Northwest Bancshares, Inc. annual report, FY2022

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Northwest Bancshares, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with fiscal 2021. This is an annual report, not a standalone fourth-quarter filing. Northwest Bank operates 150 banking locations across Pennsylvania, western New York, Ohio and Indiana.

Financial performance and position

  • Earnings: Net income was $133.7 million, or $1.05 per diluted share, versus $154.3 million, or $1.21, in 2021. Return on average assets was 0.94%; return on average equity was 8.80%.
  • Revenue and margins: Net interest income rose 7.5% to $420.7 million. The GAAP net interest margin increased to 3.17% from 2.96%, and the net interest rate spread rose to 3.09% from 2.88%. Noninterest income fell to $110.8 million from $142.9 million. The efficiency ratio was 63.16%.
  • Credit costs and asset quality: Provision for credit losses was $17.9 million, compared with a $11.9 million provision credit in 2021. The allowance for credit losses was $118.0 million, or 1.08% of gross loans. Nonperforming loans were $82.0 million (0.76% of net loans), down from $158.8 million; net charge-offs were 0.02% of average loans.
  • Balance sheet: Total assets were $14.11 billion, down 2.7%. Gross loans grew 9.0% to $10.92 billion. Deposits declined 6.8% to $11.46 billion; cash and cash equivalents fell to $139.4 million from $1.28 billion.
  • Cash flow: Operating cash flow was $175.4 million; investing cash outflow was $917.4 million and financing cash outflow was $397.9 million. Cash declined by $1.14 billion during the year.
  • Debt and liquidity: Year-end balance-sheet borrowed funds were $681.2 million, in addition to $113.8 million of subordinated debt and $129.3 million of junior subordinated debentures. The bank reported a 9.59% liquidity ratio and $3.09 billion of additional FHLB borrowing capacity, plus $96 million at the Federal Reserve and $105 million at correspondent banks. Five FHLB advances totaling $500 million were due in January 2023.
  • Capital: Northwest Bank reported CET1 of 13.63%, total risk-based capital of 14.71%, and leverage capital of 10.37%, and was classified as well-capitalized. Consolidated shareholders’ equity was $1.49 billion, down 5.8%.

Changes versus 2021 and notable items

  • Net income declined 13.4%. Higher net interest income and lower operating expense only partly offset higher credit-loss provision and lower noninterest income.
  • Noninterest income decreased mainly because 2021 included a $25.3 million gain on the sale of the insurance business. Mortgage banking income also fell 69.4% to $4.9 million amid higher rates and slower mortgage activity.
  • Loan growth reflected organic expansion and $371.1 million of loan-pool purchases, including equipment-finance and jumbo-mortgage pools. Personal Banking loans increased 13.2%; Commercial Banking loans increased 2.4%.
  • Deposit outflows and loan growth contributed to the large reduction in cash and increased reliance on borrowing. FHLB borrowing balances increased substantially during the year.
  • Rising rates reduced available-for-sale securities values. The portfolio had $343.5 million of gross unrealized losses at year-end; the filing reports $151.9 million of after-tax other comprehensive loss related to securities. Management attributed the losses mainly to rates, not credit deterioration, and said it did not expect to need to sell the securities before recovery.
  • Equity also reflected $101.5 million of common dividends. The company declared $0.80 per share in regular dividends for 2022 and made no share repurchases.
  • Branch optimization reduced the network from 170 to 150 offices. The company recorded $5.6 million of merger, asset-disposition and restructuring expense, including charges associated with further optimization planned for completion in early 2023.

Outlook, risks and contingencies

The filing does not provide specific earnings or revenue guidance. Management describes results as sensitive to rates, funding costs, deposit behavior, loan demand and credit quality. Its rate-sensitivity model estimated that a sustained 200-basis-point increase would reduce net interest income 2.7% and market value of equity 16.3%; a 200-basis-point decrease would reduce net interest income 10.8%. These are modeled estimates based on assumptions, not forecasts.

  • Key risks include deposit competition and outflows, higher funding costs, inflation and recession, and changes in collateral values and borrower repayment capacity.
  • Commercial real estate and multifamily loans represented 362% of bank capital under the filing’s concentration measure, potentially inviting heightened regulatory scrutiny. Commercial lending also carries borrower, industry and geographic concentration risks.
  • Municipal deposits totaled $672.6 million and may be more volatile. Deposits in accounts exceeding the $250,000 FDIC insurance limit totaled $4.03 billion; the filing says there were no deposits uninsured for any other reason.
  • Other disclosed exposures include unrealized securities losses, a $522.2 million negative one-year interest-rate gap, LIBOR contract transition, cybersecurity and third-party risks, regulatory changes, and unfunded credit commitments. Outstanding loan commitments were $248.6 million and unused lines of credit were $1.09 billion.
  • Management said pending legal matters were not expected to have a material effect, while noting outcomes are uncertain. The company was undergoing a New York state tax audit for 2016–2018 and did not expect material adjustments.
  • The former CEO’s passing resulted in approximately $1.4 million of accelerated compensation and stock-benefit expense. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Investor verification priorities

  1. Confirm the $500 million of FHLB advances due in January 2023 were repaid, renewed or replaced, and assess the resulting funding cost and liquidity position.
  2. Review subsequent deposit trends, particularly municipal and other large-balance deposits, and the evolution of deposit pricing and borrowing dependence.
  3. Track credit performance and allowance adequacy as economic forecasts change, with particular attention to commercial real estate concentrations, nonperforming loans and consumer vehicle lending.
  4. Assess the implications of the securities portfolio’s unrealized losses, including tangible equity and capital effects and whether any securities sales become necessary.
  5. Compare subsequent net interest margin and actual rate sensitivity with the filing’s model estimates; verify completion and financial effects of the branch and personnel optimization plan.