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NWBI > SEC Filings for NWBI > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for NORTHWEST BANCSHARES, INC.

Form 10-Q for NORTHWEST BANCSHARES, INC.


9-May-2014

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 laws, government regulations or policies affecting financial institutions, including regulatory fees and capital requirements;

general economic conditions, either nationally or in our market areas, that are worse than expected;

                      competition among depository and other financial
institutions;

                      inflation and changes in the interest rate environment
that reduce our margins or reduce the fair value of financial instruments;

                      adverse changes in the securities markets;

                      our ability to enter new markets successfully, capitalize
on growth opportunities and our ability to successfully integrate acquired
entities, if any;

                      changes in consumer spending, borrowing and savings
habits;

                      our ability to continue to increase and manage our

business and personal loans;

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

the impact of the economy on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;

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

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

                      the effect of changes in accounting policies and

practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

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 can be reasonably estimated at the date of the financial statements.

For all classes of loans, we consider a loan to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. In evaluating whether a loan is impaired, we consider not only the amount that we expect to collect but also the timing of


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collection. Generally, if a delay in payment is insignificant (e.g., less than 30 days), a loan is not deemed to be impaired.

Business Banking loans greater than or equal to $1.0 million are reviewed to determine if they should be individually evaluated for impairment. Smaller balance, homogeneous loans (e.g., primarily residential mortgage, home equity and consumer loans) are evaluated collectively for impairment. When a loan is considered to be impaired, the amount of impairment is measured based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate, (2) the loan's market price or (3) the fair value of the collateral, less estimated cost to sell, if the loan is collateral dependent. 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 non-performing loans is recognized using the cash basis method. For non-performing 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 balance sheet date. 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 and recoveries are added to the allowance for loan losses.

For Business Banking loans the allowance for loan losses consists of:

                      An allowance for impaired loans;

                      An allowance for homogenous loans based on historical
losses; and

                      An allowance for homogenous loans based on environmental
factors.

The allowance for 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. The impaired value is either (1) the present value of the expected future cash flows from the borrower, (2) the market value of the loan or (3) the fair value of the collateral, less estimated costs to sell.

The allowance for homogeneous loans based on historical factors 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, not including loans evaluated individually for impairment.

The allowance for homogeneous loans based on environmental factors 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 values and concentrations of credit.

For Personal Banking loans the allowance for loan losses consists of:

                      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 environmental
factors.


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The allowance for 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 to homogeneous pools of loans that are 90 days or more delinquent.

The allowance for homogeneous loans based on historical losses 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, not including loans that are 90 days or more delinquent.

The allowance for homogeneous loans based on environmental factors 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 values 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.

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.

Personal Banking loans are charged-off or charged down when they become 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, or when it has been determined that the collateral value no longer supports the carrying value of the loan, for loans that are collateral dependent.

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

Valuation of Investment Securities - We classify marketable securities at the time of purchase as held-to-maturity, available-for-sale, or trading securities. Securities for which management has the intent and we have the ability to hold until their maturity are classified as held-to-maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts on a level yield basis (amortized cost). If it is management's intent at the time of purchase to hold securities for an indefinite period of time and/or to use such securities as part of its asset/liability management strategy, the securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported as accumulated other comprehensive income/
(loss), a separate component of shareholders' equity, net of tax. Securities classified as available-for-sale include securities that may be sold in response to changes in interest rates, resultant prepayment risk, or other market factors. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and are reported at fair value, with changes in fair value included in earnings. The cost of securities sold is determined on a specific identification basis. We held no securities classified as trading at or for the quarter and year ended March 31, 2014 and December 31, 2013, respectively.

On at least a quarterly basis, we review our investments that are in an unrealized loss position for other-than-temporary impairment ("OTTI"). An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. If an investment security is determined to be impaired, we evaluate whether the decline in value is other-than-temporary. We also consider whether or not we expect to receive all of the contractual cash flows from the investment security based on factors that include, but are not limited to: the credit worthiness of the issuer and the historical and projected performance of the


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underlying collateral. Also, we may evaluate the business and financial outlook of the issuer, as well as broader economic performance indicators. In addition, we consider our intent to sell the investment securities and the likelihood that we will not have to sell the investment securities before recovery of their cost basis. Declines in fair value of investment securities that are deemed credit related are recognized in earnings while declines in fair value of investment securities deemed noncredit related are recorded in accumulated other comprehensive income, if we do not intend to sell and it is not likely we will be required to sell. If we intend to sell the security or if it's more likely than not that we will be required to sell the security, the entire unrealized loss is recorded in earnings.

