Q4 2024 Northwest Bancshares Inc Earnings Call
Speaker Change: Good morning. Thank you for joining us and welcome to Northwest Bankshare's fourth quarter 2024 earnings call
Speaker Change: Good morning, everyone. Thanks for joining us to discuss our quarterly results I am pleased to report that we delivered solid returns in the fourth quarter and we're happy with our core financial performance, which Doug will cover momentarily.
Speaker Change: In particular last quarter, we saw significant improvement in our net interest margin as well as in our efficiency ratio.
This continues to demonstrate that we are delivering on our commitment to sustainable growth.
Speaker Change: Thanks to our company wide focus on deposit gathering while maintaining near best in class cost of funds, we continue to maintain a stable and strong funding base.
Speaker Change: In addition, we were able to reduce classified loans, helping us further eliminate risk from the balance sheet.
Speaker Change: All of these results can be attributed to the talent hard work and thought put forth each day by the members of our northwest team.
Speaker Change: I want to thank them for their continued dedication to our company's success as well as their focus on our customers and communities.
Speaker Change: As we have reported at northwest we are steadfast in our commitment to responsible growth both organically and through acquisition.
Speaker Change: With that I'm happy to report that last quarter, we announced that we entered into an agreement to acquire Peds Woods Bancorp.
Speaker Change: This transaction is expected to be completed sometime in the third quarter of this year. This merger is northwest largest to date and marks another milestone in our long term strategy.
Speaker Change: It further connects our Pennsylvania franchise and will make US one of the top 100 largest banks in the nation.
Speaker Change: Finally, as we have for the previous 120 quarters on behalf of the board of directors I am pleased to declare a quarterly dividend of <unk> 20 per share to shareholders of record as of February three 2025 now.
Speaker Change: Now, it's my pleasure to introduce Doug Chaucer, our Chief Financial Officer, who will take us through our financial results.
Speaker Change: Thank you Lou and good morning, everyone before we dive into today's presentation I'd like to comment on the addition of Michael Perry In addition to helping US facilitate our M&A strategy. Michael will also lead our company's strategic planning process and our Investor relations function, serving as a primary point of contact to the investment community.
Speaker Change: We're really excited to add Michael and his extensive knowledge and experience in the northwest team.
Speaker Change: Now, let's begin on page four of the earnings presentation, where I'll highlight northwest financial results for the fourth quarter of 2024.
Speaker Change: We reported a net income of 33 million or <unk> 26 per diluted share.
Our net interest margin expanded by 13 basis points this quarter to 342% needed partially by an interest recovery on a non accrual loan which added six basis points to that margin.
Speaker Change: We continue to see our margin increased due to our continued pricing discipline on our deposit portfolio and our focus on appropriate pricing on our originated loans supported by a more favorable rate environment.
Speaker Change: <unk> to the same quarter last year, our loan portfolio balances were essentially flat. So we do see improvement in our mix of commercial loans increased in the portfolio becomes more commercially weighted.
Speaker Change: Deposit balances grew by 2% compared to the fourth quarter a year ago.
Speaker Change: Cost of funds decreased even further as we saw volumes into higher yielding savings products declined.
Speaker Change: Noninterest income increased $12 million for the quarter, which includes a $6 million gain on the sale of the last tranche of our visa b shares and a $4 million gain related to a low income housing tax credit investments.
Speaker Change: Noninterest expense increased by 5% or approximately $3 million since the third quarter credit quality remained strong with overall allowance coverage decreasing to one point.
What percent of loans from 111% last quarter and a year ago. This can be attributed in part to the derisking actions taken within the quarter, including the sale and transfer of certain loans from our books finally, our capital position remains strong with an estimated tier one capital to risk weighted assets of 13, 8%.
Speaker Change: On December 31st estimated.
Speaker Change: Now, let's delve into additional details on page five you'll see our commercial industrial loans grew by six 2% since last quarter and 23, 5% year over year residential mortgages declined by six 6% since last year.
The shift underscores our focus on our commercial banking transformation.
Speaker Change: Our commercial real estate portfolio shrank by 4% since last quarter, reflecting a more desirable loan mix with a higher share of C&I compared to CRE.
Speaker Change: Loan yields remained steady this quarter at five 6%.
Speaker Change: Moving to page six deposits remained strong through the end of 2024, having grown 2% versus the end of 2023.
Speaker Change: During the last quarter, we recognize the benefits of lower short term interest rates with a 10 basis point decrease in our cost of funds.
Speaker Change: Most deposit growth occurred in the interest bearing demand products, while volumes and higher costs and higher yield savings product continued to slow.
