Northwest Bancshares, Inc. quarterly report, Q3 FY2011

Northwest Bancshares, Inc. — Form 10-Q Summary

Business context and reporting period

Quarter ended September 30, 2011; comparative income and cash-flow results cover the three and nine months ended September 30, 2011 and 2010. Northwest Bancshares is a savings and loan holding company operating Northwest Savings Bank, with 169 community-banking offices and a consumer-finance business with 52 offices. Financial amounts below are in millions unless otherwise stated.

Financial performance

MetricQ3 2011Q3 2010Nine months 2011Nine months 2010
Net interest income$67.0$66.7$200.7$190.4
Provision for loan losses$8.1$9.9$23.7$26.6
Noninterest income$14.5$13.8$44.1$45.2
Noninterest expense$49.9$49.0$151.8$145.8
Net income$16.7$15.5$49.0$44.8
Diluted earnings per share$0.17$0.14$0.48$0.41
Net interest margin (GAAP)3.59%3.52%3.56%3.37%

Quarterly net income rose 7.9%; nine-month net income rose 9.4%. Management attributed the nine-month improvement mainly to higher net interest income and lower loan-loss provision. Lower funding costs and a shift toward lower-cost deposits supported margin expansion. Quarterly return on average assets/equity was 0.83%/5.62%; nine-month figures were 0.81%/5.25%.

Financial position, cash flow and liquidity

  • At September 30, total assets were $7.989 billion, down 1.9% from year-end 2010. Gross loans were $5.518 billion, down 0.3%; commercial real estate loans grew 5.2% to $1.421 billion, while personal banking loans and commercial loans declined.
  • Deposits were $5.813 billion, up 0.8% from year-end. Noninterest demand, interest-bearing demand and savings deposits increased; time deposits fell 5.1% to $2.331 billion. Borrowed funds declined 7.0% to $828.7 million, principally following scheduled FHLB advance maturities.
  • Shareholders’ equity was $1.167 billion, down $140.7 million from year-end, reflecting $170.7 million of share repurchases and $33.2 million of dividends, partly offset by $49.0 million of net income. The company repurchased 14.3 million shares during the first nine months.
  • Nine-month operating cash flow was $112.8 million, versus $26.1 million in 2010; investing activities provided $66.7 million versus $523.0 million used; financing activities used $227.6 million versus $64.9 million provided. Cash and cash equivalents decreased $48.1 million to $671.0 million.
  • The bank reported a 23.1% liquidity ratio and additional borrowing capacity of $1.672 billion at the FHLB, $205.4 million at the Federal Reserve and $80.0 million with correspondent banks. Bank regulatory capital ratios were well above stated “well capitalized” thresholds: total risk-based 22.31%, Tier 1 risk-based 21.06%, and Tier 1 leverage 13.24%.

Material changes, risks and unusual items

  • Credit quality weakened on key measures: nonaccrual loans increased to $161.4 million, or 2.92% of loans, from $148.4 million, or 2.68%, at year-end; nonperforming assets rose to $182.0 million, or 2.28% of assets. Total delinquent loans were $157.7 million, down from $201.7 million at year-end, while nonaccrual loans increased.
  • The allowance for loan losses fell to $73.2 million, or 1.33% of loans, from $76.4 million, or 1.38%. Nine-month net charge-offs increased to $26.9 million from $19.7 million; annualized net charge-offs rose to 0.65% from 0.48%. Management cited reserve releases on certain commercial loans and lower personal-loan balances, while acknowledging higher charge-offs and nonperforming loans.
  • Q3 noninterest income included $1.9 million of bank-owned life insurance income, partly driven by two death-benefit claims. Nine-month BOLI income rose to $4.8 million, including benefits from three policies. Service-charge income declined amid lower overdraft revenue and refunds of incorrectly charged fees; expense included accruals for potential customer refunds.
  • Investment securities had $6.8 million of gross unrealized losses at quarter-end, versus $23.9 million at year-end 2010. Management judged identified impairments temporary; corporate trust-preferred and non-agency mortgage securities remain areas to monitor. The filing recorded $0.5 million of nine-month securities impairment losses.
  • Newly highlighted risks include the company’s municipal exposure: $264.7 million in municipal bonds, $88.7 million in municipal loans, and $68.7 million in related unfunded commitments, lines and letters of credit. The filing also discusses uncertainty following U.S. sovereign and related agency rating downgrades, including possible valuation and funding effects.
  • Management gave no specific earnings or growth guidance. It cautioned that results are not necessarily indicative of full-year results. Interest-rate simulations estimated net income up 9.1% under a 2% rate increase and down 10.4% under a 2% decrease over 12 months; these are model estimates dependent on assumptions. The company declared a $0.11-per-share dividend payable November 17, 2011.
  • Standby letters of credit had a maximum potential payment of $64.4 million, of which $63.3 million was collateralized. Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material internal-control changes reported.

Most important facts for investors to verify

  • Whether rising nonaccrual loans, nonperforming assets and charge-offs are consistent with the allowance level and management’s reserve assumptions.
  • The credit quality and valuation of municipal, corporate trust-preferred and non-agency mortgage securities, including any subsequent deterioration or impairment.
  • Whether deposit-mix changes and lower funding costs can continue to offset declining asset yields and modest loan demand.
  • The effect of the substantial share repurchases on capital, liquidity, per-share results and the sustainability of the dividend.
  • Potential customer fee refunds, municipal commitments, contingent letter-of-credit exposure and any developments in litigation or regulatory requirements.