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NWBI > SEC Filings for NWBI > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for NORTHWEST BANCSHARES, INC.

Form 10-Q for NORTHWEST BANCSHARES, INC.


5-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements:

In addition to historical information, this document may contain certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, as they reflect management's analysis only as of the date of this report. We have no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Important factors that might cause such a difference include, but are not limited to:

Changes in interest rates which could impact our net interest margin;

Adverse changes in our loan portfolio or investment securities portfolio and the resulting credit risk-related losses and/ or market value adjustments;

The impact of the uncertain economic environment on our loan portfolio (including cash flow and collateral values), investment portfolio, customers, demand for credit and capital market activities;

Possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;

Our ability to continue to increase and manage our commercial and residential real estate, multifamily and commercial and industrial loans;

          The adequacy of the allowance for loan losses;

          Changes in the financial performance and/ or condition of our
borrowers;

          Changes in consumer confidence, spending and savings habits relative
to the bank and non-bank financial services we provide;

          Compliance with laws and regulatory requirements of federal and state
agencies;

          New legislation affecting the financial services industry;

          The impact of the current governmental effort to restructure the U.S.
financial and regulatory system;

          The level of future deposit premium assessments;

          Competition from other financial institutions in originating loans
and attracting deposits;

          The effect of changes in accounting policies and practices, as may be

adopted by the regulatory agencies, as well as the SEC, Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standards setters;

          Our ability to effectively implement technology driven products and
services;

          Sources of liquidity; and

          Our success in managing the risks involved in the foregoing.

Overview of Critical Accounting Policies Involving Estimates

Critical accounting policies involve accounting estimates that: a) require assumptions about highly uncertain matters, and b) could vary sufficiently enough to have a material effect on our financial condition and/ or results of operations.

Allowance for Loan Losses. Provisions for estimated loan losses and the amount of the allowance for loan losses are based on losses inherent in the loan portfolio that are both probable and reasonably estimable as of the date of the financial statements. Management believes, to the best of their knowledge, that all known losses as of the statement of condition dates have been recorded.


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For all classes of loans, management considers a loan to be impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the loan agreement. In evaluating whether a loan is impaired, management considers not only the amount that we expect to collect but also the timing of collection. Generally, if a delay in payment is insignificant (e.g., less than 30 days), a loan is not deemed to be impaired.

When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's market price, or fair value of the collateral, less cost to sell, if the loan is collateral dependent. Business banking loans greater than or equal to $1.0 million are evaluated individually for impairment. Smaller balance, homogeneous loans (e.g., primarily consumer and residential mortgages) are evaluated collectively for impairment. Impairment losses are included in the allowance for loan losses. Impaired loans are charged-off or charged down when we believe that the ultimate collectability of a loan is not likely or the collateral value no longer supports the carrying value of the loan.

Interest income on impaired loans is recognized using the cash basis method. For impaired loans interest collected is credited to income in the period of recovery or applied to reduce principal if there is sufficient doubt about the collectability of principal.

The allowance for loan losses is shown as a valuation allowance to loans. The accounting policy for the determination of the adequacy of the allowance by portfolio segment requires us to make numerous complex and subjective estimates and assumptions relating to amounts which are inherently uncertain. The allowance for loan losses is maintained to absorb losses inherent in the loan portfolio as of the statement of condition dates based on our judgment. The methodology used to determine the allowance for loan losses is designed to provide procedural discipline in assessing the appropriateness of the allowance for loan losses. Losses are charged against the allowance for loan losses and recoveries are added to the allowance for loan losses.

The allowance for loan losses for all classes of Business Banking loans consists of three elements:

                      An allowance for impaired loans;

                      An allowance for homogenous loans based on historical
losses; and

                      An allowance for homogenous loans based on judgmental
factors.

The first element, impaired loans, is based on individual analysis of all nonperforming loans greater than or equal to $1.0 million. The allowance is measured by the difference between the recorded value of impaired loans and their impaired value. Impaired value is either the present value of the expected future cash flows from the borrower, the market value of the loan, or the fair value of the collateral, less cost to sell if the loan is collateral dependent.

The second element is a rolling three-year average of actual losses incurred, adjusted for a loss realization period (the period of time from the event of loss to loss realization), applied to homogenous pools of loans categorized by similar risk characteristics.