Speaker Change: The current cost of deposits stands at 168, again down 10 basis points from the third quarter and still near best in class relative to our peers.
Speaker Change: On page seven we cover the net interest margin, which now stands at 342% up from 333% last quarter included in the fourth quarter results with an interest recovery on a non accrual loan that was paid off in full this added six basis points to our margin in the quarter.
Speaker Change: A more normalized net interest margin in the fourth quarter would be about 336%.
Speaker Change: Fully tax equivalent net interest income grew by approximately 4% from $112 million last quarter to $115 million this quarter.
Our second consecutive quarter of net interest income growth.
Speaker Change: Collecting reduced borrowings higher loan yields and a reduction in our cost of funds. We ended the quarter with a cost of funds of 227% a significant improvement from the last quarter. We have included some additional information on the margin on the next few slides.
Speaker Change: Now moving to slide 10, noninterest income increased $12 $2 million from the previous quarter driven by an increase in other operating income that included the sale of business. The B shares and the low income housing tax credit I mentioned earlier.
Compared to the year ago quarter, we saw an $11 million increase in non interest income as a result of our continued growth in trust income higher gains on sale of SBA loans, a bully income, partially offset by lower gains on the sale of Oreo properties and a prior gain on sale of non SBA loans.
Speaker Change: Slide 11 details our noninterest expense, our adjusted efficiency ratio improved to 59, 5%, reflecting our continued focus on managing expenses without impacting where operations are sacrificing customer service.
Speaker Change: Regarding credit quality on page 12, our allowance to loans coverage decreased to one 4% with net charge offs recorded at 87 basis points, including the impact of our derisking activities taken within the quarter. If we exclude those impacts are charge offs would be just 35 basis points.
Speaker Change: Page 13 shows that overall credit performance remains strong with nonperforming assets holding steady at 20.
Speaker Change: Five 4%, while 30 day loan delinquency saw a slight increase to 90 basis points classified loans decreased to 244% of total loans and our coverage ratio of nonperforming loans increased to 188% from 162% recorded in the third quarter.
Speaker Change: Slide 14 highlights our commercial loan concentration showcasing a diverse portfolio strong.
Speaker Change: Underwriting has helped us avoid many CRE specific issues and we have minimal exposure to large metro office or rent control markets.
Speaker Change: With the success of 2024, we have entered 2025 with significant momentum I'd like to review, our 2020 guidance, which can be found on slide 16.
Speaker Change: We will still continue to focus on responsible and profitable loan growth in the commercial space, particularly C&I lending.
Speaker Change: We anticipate low single digit loan and deposit growth.
Speaker Change: We will manage deposit costs, while balancing client expectations and market preferences, allowing for continued modest net interest margin expansion.
Speaker Change: We expect noninterest income to be in the range of 124 $229 million for the full year.
Speaker Change: We will keep expense growth in the low single digits in 2025, as we shift our focus to creating positive operating leverage and balanced expense growth and our long term investments.
Speaker Change: Both our tax rate and net charge offs are expected to normalize in 2025 as our net charge offs to remain within a normalized range of 25% to 35 basis points and our tax rate will remain unchanged our guidance excludes any impacts from the recently announced acquisition of <unk>.
Speaker Change: On behalf of the entire leadership team and the board of directors. Thank you for joining our call. This morning, I will now turn the call over to the operator, who will facilitate the live Q&A session.
Speaker Change: At this time I would like to remind everyone in order to ask a question press. The Star then the number one on your telephone keypad.
Speaker Change: Pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Tim Switzer with Jamie Double you. Your line is open. Please go ahead.
Tim Switzer: Hey, good morning, Thank you for taking my questions.
Speaker Change: Good morning, Good morning, Tim.
Tim Switzer: We appreciate the detailed guide you.
Speaker Change: You provided in the slide deck here.
Speaker Change: Can you clarify real quick for the noninterest income outlook does that also exclude the impact of pins woods and what's driving that growth there.
Yes, all of the guidance, we are providing excludes the impact from pens woods and we are focused on driving better fee income performance and more consistent fee income performance strategically within the firm. So thats, an expectation that we'll be able to generate that type of activity through the course of the year.
Speaker Change: Sure.
Speaker Change: I think we also provided more of numerical guide only because we had so many things rolling through fee income this year that were.
Speaker Change: A little bit unique like the securities restructure that we wanted to be transparent with where we are targeting fee income.
Speaker Change: Yes, no. That's super helpful. Appreciate you doing that and.
If we think about the NII outlook with tens wood.