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. 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, 2013, we, through the assistance of an external third party, 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. As of June 30, 2013, we did not identify any individual reporting unit where the fair value was less than the carrying value. 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. There were no changes in our operations that would cause us to update the goodwill impairment test performed as of June 30, 2013 and accordingly we have determined that goodwill is not impaired as of March 31, 2014.

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. Through the assistance of an independent third party, we analyze and prepare a core deposit study for all bank acquisitions or an other identifiable intangible asset study, such as customer lists, for all non-bank acquisitions. The core deposit study reflects the cumulative present value benefit of acquiring deposits versus an alternative source of funding. The other identifiable intangible asset study reflects the cumulative present value benefit of acquiring the income stream from an existing customer base versus developing new business relationships. Based upon analysis, the amount of the premium related to the core deposits or other identifiable intangibles of the business purchased is calculated along with the estimated life of the intangible. The intangible, which is recorded in other intangible assets, is then amortized to expense on an accelerated basis over an approximate life of seven years. If it is subsequently determined that the period of economic benefit has decreased or no longer exists, accelerated amortization or impairment may occur.

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.


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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. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings.

Executive Summary and Comparison of Financial Condition

Total assets at March 31, 2014 were $7.975 billion, an increase of $93.5 million, or 1.2%, from $7.881 billion at December 31, 2013. This increase in assets was due to increases in interest-earning deposits in other financial institutions of $86.6 million and net loans receivable of $39.9 million, which were partially offset by decreases in cash and cash equivalents of $16.2 million and marketable securities of $10.7 million. The net increase in total assets was funded by increases in deposits and advances from borrowers for taxes and insurance of $106.0 million and $4.4 million, respectively, as well as net income of $14.6 million for the quarter.

Total loans receivable increased by $44.8 million, or 0.8%, to $5.851 billion at March 31, 2014, from $5.806 billion at December 31, 2013. Loan fundings during the quarter ended March 31, 2014, of $448.1 million exceeded loan maturities and principal repayments of $398.7 million and mortgage loan sales of $907,000. Our business banking loan portfolio increased by $65.4 million, or 3.2%, to $2.076 billion at March 31, 2014 from $2.011 billion at December 31, 2013, as we continue to emphasize the origination of commercial and commercial real estate loans. Our personal banking loan portfolio decreased by $20.6 million, or 0.5%, to $3.775 billion at March 31, 2014 from $3.795 billion at December 31, 2013. This decrease is primarily attributable to an $18.0 million decrease in home equity loans. Historically home equity loan balances decrease during the first quarter and rebound during the second quarter as the weather improves and home improvements begin.

Total deposits increased by $106.0 million, or 1.9%, to $5.775 billion at March 31, 2014 from $5.669 billion at December 31, 2013. All deposit account types, with the exception of time deposits, increased during the quarter ended March 31, 2014. Noninterest-bearing demand deposits increased by $55.6 million, or 7.0%, to $844.7 million at March 31, 2014 from $789.1 million at December 31, 2013. Interest-bearing demand deposits increased by $38.0 million, or 4.5%, to $890.8 million at March 31, 2014 from $852.8 million at December 31, 2013. Money market deposit accounts increased by $8.5 million, or 0.7%, to $1.176 billion at March 31, 2014 from $1.168 billion at December 31, 2013. Savings deposits increased by $44.5 million, or 3.7%, to $1.236 billion at March 31, 2014 from $1.192 billion at December 31, 2013. Time deposits decreased by $40.7 million, or 2.4%, to $1.627 billion at March 31, 2014 from $1.667 billion at December 31, 2013. We believe the increase in more liquid types of deposit accounts is due primarily to customers' reluctance to lock in time deposits at these historically low rates as well as our new marketing campaign to attract demand deposit customers, which started during March 2014.