The third element augments the historical loss factors for changes in economic conditions, lending policies and procedures, the nature and volume of the loan portfolio, management, delinquency trends, loan administration, underlying collateral and concentrations of credit.

The allowance for loan losses for all classes of Personal Banking loans consists of three elements:


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                      An allowance for loans 90 days or more delinquent;

                      An allowance for homogenous loans based on historical
losses; and

                      An allowance for homogenous loans based on judgmental
factors.

The first element, loans 90 days or more delinquent is based on the loss history of loans that have become 90 days or more delinquent. We apply a historical loss factor for loans that have been 90 days or more delinquent.

The second element is a rolling three-year average of actual losses incurred, adjusted for a loss realization period (the period of time from the event of loss to loss realization), applied to homogenous pools of loans categorized by similar risk characteristics.

The third element augments the historical loss factors for changes in economic conditions, lending policies and procedures, the nature and volume of the loan portfolio, management, delinquency trends, loan administration, underlying collateral and concentrations of credit.

We also have an unallocated allowance which is based on our judgment regarding economic conditions, collateral values, specific loans and industry conditions as well as results of bank regulatory and internal credit exams.

The allocation of the allowance for loan losses is inherently judgmental, and the entire allowance for loan losses is available to absorb loan losses regardless of the nature of the loss.

We have not made any significant changes to our methodology for the calculation of the allowance for loan losses during the current year.

Personal Banking loans are charged-off or charged down when they become no more than 180 days delinquent, unless the borrower has filed for bankruptcy. Business Banking loans are charged-off or charged down when, in our opinion, they are no longer collectible, for commercial loans, or when it has been determined that the collateral value no longer supports the carrying value of the loan, for commercial real estate loans.

Valuation of Investment Securities. Unrealized gains or losses, net of deferred taxes, on available for sale securities are reported as a separate component of shareholders' equity and on the statement of comprehensive income. In general, fair value is based upon quoted market prices of identical assets, when available. If quoted market prices are not available, fair value is based upon valuation models that use cash flow, security structure and other observable information. Where sufficient data is not available to produce a fair valuation of a specific security, fair value is based on broker quotes for similar assets. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include unobservable parameters, among other things. Semi-annually (as of May 31 and November 30) we receive quoted market prices from a second independent pricing service.

We conduct a quarterly review and evaluation of our investment securities to determine if any declines in fair value are other than temporary. In making this determination, we consider the period of time the securities were in a loss position, the percentage decline in comparison to the securities' amortized cost, the financial condition of the issuer, if applicable, and the delinquency or default rates of underlying collateral. In addition, we consider our intent to sell the investment securities currently in an unrealized loss position and whether it is more likely than not that we will be required to sell the security before recovery of its cost basis. Any valuation decline that we determine to be other than temporary


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would require us to write down the security to fair value through a charge to earnings for the credit loss component.

Goodwill. Goodwill is not subject to amortization but must be evaluated for impairment at least annually and possibly more frequently if certain events or changes in circumstances arise that could negatively affect its value. Under a quantitative approach, impairment testing requires that the fair value of each reporting unit be compared to its carrying amount, including goodwill. Reporting units are identified based upon analyzing each of our individual operating segments. A reporting unit is defined as any distinct, separately identifiable component of an operating segment for which complete, discrete financial information is available that management regularly reviews. Determining the fair value of a reporting unit requires a high degree of subjective management judgment. We have established June 30th of each year as the date for conducting the annual goodwill impairment assessment. As of June 30, 2012, through the assistance of an external third party, we performed an impairment test on goodwill. We valued each reporting unit by using a weighted average of four valuation methodologies; comparable transaction approach, control premium approach, public market peers approach and discounted cash flow approach. Declines in fair value could result in impairment being identified. At June 30, 2012, we did not identify any individual reporting units where the fair value was less than the carrying value. No events or material changes have occurred since that date that would require an updated evaluation. Future changes in the economic environment or the operations of the operating units could cause changes to the variables used, which could give rise to declines in the estimated fair value of the reporting units.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates made in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance which could result in increased income tax expense, and could negatively affect earnings.

