Northwest Bancshares, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Northwest is a community banking company operating Northwest Bank, with 181 banking locations in Pennsylvania, New York and Ohio.
Financial performance and condition
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net interest income | $360.5 million | $338.6 million | +6.4% |
| Provision for loan losses | $22.7 million | $20.3 million | +11.4% |
| Noninterest income | $99.4 million | $91.7 million | +8.4% |
| Noninterest expense | $296.1 million | $276.1 million | +7.2% |
| Net income | $110.4 million | $105.5 million | +4.7% |
| Diluted earnings per share | $1.04 | $1.02 | +2.0% |
| Net interest margin (FTE) | 3.84% | 3.88% | Down 4 basis points |
| Return on average assets / equity | 1.07% / 8.36% | 1.11% / 8.61% | Both lower |
At year-end, assets were $10.494 billion, up 9.2%; net loans were $8.751 billion, up 9.4%; deposits were $8.592 billion, up 8.8%; and shareholders’ equity was $1.353 billion, up 7.6%. Loan growth reflected both the Union Community Bank acquisition and organic growth.
Operating cash flow was $127.5 million, compared with $138.9 million in 2018. Investing activities used $300.6 million; financing activities provided $165.2 million. Cash and cash equivalents declined $7.9 million to $60.8 million.
Borrowed funds were $246.3 million and junior subordinated debentures were $121.8 million. The Bank reported an 8.57% liquidity ratio and $3.3 billion of additional FHLB borrowing capacity, plus $40.8 million at the Federal Reserve and $110 million at correspondent banks. Bank capital ratios included 13.15% CET1, 13.86% total risk-based capital and 10.52% leverage; the Bank was classified as well capitalized.
Fourth quarter
Q4 2019 net income was $25.6 million, or $0.24 diluted EPS, versus $26.5 million, or $0.26, in Q4 2018. Net interest income increased to $88.9 million from $86.8 million, while provision for loan losses rose to $8.2 million from $3.8 million.
Material changes and notable items
- Completed the Union Community Bank acquisition on March 8, 2019, adding 12 offices in Lancaster County, Pennsylvania. Consideration was $85.8 million, split between cash and stock; acquired loans were recorded at fair value.
- Loan growth and higher asset yields lifted interest income, but deposit and borrowing costs rose faster: total interest expense increased 53.2% to $56.9 million. Net interest spread and margin both declined.
- Mortgage banking income increased to $3.8 million, and the company recorded a $1.7 million gain on sale of approximately $98.2 million of residential mortgage loans. Lower FDIC premiums partly offset higher compensation, processing and acquisition costs.
- FY2019 included $4.2 million of restructuring/acquisition expense. Cash dividends totaled $0.72 per share, or $76.2 million.
Outlook, risks and contingencies
- Outlook: The filing provides no general earnings or growth guidance. Management expected the Dodd-Frank debit-interchange fee cap to reduce 2020 interchange income by approximately $8.0 million before tax.
- CECL: Expected to take effect for the company in 2020. Management estimated adoption could increase the combined allowance for loan losses and reserve for unfunded commitments by 15%–35%, with a cumulative after-tax equity adjustment; no significant regulatory-capital impact was expected.
- Acquisition pending: A proposed MutualFirst Financial merger, valued at approximately $346 million in stock, remained subject to regulatory and stockholder approvals; the filing anticipated closing in Q2 2020.
- Credit and concentration risk: Commercial real estate and multifamily exposures represented 516.9% of Bank capital, a level the filing says could attract regulatory scrutiny. A commercial loan downgrade drove approximately $7.4 million of specific reserve. Nonaccrual loans declined to $68.9 million, while the allowance was $57.9 million, or 0.66% of loans.
- Funding and rate risks: Municipal deposits totaled $455.8 million and may be volatile; $2.211 billion of deposits exceeded the $250,000 FDIC insurance limit. Management’s rate simulations are assumption-dependent; the filing identifies LIBOR transition risk and interest-rate sensitivity.
- Other contingencies: Management did not expect pending legal matters to have a material aggregate effect, but did not accrue any potential award from a 2018 insurance-related verdict because post-trial proceedings remained uncertain. Cybersecurity, regulatory costs, competition, economic deterioration and loan-loss estimation are also cited risks.
Investor verification priorities
- Review the UCB integration results and the final terms, approvals and closing outcome of the proposed MutualFirst transaction.
- Track CECL adoption and the realized allowance and unfunded-commitment reserve changes against the disclosed 15%–35% estimate.
- Assess commercial real estate concentration, criticized loans and the specific commercial-credit reserve, alongside delinquency and charge-off trends.
- Monitor deposit pricing, uninsured and municipal deposit retention, borrowing dependence, and the projected interchange-fee reduction.
- Confirm subsequent developments in the unaccrued litigation matter and in LIBOR replacement planning.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.