $8.8 million.
- Expenses and taxes: Noninterest expense rose 1.6% to $49.4 million. Income tax expense was $7.5 million; the effective tax rate was 30.3%, compared with 28.8%.
- Cash flow: Operating activities provided $42.3 million, investing activities provided $49.9 million, and financing activities used $41.6 million. Cash and cash equivalents increased $50.5 million to $769.7 million.
- Liquidity and capital: The bank’s liquidity ratio was 24.7%. Additional borrowing capacity was reported at $2.0 billion with the FHLB, $176.8 million with the Federal Reserve, and $80.0 million with correspondent banks. Northwest reported total capital of 21.45% of risk-weighted assets, Tier I capital of 20.20%, and a Tier I leverage ratio of 12.41%, above stated “well-capitalized” thresholds.
- Dividends and repurchases: Dividends paid were $10.7 million, or $0.10 per share. The board declared a subsequent $0.11-per-share dividend. The company repurchased 2.62 million shares in Q1 for $31.1 million, averaging $12.04 per share.
Material changes and asset quality
- Total assets declined 0.3% from year-end; loans fell 0.9%, while cash and investments increased 1.9%. Commercial real estate loans grew 1.4%; other major loan categories declined. Management attributed softer loan growth to weaker demand and noted $23.2 million of residential mortgage loan sales.
- Deposits increased 1.0%, led by savings and demand deposits; time deposits decreased 2.4%. Management said customers continued to favor more liquid deposits. Borrowed funds decreased 6.7%, mainly after scheduled FHLB advance maturities.
- Nonaccrual loans increased to $156.2 million, or 2.85% of loans, from $148.4 million, or 2.68%, at year-end. Total nonperforming assets rose to $175.8 million, or 2.16% of assets, from $169.2 million, or 2.08%.
- Allowance for loan losses was $76.5 million, or 1.39% of loans. Annualized net charge-offs increased to 0.52% of average loans from 0.33% in Q1 2010. Management cited unemployment, bankruptcies, falling real-estate collateral values, and negative asset-quality trends, while also noting lower classified assets and recoveries/payments on certain loans.
- Noninterest income fell primarily because Q1 2010 included a $2.1 million gain on securities sales; no comparable gain occurred in Q1 2011. There were no securities impairment losses recognized in Q1 2011, versus net impairment losses of $97,000 in Q1 2010.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it did not expect the effective tax rate to change substantially during 2011 and cautioned that quarterly results are not necessarily indicative of full-year results.
- The company planned to close its three southern Florida offices on June 30, 2011. Management also described marketing campaigns to grow checking accounts and home-equity lending.
- Interest-rate sensitivity modeling projected net income changes over 12 months of +6.9% and +11.1% for rate increases of 1% and 2%, and -4.0% and -10.9% for corresponding decreases. These are model estimates based on assumptions, not forecasts.
- Newly highlighted risk: municipal exposure. At March 31, 2011, the company held $284.3 million of municipal securities, had $78.9 million of municipal loans, and $86.1 million of unfunded municipal commitments and lines. The filing warned that stress or defaults among state and local governments could affect earnings, financial condition, or liquidity.
- Investment securities included $20.0 million book value of corporate trust-preferred investments with fair value of $13.5 million and $7.4 million book value of municipal securities with fair value of $6.6 million, both in loss positions for over 12 months. Management judged the impairments temporary. Nonagency mortgage-backed securities also had unrealized losses; management reported no current-period impairment charge.
- Standby letters of credit had a maximum potential payment of $59.9 million, of which $58.8 million was fully collateralized. The company reported ordinary-course asserted and unasserted claims and did not expect aggregate liability, if any, to have a material adverse effect.
- Other relevant items: $103.1 million of junior subordinated debentures; the company may defer interest for periods up to five years, with distributions on related trust preferred securities also deferred. Interest-rate swaps had a $8.0 million fair-value liability and matching collateral posted. No unrecognized tax-benefit liability or accrued tax interest/penalties was reported.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and nonperforming assets continues, particularly in commercial real estate and commercial loans, and whether the allowance remains adequate.
- Whether deposit growth, lower funding costs, and net interest margin gains can persist as interest rates and customer deposit preferences change.
- The credit quality and valuation of municipal securities and trust-preferred investments, including the assumptions supporting management’s conclusion that prolonged unrealized losses are temporary.
- Actual credit losses, liquidity needs, and capital effects compared with management’s estimates and interest-rate sensitivity models.
- The financial and operational effects of the planned Florida office closures, share repurchases, and the declared dividend.