Other Intangible Assets. Using the purchase method of accounting for acquisitions, we are required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair values. These fair values often involve estimates based on third party valuations, including appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, which are inherently subjective. Core deposit and other intangible assets are recorded in purchase accounting. Intangible assets, which are determined to have finite lives, are amortized based on the period of estimated economic benefits received, primarily on an accelerated basis. If it is subsequently determined that the period of economic benefit has decreased or no longer exists, accelerated amortization or impairment may occur.


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Executive Summary and Comparison of Financial Condition

Total assets at September 30, 2012 were $8.048 billion, an increase of $90.0 million, or 1.1%, from $7.958 billion at December 31, 2011. This increase in assets was due to an increase in loans receivable of $177.1 million, which was partially offset by decreases in total cash, interest-earning deposits and marketable securities of $70.3 million and other assets of $23.6 million. The net increase in total assets primarily resulted from a net increase in funding sources as deposits and borrowed funds increased by $44.4 million and $27.6 million, respectively, and shareholder's equity grew by $19.7 million primarily driven by earnings.

Loans receivable increased by $177.1 million, or 3.2%, to $5.729 billion at September 30, 2012, from $5.552 billion at December 31, 2011. Loan demand was strong during the nine months ended September 30, 2012, with originations of $1.749 billion. Due to our continued efforts to expand business banking relationships, our business banking loan portfolio increased by $144.1 million, or 7.9%, to $1.968 billion at September 30, 2012 from $1.824 billion at December 31, 2011. Commercial real estate loans and commercial loans increased during the first nine months of the year by $125.2 million, or 8.7%, and $18.9 million, or 4.9%, respectively. Our personal banking loan portfolio increased by $33.0 million, or 0.9%, to $3.761 billion at September 30, 2012 from $3.728 billion at December 31, 2011. With consumers taking advantage of continued low interest rates on loans secured by residential properties, mortgage loans increased by $26.9 million, or 1.1%, and home equity loans increased by $16.1 million, or 1.5%. These increases were partially offset by a decrease in consumer loans of $10.0 million, or 4.1%.

Total deposits increased by $44.4 million, or 0.8%, to $5.825 billion at September 30, 2012 from $5.780 billion at December 31, 2011. Deposit balances increased across all product types with the exception of time deposits. Noninterest-bearing demand deposits increased by $105.2 million, or 16.0%, to $763.8 million at September 30, 2012 from $658.6 million at December 31, 2011. Interest-bearing demand deposits increased by $41.7 million, or 5.2%, to $842.4 million at September 30, 2012 from $800.7 million at December 31, 2011. Savings deposits, including insured money fund accounts, increased by $220.3 million, or 10.8%, to $2.257 billion at September 30, 2012 from $2.036 billion at December 31, 2011. Time deposits decreased by $322.8 million, or 14.1%, to $1.962 billion at September 30, 2012 from $2.285 billion at December 31, 2011. We believe this continued movement of funds from time deposits to other deposit products reflects depositors' concerns about the current economic environment and their desire to retain liquidity and flexibility for the possibility of a future increase in market interest rates.

Borrowed funds increased by $27.7 million, or 3.3%, to $855.6 million at September 30, 2012, from $827.9 million at December 31, 2011 due to an increase in corporate sweep repurchase agreements. None of our FHLB advances matured during the quarter and the next scheduled maturity is in 2015.

Total shareholders' equity at September 30, 2012 was $1.175 billion, or $12.00 per share, an increase of $19.7 million, or 1.7%, from $1.155 billion, or $11.85 per share, at December 31, 2011. This increase was primarily attributable to net income of $47.2 million and other comprehensive income of $3.6 million, which was partially offset by cash dividends paid of $34.3 million and the repurchase of common stock of $2.2 million.


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Financial institutions and their holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on a company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments made by the regulators about components, risk-weighting and other factors.

Quantitative measures, established by regulation to ensure capital adequacy, require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Capital ratios are presented in the tables below. Dollar amounts in the accompanying tables are in thousands.