Speaker Change: The rate movements have been pretty extreme over the last month or so can you talk about I guess first maybe how that's changed.
Speaker Change: Expect the tangible book value dilution and then.
Speaker Change: What's the expected.
Speaker Change: Purchase accounting.
Speaker Change: As of now most recently with the change in the yield curve.
Yes, we're not intending to provide updated guidance on the <unk> acquisition until we get much closer to the closing date, because as you know all of that will constantly change with our stock with changes in our stock price.
Speaker Change: Okay.
Speaker Change: And the last question I have is after cleaning up some of the credit book here can you give us an update on like what's remaining in the health care portfolio with the.
Speaker Change: Our credit quality looks like and then.
Speaker Change: Are you seeing any other areas outside of that book that.
Speaker Change: You are more cautious about or anything you've seen in maybe the consumer portfolio.
Speaker Change: Yeah. So.
Speaker Change: So I think we dealt with most of the stress that we saw in the long term health care portfolio with these transactions I will remind everyone. We moved some of the transactions. Some of the credits are in held for sale, we would expect to.
Speaker Change: Execute a transaction to get those fully off the books over the course of the first quarter. So we don't have any concerns in any particular sectors and the rest of the book and feel like we're entering the year in a pretty stable position.
Speaker Change: Also tried to provide that normalized charge off number just to show that absent some of those derisking transactions, we would have been within the normalized range that we were projecting.
Speaker Change: Okay, great. Thank you guys.
Speaker Change: Your next question comes from the line of Danielle <unk> with Raymond James. Please go ahead.
Speaker Change: Thank you good morning, guys.
Dan: Dan Good morning.
Speaker Change: So I guess my.
Speaker Change: First question just on the loan growth side. So you talked about I think I heard low single digits for the year.
Speaker Change: <unk> had strong momentum certainly on the commercial side.
Speaker Change: Maybe if you could just talk about.
Speaker Change: And what Youre seeing in terms of momentum in the commercial side. If that's still strong and then really the driver of the net loan growth number is reductions in CRE or other portfolios or just how youre thinking about it kind of segmented out a little bit.
Speaker Change: Yes, so we are looking at.
Deep pipeline strengthen our pipelines right now for commercial so we feel that theres going to be a more constructive environment in 2025 as all of the different.
Speaker Change: Changes in administration install of that settles down a little bit. So we're thinking that that is going to be a net positive for us. We also will take advantage of opportunities to grow consumer loans when those opportunities present themselves. So in general we're going to try we're going to continue to focus obviously on commercial we also guided for.
Speaker Change: Some expense growth. This year, we will allow for some additional hiring in the commercial verticals as well just to continue to develop the buildout in commercial that we've talked about so again I think I would generally say just looking for a more balanced overall approach and when we have the opportunity to generate good returns either in the consumer portfolios.
Speaker Change: The commercial portfolio is next year, we will take advantage of them and we expect some of that business to be available for us. So thats reflective of the overall guide us.
Speaker Change: Some modest balance sheet growth next year.
Speaker Change: Got it that makes sense do you think.
Speaker Change: Yes.
Speaker Change: Maybe a little bit slower than what it what it can be on a total loan growth basis.
Speaker Change: Next year, and then and then you could potentially end the year, a little bit faster going into 'twenty six moving towards more of a normalized loan growth rate, maybe in the mid or a little bit above that.
Speaker Change: Percentage growth rate.
Speaker Change: Yes, I mean again theres fluctuations that you have to deal with all along the way like all of these all of these weather events are certainly going to slow down for example, the car sales market right. So when we have opportunities to take advantage, we will but we can accommodate exactly when the growth will come it will be there when the market allows it to be we're still focused as we've been on.
Speaker Change: Making sure that we get good pricing and good terms on both consumer and commercial loans and Windows are there, we're going to take advantage of them and do them.
But we are really working on maintaining the loan yields and improving the overall margin by making sure that we're not just out.
Speaker Change: Taking significant levels of growth at rates that arent going to produce stable and growing margin.
Speaker Change: Hey, Danny its Lou I would just add that the strategy is intact right. So we're going to have the maturation of the verticals that we've discussed.
Speaker Change: On prior calls and prior meetings as well as we have a renewed focus.
Speaker Change: On the what we call the core franchise middle market lower middle market in the four states that we have a retail presence.
Speaker Change: So.
Speaker Change: To your point about while it may be a slower start to the year.
Speaker Change: We're looking to pick up steam in the latter part of the year, a little bit as well as we have.
Speaker Change: We have a continued focus on deposit gathering in our commercial franchise.
