Northwest Bancshares, Inc. annual report, FY2020

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Northwest Bancshares, Inc. — FY2020 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. Northwest Bancshares is a bank holding company operating Northwest Bank, a regional community bank with 170 locations across Pennsylvania, New York, Ohio and Indiana. The year includes MutualBank, acquired April 24, 2020, which added 36 Indiana offices.

Key financial results and condition

  • Earnings: Net income was $74.9 million, down 32.2% from $110.4 million in 2019. Diluted EPS fell to $0.62 from $1.04. Return on average assets was 0.58% versus 1.07%; return on average equity was 4.72% versus 8.36%.
  • Revenue and margins: Net interest income rose 8.7% to $391.7 million, while noninterest income rose 33.1% to $132.3 million. Mortgage banking income increased to $31.4 million from $3.8 million. Net interest margin (GAAP) declined to 3.34% from 3.82%, reflecting lower asset yields and elevated cash balances.
  • Credit costs and asset quality: Provision for credit losses increased to $84.0 million from $22.7 million. The allowance for credit losses ended the year at $134.4 million, or 1.27% of loans, versus $57.9 million, or 0.66%, in 2019. Nonperforming loans rose to $103.4 million from $68.9 million; nonperforming assets were $105.6 million, or 0.77% of assets.
  • Balance sheet and liquidity: Total assets increased 31.6% to $13.806 billion; net loans rose 19.4% to $10.446 billion and deposits increased 35.0% to $11.599 billion. Cash and equivalents were $736.3 million. The Bank reported a 16.78% liquidity ratio and $3.872 billion of additional FHLB borrowing capacity, plus $95.4 million available from the Federal Reserve and $110.0 million from correspondent banks.
  • Debt and capital: Borrowed funds totaled $283.0 million, including $123.3 million carrying value of the $125.0 million subordinated notes issued in September 2020; junior subordinated debentures were $128.8 million. Northwest Bank’s CET1, total risk-based capital and leverage ratios were 13.64%, 14.89% and 9.90%, respectively; the Bank was reported well-capitalized.
  • Cash flow and shareholder returns: Operating cash flow was $140.4 million; investing cash flow was negative $560.6 million; financing cash flow was positive $1.096 billion. Cash increased $675.4 million. The company paid $0.76 per share in dividends and repurchased 759,827 shares in Q4. The reported annual dividend payout ratio was 122.58%.

Material changes versus 2019

  • MutualBank contributed acquired assets, deposits and loans; the acquisition consideration was $213.4 million in stock. Total assets rose by $3.312 billion, including $1.508 billion of acquired loans and $1.617 billion of acquired deposits at fair value.
  • Net income declined chiefly because provision expense increased $61.3 million and noninterest expense increased $51.4 million. Higher net interest income, noninterest income and lower tax expense partly offset these increases.
  • The company adopted CECL on January 1, 2020. Adoption increased the allowance by $10.8 million and reduced retained earnings by $9.6 million, net of tax. Management attributed additional credit provisioning to COVID-19 and MutualBank purchase accounting.
  • Commercial banking grew to 42.9% of gross loans from 39.4%. Commercial real estate loans were 31.6% of gross loans; commercial real estate concentration was 473.7% of bank capital.

Outlook, commentary and risks

  • No specific earnings or growth guidance is provided. Management identifies the continuing effects of COVID-19, borrower performance, credit losses and low interest rates as uncertain factors.
  • Management estimated Dodd-Frank debit interchange provisions could reduce 2021 pretax interchange income by approximately $8.0 million.
  • Approximately $500 million of PPP loans were originated. The filing highlights potential SBA-guarantee, litigation, regulatory and reputational exposure related to PPP participation.
  • In Q4, the company recorded a $2.2 million provision credit for credit losses; quarterly net income was $35.1 million. The filing reports no goodwill impairment after impairment testing triggered by the pandemic.
  • Other risks include commercial real estate concentration, municipal exposures, deposit volatility, interest-rate and funding risk, cybersecurity and third-party service disruptions, and the transition from LIBOR. Management says pending legal matters are not expected to have a material aggregate effect, but a verdict in a separate insurance-related case was not accrued because post-trial proceedings remained uncertain.
  • Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The collective allowance for credit losses was identified as a critical audit matter because it relies on complex models, forecasts and judgment.

Important facts for investors to verify

  • Whether elevated allowance coverage and rising nonperforming loans adequately reflect COVID-19-related and acquired-credit risks, particularly in commercial real estate.
  • How MutualBank integration, branch optimization and acquisition-related expenses affect recurring earnings and expected cost savings.
  • Whether the unusually high dividend payout ratio is sustainable given earnings, capital needs and regulatory limits.
  • How deposit growth, excess liquidity and falling asset yields affect future net interest margin and profitability.
  • The assumptions behind the $8.0 million estimated 2021 interchange fee impact and the progress of the LIBOR transition.