Northwest Bancshares, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports quarterly results; Q4 2018 net income was $26.5 million, or $0.26 diluted EPS, versus $22.1 million and $0.22 in Q4 2017.
Business context
Northwest is a community banking holding company operating Northwest Bank, with 172 banking locations across Pennsylvania, New York and Ohio. Its principal activities are deposit-taking and consumer, residential mortgage, commercial real estate and commercial lending, alongside insurance and trust services.
Financial results and condition
| Metric | FY 2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Net income / diluted EPS | $105.5 million / $1.02 | 2017: $94.5 million / $0.92 |
| Net interest income | $338.6 million | 2017: $330.8 million |
| Net interest margin (GAAP) | 3.86% | 2017: 3.78% |
| Provision for loan losses | $20.3 million | 2017: $19.8 million |
| Noninterest income | $91.7 million | 2017: $110.5 million |
| Noninterest expense | $276.1 million | 2017: $285.6 million |
| Total assets / net loans | $9.608 billion / $7.996 billion | 2017: $9.364 billion / $7.737 billion |
| Deposits / shareholders’ equity | $7.894 billion / $1.258 billion | 2017: $7.827 billion / $1.208 billion |
| Cash and cash equivalents | $68.8 million | 2017: $77.7 million |
Net cash provided by operating activities was $138.9 million; investing activities used $281.9 million and financing activities provided $134.1 million. Cash and cash equivalents declined $8.9 million during the year. Borrowed funds rose to $234.4 million, including $128.6 million of FHLB advances and $105.8 million of collateralized borrowings; junior subordinated debentures were $111.2 million.
Northwest Bank reported regulatory capital ratios of 13.00% CET1, 13.74% total risk-based capital and 10.24% leverage, and was classified as well-capitalized. The reported liquidity ratio was 9.1%; additional borrowing capacity included approximately $3.1 billion at the FHLB, $51.6 million at the Federal Reserve and $80.0 million with correspondent banks.
Changes versus 2017
- Net income increased 11.7%, supported by higher net interest income, lower noninterest expense and a lower tax provision. Pretax income, however, decreased 1.5% to $133.9 million.
- Net interest income rose 2.4%; the margin improved as loan growth and a shift toward lower-cost deposit accounts partly offset higher deposit and borrowing costs.
- Noninterest income fell 17.0%, largely because 2017 included a $17.2 million gain on the sale of three Maryland offices. 2018 also had lower mortgage banking and trust-related income.
- Net loans grew 3.4%. Commercial banking represented 40.0% of gross loans; consumer loans rose to 10.2%, including growth in indirect auto lending.
- Deposits increased 0.9%, with demand deposits up 4.5%; money market and savings balances declined amid rate competition. Borrowings increased $126.2 million to support loan growth.
- Nonaccrual loans increased to $72.3 million from $64.5 million, while the allowance declined to $55.2 million from $56.8 million. Allowance coverage of nonperforming loans fell to 76.21% from 87.43%.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management describes continued focus on commercial banking, indirect consumer lending and low-cost deposit growth.
- Credit risks include increasing commercial and commercial real estate exposure, borrower and collateral sensitivity to local economic conditions, and a $4.6 million write-down on one commercial real estate loan. Management cited a separate $8.4 million commercial relationship downgrade as a key contributor to higher nonaccrual loans.
- Interest-rate, funding and securities valuation risks remain material. At year-end, a modeled parallel 200-basis-point rate increase was projected to reduce one-year net interest income by 0.7%; a 100-basis-point decrease was projected to reduce it by 3.7%. These are estimates dependent on assumptions.
- Federal tax reform lowered the corporate rate to 21% in 2018; the effective tax rate was 21.2%, versus 30.5% in 2017. The lower tax expense materially supported year-over-year net income.
- CECL was scheduled to take effect for the company in 2020. Management was developing models and data processes, but the effect on results and financial position was not yet determined. The new lease standard was expected to add approximately $40–$45 million in right-of-use assets and lease liabilities, with no material net-income impact expected.
- Consolidated assets were $9.608 billion, below the $10 billion threshold that would trigger additional regulatory requirements, including CFPB examination authority and stress testing. Management estimated possible annual costs of about $3 million for stress testing and an approximately $8 million pretax interchange-income reduction if applicable.
- A jury verdict favored Northwest Insurance Services in litigation; post-trial proceedings continued. No award was accrued because the outcome remained uncertain. Management said other routine legal matters were not expected to have a material adverse effect.
- Available-for-sale securities had $12.5 million of gross unrealized losses at year-end; management considered them temporary and reported no 2018 credit-related impairment charge. Goodwill of $307.4 million was not impaired.
- Key broader risks include cybersecurity and third-party systems, competition, regulatory changes, LIBOR transition, and economic weakness in the company’s regional markets. Management reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether rising nonaccrual loans, delinquency and commercial credit exposures lead to higher provisions or charge-offs, and whether allowance coverage is adequate.
- Whether loan growth can be funded without further reliance on higher-cost deposits or borrowings, and how deposit pricing affects the margin.
- The sustainability of earnings excluding the tax-rate benefit and the prior-year office-sale gain, including trends in fee and mortgage banking income.
- The eventual CECL transition impact and the costs or revenue effects if assets exceed the $10 billion regulatory threshold.
- The resolution and financial effect, if any, of the insurance litigation, and the performance of securities with unrealized losses.