Business context and reporting period
Northwest Bancshares, Inc. is the parent of Northwest Bank, a community-oriented bank serving Pennsylvania, western New York and eastern Ohio. It offers consumer and commercial banking, trust and investment management, and insurance services. This Form 10-K covers the fiscal year ended December 31, 2017; quarterly figures are unaudited.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets, year-end | $9.364 billion | $9.624 billion | Down 2.7% |
| Net interest income | $330.8 million | $307.3 million | Up 7.6% |
| Provision for loan losses | $19.8 million | $13.5 million | Up 45.8% |
| Noninterest income | $110.5 million | $85.4 million | Up 29.4% |
| Noninterest expense | $285.6 million | $307.8 million | Down 7.2% |
| Net income | $94.5 million | $49.7 million | Up 90.2% |
| Diluted earnings per share | $0.92 | $0.49 | Up from $0.49 |
Net interest margin was 3.78% on a GAAP basis (3.82% fully taxable equivalent), compared with 3.69% and 3.73%, respectively, in 2016. Return on average assets was 0.99% versus 0.55%; return on average equity was 7.95% versus 4.28%. The efficiency ratio improved to 63.19% from 77.31%.
Year-end loans, net of allowance, were $7.737 billion, up from $7.496 billion; deposits were $7.827 billion, down from $7.882 billion. Shareholders’ equity was $1.208 billion. Borrowed funds were $108.2 million, and junior subordinated debentures were $111.2 million.
Cash and cash equivalents fell to $77.7 million from $389.9 million. Operating cash flow was $156.1 million; investing cash flow was negative $108.3 million and financing cash flow was negative $359.9 million. The company reported a $312.2 million decrease in cash, principally reflecting loan growth, deposit movements and the Maryland office transaction. The bank reported a 9.1% liquidity ratio and $3.265 billion of additional borrowing capacity across the FHLB, Federal Reserve and correspondent banks.
Material changes versus the prior period
- Net income increased sharply, reflecting higher net interest income, lower expenses and higher noninterest income. The 2017 result included a $17.2 million gain from selling three Maryland offices; therefore, the increase was not wholly recurring.
- 2016 expenses included a $37.0 million FHLB prepayment penalty and $12.2 million of restructuring and acquisition expense. In 2017, restructuring and acquisition expense was $4.4 million.
- Net interest income benefited from loan growth and lower funding costs after repayment of FHLB advances. The average cost of interest-bearing liabilities fell to 0.42% from 0.59%.
- Commercial banking and indirect automobile lending contributed to loan growth. Commercial real estate and commercial loans together represented about 40.5% of gross loans, compared with 39.6% a year earlier.
- Asset quality improved on several measures: nonaccrual loans declined to $64.5 million from $79.5 million, and nonperforming assets fell to $70.6 million from $85.1 million. However, provision expense rose, and net charge-offs increased to 0.31% of average loans from 0.21%, concentrated largely in the discontinued consumer finance business.
- Deposits shifted toward lower-cost demand and savings accounts, while time deposits and money market accounts declined. Demand deposits increased $176.0 million; total deposits declined modestly.
Outlook, commentary, risks and unusual items
- The filing provides no earnings or revenue guidance. Management describes growth in deposits, assets and lending as part of its strategy, with emphasis on commercial banking and consumer lending.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% from 35% beginning in 2018. The company recorded a $3.1 million 2017 tax benefit from remeasuring deferred taxes, but disclosed provisional tax accounting items still to be completed.
- The bank was well capitalized at year-end: total risk-based capital was 14.19%, CET1 was 13.40%, and the leverage ratio was 10.40%. These exceeded the stated well-capitalized thresholds. Consolidated assets of $9.364 billion were below the $10 billion threshold that would trigger additional regulatory requirements described in the filing.
- Interest-rate sensitivity modeling estimated that a parallel 200-basis-point increase would raise net interest income 0.8% over 12 months but reduce the market value of equity 7.3%. A 100-basis-point decline was modeled to reduce net interest income 6.0%. These are model estimates dependent on assumptions, not forecasts.
- Key risks include regional economic deterioration, commercial credit concentrations, interest-rate and securities valuation exposure, deposit competition and funding access, cybersecurity and third-party technology risks, regulatory changes, and the potential impact of adopting CECL, which was scheduled to become effective after 2019.
- Commitments included $181.1 million of loan commitments, $872.7 million of unused credit lines and $25.7 million of standby letters of credit. Management said ordinary-course legal matters were not expected to materially affect results; no legal-proceeding accrual was recorded at year-end.
- The board declared $0.64 per share in regular dividends for 2017, versus $0.60 in 2016. Future dividends remain subject to board decisions, regulatory limits, capital needs and financial performance.
Most important facts for investors to verify
- How much of the 2017 earnings increase is sustainable after excluding the $17.2 million office-sale gain and accounting for the unusually high 2016 expense base.
- Whether loan-loss provisions and charge-offs stabilize, particularly in consumer and indirect-auto lending, and whether commercial credit quality holds as that portfolio grows.
- Whether the decline in cash and deposits affects funding flexibility; compare the cash-flow statement’s deposit outflow with the balance-sheet deposit change and account for the Maryland transaction.
- How the 21% federal tax rate and remaining provisional Tax Act calculations affect 2018 effective taxes and earnings.
- How rising or falling rates affect realized margins, deposit pricing and securities values relative to the company’s model assumptions.
- Whether capital, liquidity and dividend capacity remain adequate as the company approaches the $10 billion asset threshold and implements CECL.