Speaker Change: So that will become more evident.
<unk>.
Speaker Change: As we move along through the year as well.
Speaker Change: And as Doug pointed out.
Speaker Change: It's not that we're not we're completely focused on commercial so notwithstanding we have these mortgages on the balance sheet that that really are low right along that were that were running off.
Speaker Change: Have some opportunities.
Speaker Change: In the consumer segment and so.
Speaker Change: So we will look for a balance growth in that area as well.
Speaker Change: Terrific.
Speaker Change: Well, thanks for all that color I guess, just one last one maybe on the.
Speaker Change: On the Securities book I'm, just looking at your your slide nine here on that.
Speaker Change: You've got you've got the direct duration of four years. So I'm, just curious kind of what what's rolling off this year, where you might see some benefit.
Speaker Change: In terms of the margin in 2025, obviously that that book remains a little bit of a drag on the NIM overall from $1 respectively.
Speaker Change: Yes, I can turn it over to Sean if he has any specifics he wants to highlight.
Speaker Change: Things that are rolling off I mean, we are reinvesting cash flows into higher yielding securities.
Speaker Change: So that will continue to help drag that march or that return up over time.
Speaker Change: If there is an opportunity over the course of the year to consider our balance sheet our.
Speaker Change: Investment Securities reposition, we'd probably take advantage of that but again.
Speaker Change: That's not a core focus of ours and it would be something that would be opportunistic versus something that would be that is in part of our strategies next year. So as we did last time, if we get closer to executing one of those we have the opportunity and we'll certainly talk a little bit about it in advance, but I would say generally speaking, we're looking at maintaining the size and strength.
Speaker Change: That portfolio and as we continue to get.
Speaker Change: Cash flows from it.
Speaker Change: We'll obviously be reinvesting at high rates.
Speaker Change: Does that answer your question.
Speaker Change: It does yeah no. Thanks for all the color I appreciate it I'll step back.
Speaker Change: Okay.
Speaker Change: Your next question comes from delayed of Matthew Breese with Stephens Inc. Please go ahead.
Matthew Breese: Hey, good morning.
Speaker Change: Good morning.
I wanted to touch on commercial real estate just for a second lot of your peers in similar situations as you with lower CRE concentrations.
Speaker Change: Many of them haven't been kind of nibbling back into the space.
Speaker Change: What are your higher CRE concentration peers have kind of pulled back and I'm curious if.
Speaker Change: If you've kind of looked at spreads and yields and if theres been any sort of change in thinking there and is that is that a book at the yields present themselves that we might see some growth 25. Thank you.
Speaker Change: Yes.
I mean I sit on our senior loan committee. So we see the largest deals that come through the firm. When there are commercial real estate deals that have appropriate hurdles in that or have good risk profiles.
Speaker Change: Going to take advantage and do those deals.
Speaker Change: I don't think it is a focus of ours to specifically go out and grow that book materially from where it is but we also don't have a specific target that suggests it has to that we're planning to materially run it off necessarily either so again I think you would just expect us to continue to practice good credit discipline.
Speaker Change: In that space and take advantage when there are good opportunities to do commercial real estate deals, we'll do them.
Speaker Change: But again, we're we're liking how the balance sheet is shaping up through the natural flows in the business opportunities that we're taking advantage us and generally speaking we would like to get a little bit more focus on the C&I book and some of the variable rate deals that give us a little bit of different dynamics on our net interest income.
Speaker Change: Also but if teekay if anything to add he can jump in.
Speaker Change: So thats the appropriate comments, we've just been really strategic about those opportunities. We obviously have the balance sheet to lean into that space. If we launch it and when we find the appropriate opportunities.
Speaker Change: So from our perspective is it fair to consider that that portion of the loan portfolio flattish for the year or is that a fair statement.
Speaker Change: Yes.
Speaker Change: Thank you and then I was hoping you could also just go into expectations around loan and deposit betas expectations for the year end.
Speaker Change: Exit 2025, do you think there is an upward bias to the NIM given the shape of the yield curve and I feel like this environment for you with an upward sloping yield curve is certainly improving if not a more ideal one than we've seen in the last couple of years.
Speaker Change: Yes, I would agree that there is definitely an opportunity to.
Speaker Change: Lean into the current rate environment, and the current rate curve right. So.
Speaker Change: Given sort of my earlier comments around how we think about consumer might be a good place to start we have the opportunity to grow that.
Speaker Change: Consumer portfolio in the first half of the year those are going to be when the rate profile that those credits are going to be the strongest.