Borrowed funds decreased by $16.0 million, or 1.8%, to $865.6 million at March 31, 2014, from $881.6 million at December 31, 2013. This decrease is the result of a $16.0 million decrease in reverse repurchase agreements. None of our FHLB advances matured during the quarter and the next scheduled maturity is in 2015.

Total shareholders' equity at March 31, 2014 was $1.158 billion, or $12.25 per share, an increase of $754,000, or 0.1%, from $1.157 billion, or $12.27 per share, at December 31, 2013. This increase was primarily attributable to net income of $14.6 million for the quarter ended March 31, 2014, an increase in paid-in-capital of $3.1 million related to employee incentive stock option exercises and a decrease in accumulated other comprehensive loss of $3.8 million due to an improvement in the unrealized loss


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position of the investment securities portfolio. These increases were partially offset by cash dividend payments of $21.2 million.

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 guidelines. 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 total assets (as defined). Capital ratios are presented in the tables below. Dollar amounts in the accompanying tables are in thousands.

                                                         At March 31, 2014
                                                           Minimum capital        Well capitalized
                                       Actual             requirements (1)        requirements (1)
                                 Amount       Ratio       Amount      Ratio      Amount       Ratio
Total capital (to risk
weighted assts)
Northwest Bancshares, Inc.     $ 1,139,987      22.18 %          -          -           -           -
Northwest Savings Bank             958,066      18.69 %    410,193       8.00 %   512,742       10.00 %

Tier I capital (to risk
weighted assets)
Northwest Bancshares, Inc.       1,074,781      20.91 %          -          -           -           -
Northwest Savings Bank             893,523      17.43 %    205,097       4.00 %   307,645        6.00 %

Tier I capital (leverage)
(to average assets)
Northwest Bancshares, Inc.       1,074,781      13.98 %          -          -           -           -
Northwest Savings Bank             893,523      11.40 %    313,446       4.00 %   391,808        5.00 %




                                                        At December 31, 2013
                                                           Minimum capital        Well capitalized
                                       Actual             requirements (1)        requirements (1)
                                 Amount       Ratio       Amount      Ratio      Amount       Ratio
Total capital (to risk
weighted assts)
Northwest Bancshares, Inc.     $ 1,147,027      22.46 %          -          -           -           -
Northwest Savings Bank             946,531      18.60 %    407,062       8.00 %   508,828       10.00 %

Tier I capital (to risk
weighted assets)
Northwest Bancshares, Inc.       1,081,060      21.17 %          -          -           -           -
Northwest Savings Bank             882,234      17.34 %    203,531       4.00 %   305,297        6.00 %

Tier I capital (leverage)
(to average assets)
Northwest Bancshares, Inc.       1,081,060      13.87 %          -          -           -           -
Northwest Savings Bank             882,234      11.42 %    309,127       4.00 %   386,408        5.00 %



(1) The Federal Reserve does not yet have formal capital requirements established for savings and loan holding companies.


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In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule becomes effective for Northwest on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements for savings and loan holding companies, such as the Company, effective January 1, 2015.

The following table shows the Basel III regulatory capital levels that must be maintained to avoid limitations on capital distributions and discretionary bonus payments for the periods indicated:

                                                      Basel III Regulatory Capital Requirements
                                            January 1,   January 1,   January 1,   January 1,   January 1,
                                  Current      2015         2016         2017         2018         2019
New Tier 1 common equity ratio
plus capital conservation
buffer                                  -         4.50 %      5.125 %       5.75 %      6.375 %       7.00 %
Tier 1 risk-based capital ratio      4.00 %          -            -            -            -            -
Tier 1 risk-based capital ratio
plus capital conservation
buffer                                  -         6.00 %      6.625 %       7.25 %      7.875 %       8.50 %
Total risk-based capital ratio       8.00 %          -            -            -            -            -
Total risk-based capital ratio
plus capital conservation
buffer                                  -         8.00 %      8.625 %       9.25 %      9.875 %      10.50 %

We are required to maintain a sufficient level of liquid assets, as determined . . .

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