                             At September 30, 2012



                                                            Minimum capital       Well capitalized
                                         Actual             requirements *         requirements *
                                    Amount       Ratio     Amount      Ratio     Amount       Ratio
Total capital (to risk weighted
assts)
Northwest Bancshares, Inc.        $ 1,177,648     22.91 %         -         -           -          -
Northwest Savings Bank              1,038,223     20.30 %   409,161      8.00 %   511,451      10.00 %

Tier I capital (to risk
weighted assets)
Northwest Bancshares, Inc.          1,110,124     21.59 %         -         -           -          -
Northwest Savings Bank                973,909     19.04 %   204,580      4.00 %   306,870       6.00 %

Tier I capital (leverage) (to
average assets)
Northwest Bancshares, Inc.          1,110,124     14.04 %         -         -           -          -
Northwest Savings Bank                973,909     12.36 %   315,250      4.00 %   394,063       5.00 %

                              At December 31, 2011



                                                            Minimum capital       Well capitalized
                                         Actual             requirements *         requirements *
                                    Amount       Ratio     Amount      Ratio     Amount       Ratio
Total capital (to risk weighted
assts)
Northwest Bancshares, Inc.        $ 1,155,490     23.14 %         -         -           -          -
Northwest Savings Bank                982,156     19.78 %   397,302      8.00 %   496,627      10.00 %

Tier I capital (to risk
weighted assets)
Northwest Bancshares, Inc.          1,092,787     21.88 %         -         -           -          -
Northwest Savings Bank                919,807     18.52 %   198,651      4.00 %   297,976       6.00 %

Tier I capital (leverage) (to
average assets)
Northwest Bancshares, Inc.          1,092,787     13.98 %         -         -           -          -
Northwest Savings Bank                919,807     11.81 %   311,431      4.00 %   389,288       5.00 %



* Currently the Federal Reserve does not have capital requirements established for Savings and Loan holding companies.

We are required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking during their regular examinations. Northwest monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings ("liquidity ratio"). Northwest's


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liquidity ratio at September 30, 2012 was 16.4%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. As of September 30, 2012 Northwest had $1.918 billion of additional borrowing capacity available with the FHLB, including $150.0 million on an overnight line of credit, as well as $194.0 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.

We paid $11.5 million and $11.1 million in cash dividends during the quarters ended September 30, 2012 and 2011, respectively, and $34.3 million and $33.2 million during the nine months ended September 30, 2012 and 2011, respectively. Dividends paid for the quarter ended and nine months ended September 30, 2012 increased compared to the same periods in the prior year due to an increase in dividends per share of $0.01 and $0.04, respectively. This increase was partially offset by the large number of shares of common stock that were repurchased and retired during 2011. The common stock dividend payout ratio (dividends declared per share divided by net income per share) was 70.1% and 64.7% on dividends of $0.12 and $0.11 for the quarters ended September 30, 2012 and 2011, respectively. The common stock dividend payout ratio for the nine month periods ended September 30, 2012 and 2011 was 72.0% and 66.7%, respectively, on dividends of $0.36 and $0.32 per share, respectively. The Board of Directors declared a cash dividend of $0.12 per share payable on November 15, 2012 to shareholders of record as of November 1, 2012. This represents the 72nd consecutive quarter we have paid a cash dividend. On October 19, 2012 Northwest paid a dividend of $175.0 million to the Company as part of our on-going capital management strategy.

Nonperforming Assets

The following table sets forth information with respect to our nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Loans are automatically placed on nonaccrual status when they are 90 days or more contractually delinquent and may also be placed on nonaccrual status even if not 90 days or more delinquent but other conditions exist. Other nonperforming assets represent property acquired by the Company through foreclosure or repossession. Foreclosed property is carried at the lower of its fair value less estimated costs to sell, or the principal balance of the related loan.

                                                     September 30, 2012     December 31, 2011
                                                             (Dollars in thousands)
Loans accounted for on a nonaccrual basis
Personal Banking:
Residential mortgage loans                          $             24,476               28,221
Home equity loans                                                  9,365                9,560
Other consumer loans                                               1,494                2,667
Total Personal Banking                                            35,335               40,448
Business Banking:
Commercial real estate loans                                      61,632               62,494
Commercial loans                                                  23,805               28,163
Total Business Banking                                            85,437               90,657
Total nonaccrual loans                                           120,772              131,105

Total nonaccrual loans as a percentage of total
loans                                                               2.11 %               2.36 %
Total real estate acquired through foreclosure
and other real estate owned ("REO")                               29,291               26,887
Total nonperforming assets                          $            150,063              157,992
Total nonperforming assets as a percentage of
total assets                                                        1.86 %               1.99 %


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A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement including both . . .

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