Northwest Bancshares, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Northwest Bancshares is a regional savings-and-loan holding company operating Northwest Bank and a consumer-finance subsidiary across Pennsylvania, Ohio, New York and Maryland.
Financial results and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total interest income | $319.6 million | $305.4 million |
| Net interest income | $263.3 million | $248.8 million |
| Net interest margin (FTE) | 3.49% | 3.47% |
| Provision for loan losses | $9.7 million | $20.3 million |
| Noninterest income | $68.8 million | $70.8 million |
| Noninterest expense | $233.9 million | $215.5 million |
| Net income | $60.5 million | $62.0 million |
| Diluted EPS | $0.64 | $0.67 |
| Return on average assets / equity | 0.73% / 5.49% | 0.79% / 5.69% |
- Balance sheet: Assets were $8.95 billion, up 15.1%; net loans were $7.16 billion, up 20.9%; deposits were $6.61 billion, up 17.4%; and shareholders’ equity was $1.16 billion. Growth primarily reflects the LNB acquisition.
- Cash flow: Operating activities provided $113.2 million; investing activities used $88.8 million; financing activities used $97.7 million. Cash and cash equivalents declined $73.3 million to $167.4 million, principally reflecting acquisition consideration and loan growth.
- Funding and liquidity: Borrowed funds totaled $975.0 million, including $856.3 million of FHLB advances and $111.2 million of junior subordinated debentures. The bank’s liquidity ratio was 9.7%. It reported $2.233 billion of additional FHLB borrowing capacity, plus $142.6 million at the Federal Reserve and $80 million at correspondent banks.
- Capital: Northwest Bank was classified as well capitalized. Its CET1, total risk-based capital and leverage ratios were 14.26%, 15.20% and 10.87%, respectively.
- Credit quality: Nonperforming assets were $81.7 million (0.91% of assets), down from $96.8 million (1.25%) in 2014. Nonperforming loans were $73.0 million; the allowance was $62.7 million, or 0.88% of net loans. Net charge-offs were 0.23% of average loans, versus 0.41%.
- Dividends: Regular quarterly dividends totaled $0.56 per share in 2015; cash dividends paid were $52.8 million. The 2014 cash-dividend total of $149.9 million included a special dividend.
Material changes and unusual items
- On August 14, 2015, the company acquired LNB Bancorp for approximately $181.0 million, paid in cash and stock. LNB added 21 Ohio branches and, at acquisition-date fair value, approximately $928.1 million of loans and $1.034 billion of deposits. Its results are included from the acquisition date.
- Net interest income rose 5.8%, supported by loan growth and lower funding costs, while the average loan yield declined to 4.62% from 4.79%. Provision expense fell 52.2%, reflecting improved credit metrics and the absence of certain large 2014 commercial-loan provisions.
- Net income declined 2.3% as acquisition-related and operating costs, lower investment-sale gains and higher taxes more than offset higher net interest income and lower credit provision. LNB acquisition expenses were $9.8 million.
- Fourth-quarter 2015 net income was $16.2 million and diluted EPS was $0.16, compared with $17.3 million and $0.19 in fourth-quarter 2014. Q4 2015 provision expense was $4.6 million.
- The company reported no 2015 credit-related other-than-temporary securities impairment charges. Goodwill was $261.7 million and management reported no impairment at year-end. KPMG issued unqualified opinions on the financial statements and internal controls.
Outlook, risks and contingencies
- No earnings or revenue guidance is provided. As a subsequent event, the company planned to consolidate 24 offices and convert two full-service offices to drive-up facilities by mid-2016. It expected approximately $5 million in costs in the first half of 2016 and annual pretax savings of $5–$6 million beginning in 2017.
- Management highlighted sensitivity to interest rates, local economic conditions, competition, regulation, funding availability and the credit quality of borrowers. Commercial real estate and business lending have grown, and the filing notes that a substantial portion of these loans is relatively unseasoned.
- The one-year interest-rate gap was negative $546.5 million. Modeling estimated market value of equity would decline 7.6% under an immediate 200-basis-point rate increase; the modeled effects rely on assumptions and actual results may differ.
- Other exposures include municipal borrowers and securities, securities valuation, cyber and third-party service-provider risks, acquisition integration, and possible changes in regulatory capital or compliance costs. The company disclosed ordinary-course legal claims, no accrued legal loss, and management did not expect the matters to materially affect current financial condition or results; future-period effects could not be determined.
- The consumer-finance subsidiary reported a loan portfolio with an average FICO score of 627, delinquency of approximately 4.9%, and annual net charge-offs averaging approximately 3.0% of loans.
Investor verification priorities
- Separate LNB’s contribution from underlying organic growth in loans, deposits, earnings and expenses; verify integration progress and realized synergies.
- Track credit quality in commercial real estate and business loans, including nonperforming balances, criticized assets, charge-offs and reserve adequacy.
- Assess recurring earnings after acquisition costs, investment-sale gains, tax credits and other nonrecurring items; reconcile the higher 2015 effective tax rate.
- Review deposit stability and refinancing needs, including $929.4 million of time deposits due within one year, unused commitments and reliance on borrowings.
- Monitor capital, interest-rate sensitivity and dividend capacity as capital-buffer requirements phase in; verify branch-consolidation costs and expected savings.