Speaker Change: Similarly, as we get the opportunity to think about our deposit book over time, we have a relatively good amount of Cds that are priced in that year or less those as they mature.
Speaker Change: We might take a pause and issuing Cds until rates come down a little bit and take advantage of issuing later and then just naturally.
Speaker Change: With our deposits being a little bit on the sugar and in our lending tend to be on a little bit longer than that upward sloping yield curve is going to provide additional benefits and that's why we're guiding to sort of continued margin growth in that $3 30 to $3 40 range and we don't have a lot of rate cuts in our outlook we have to.
Speaker Change: And I don't know that I would necessarily say if the two based at the two cuts didn't come we'd be in that much of a worse position I mean, we're in pretty I think we're pretty comfortable with.
Speaker Change: Being able to manage through the rate environment in those parameters and even if they don't come.
Got it Okay and then the last one for me I appreciate the net charge off guide.
Maybe you could help us out a little bit with the provision and ore.
Speaker Change: Where you expect the reserve to settle out given the mix shift in the loan portfolio.
Speaker Change: Yes, I would you should expect to see slight increases in provision all else being equal I'm not going to speak to where the credit environment is going to take us because as you know the seasonal models begin to.
Speaker Change: That future expectations on credit losses, but if were projecting some balance sheet growth and some loans, but you should expect to see a similar amount of increases in the provision for loan losses, because we'll have to provide for that growth as we go. So I would just sort of look at it that way.
Speaker Change: That's all I had thanks for taking my questions.
Speaker Change: Your next question comes from the line of Daniel Cardenas with Janney Montgomery Scott. Please go ahead.
Good morning, Hey, Dani.
Speaker Change: Just a quick follow up just a quick follow up excuse me on that provision comment.
Speaker Change: When you say you were looking for a slight increase.
Speaker Change: I guess, the 24 that that's excluding the.
Speaker Change: The fourth quarter results.
Speaker Change: Yes.
Speaker Change: Okay, Yes that would be if were at 1.4 as a percent of loans at the end of the year. If we have loan growth that you kind of stayed consistent with that level of reserving you would expect to see general levels of growth, but it wouldnt.
Speaker Change: Excluding the impact of those transactions.
Speaker Change: Okay Gotcha Gotcha, Okay and then.
Speaker Change: On the capital deployment front, what are your thoughts on buybacks here in 2025, we had a hand up until the deal is done.
Speaker Change: Or would you guys be in the market looking to.
Speaker Change: To buy back stock Opportunistically.
Speaker Change: Yes, I think we've been pretty consistent with our capital priorities, but we'll go back through them right like our number one priority is we're going to our earnings support the dividend that we have out there and then we look for opportunities to support organic growth and then we look for opportunities to deploy.
Speaker Change: For strategic M&A, and then last if we end up not having any of those opportunities and we needed to think about an incremental return to shareholders. We have buybacks kind of in that category. So that has been consistent and we will continue to be consistent so given where our dividend payout ratio is I wouldnt say buybacks are.
Speaker Change: Really contemplated in the near or intermediate future.
Okay.
Speaker Change: Alright, one other questions have been asked and answered thanks, So I'll step back.
Speaker Change: Great. Thank.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Frank's Urology with Piper Sandler. Please go ahead.
Speaker Change: Good morning, Frank Hey, good morning, guys.
Speaker Change: Beta is starting in for Frank.
Speaker Change: Oh, Hi, I had a.
Speaker Change: I had a question.
Speaker Change: About the deposit beta are you guys curious since you guys.
Speaker Change: Is there anything any pressure or pushback on.
Speaker Change: Deposit costs as rates continue to drop maybe what youre seeing in a different market with regard to any pressure or any competition.
Speaker Change: Color on that would be helpful. Thank you.
Speaker Change: Yeah, I mean I.
Speaker Change: I think we're still priced competitively everywhere that we are right. We tend to operate in less competitively intense markets generally and we have not had significant reaction or pushback at the rates that we've had in market in many markets. We have very good very strong kind of top court.
Speaker Change: Title rates.
Speaker Change: For acquisition products and other things so I would not say, we're experiencing that phenomenon.
Speaker Change: Okay.
Speaker Change: Understood.
Speaker Change: I had a previous question I would answer it's all return back to the queue. Thank you.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Again, if you would like to ask a question press star one on your telephone keypad.
Speaker Change: I will now turn the call back over to Doug Shaw for closing remarks.
Speaker Change: Great well, thanks to everybody again, we appreciate your interest in northwest and taking time with us on the call and we will come back to you next quarter. Thank you.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Speaker Change: Okay.
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