Northwest Bancshares Q1 2025 Earnings Call Transcript

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April 29, 2025

There are 10 speakers on the call.

Operator

you for standing by. At this time, I would like to welcome everyone to the Northwest Bancshares Inc. First Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the conference over to Michael Perry, Northwest Managing Director of Corporate Development and Strategy and Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares' first quarter twenty twenty five earnings call. Joining me today are Lou Torcheaux, President and CEO of Northwest Bancshares Doug Schauser, our Chief Financial Officer Sean Morrow, our Treasurer and T. K. Creel, our Chief Credit Officer.

Speaker 1

During this call, we will refer to information included in the supplemental first quarter earnings presentation, which is available on our Investor Relations website. If you'd like to read our forward looking and other related disclosures, you can find them on Slide two. Thank you. And now I'll hand it over to Lou.

Speaker 2

Good morning, everyone. Thanks for joining us today to discuss our first quarter results. I'm pleased with our performance in the first quarter of twenty twenty five as we continue to execute our strategy and deliver on our commitment to sustainable, responsible and profitable growth. Doug will discuss the details of our core financial performance shortly, but I will address some of the highlights on Slide four. Overall, we had a strong start to the year, delivering $156,000,000 of revenue while controlling our overall expenses to deliver net income of $43,000,000 an increase of $14,000,000 or 48% compared to the same quarter last year and earnings per diluted share of $0.34 compared to $0.23 per diluted share in the first quarter of twenty twenty four.

Speaker 2

This represents record earnings in a first quarter and one of the best quarters in Northwest's history. We continued our strategic shift towards commercial lending with a 20 increase in average commercial C and I loans in the last year. In addition, our successful focus on deposit gathering while maintaining near best in class cost of funds provides a quality and stable funding base for the organization. Additionally, we delivered a significant improvement in our net interest margin as well as in our efficiency ratio, and we reduced our exposure to classified loans, further minimizing our balance sheet risk. And as we have for the previous one hundred and twenty one quarters, on behalf of the Board of Directors, I'm pleased to declare a quarterly dividend of $0.20 per share to shareholders of record as of 05/08/2025.

Speaker 2

Our strong performance this quarter is a result of our continued rigorous focus on execution, cost control and risk management discipline. We continue to enhance our capabilities, expand our footprint and provide personalized services and expertise to our customers, companies and the communities we serve. Our renewed focus on enhancing our retail banking franchise continues. Additionally, we are making good progress with de novo branch opportunities throughout our existing footprint, particularly in Columbus and Indianapolis. I look forward to sharing more details in the upcoming months.

Speaker 2

Regarding acquisitions, in December of last year, we announced a merger with Pennswoods Bancorp, the parent company of Jersey Shore State Bank and Luzerne Bank, headquartered in Williamsport, Pennsylvania. I'm pleased to report that we have now received all required regulatory approvals. And at a special meeting last week, Pennswood shareholders voted to approve the merger. Integration activities are well underway, and we are working closely together to ensure a seamless transition. The strong cultural fit between our two organizations is evident as forward thinking, employee and customer centric banks and a rich history focused on community banking.

Speaker 2

I am pleased to share that we expected to close the merger and convert the bank systems by late July of this year. Upon closing the largest merger in our bank's history, Northwest will be in the top 100 banks in The United States by asset size, further enhancing our scale for driving sustainable forward momentum and revenue. This quarter's strong results can be attributed to the talent, hard work and thought put forth each day by our Northwest team. I want to thank them for their continued dedication to our company's success. The current operating environment with significant market volatility and uncertainty over the economic outlook may be somewhat challenging.

Speaker 2

However, we continue to focus on managing the factors within our control, such as serving our core customers and communities, building on strong financial foundations, maintaining prudent cost control and risk management discipline, and being prepared to capitalize on opportunities aligned with our strategy. Now it's my pleasure to introduce Doug Schauser, our Chief Financial Officer, who will take us through our financial results. Doug?

Speaker 3

Thank you, Lou, and good morning, everyone. As Lou indicated, we are pleased with our performance. Now let's begin on Page five of our earnings presentation where I'll walk you through the highlights of Northwest's financial results for the first quarter of twenty twenty five. We reported net income of $43,000,000 or $0.34 per diluted share and we expanded our net interest margin by 45 basis points from the prior quarter to 3.87% due to lower cost of funds and increased asset yields inclusive of a 39 basis point interest recovery. This marks the fourth quarter in a row of improved margin for the company as we continue to manage our loan pricing and deposit costs.

Speaker 3

Non interest income decreased by $11,700,000 with the majority of the quarter on quarter change arising from two fourth quarter transactions, including a $5,900,000 gain on the sale of our Visa B shares and a 4,300,000 gain on a low income housing tax credit investment. Overall, we did post 1.2% linked quarter revenue growth and 19% revenue growth compared to the first quarter twenty twenty four. Our non interest expense declined 3.8% or $4,000,000 compared with the prior quarter, driven by a reduction in processing expenses and merger related costs and continued disciplined expense management. Pretax pre provision net revenue was $64,500,000 which was a 9% improvement from the fourth quarter twenty twenty four and a 56 increase from the first quarter twenty twenty four based on factors previously mentioned. Now I will highlight some additional details on our quarterly results.

Speaker 3

Turning to Page six and our loan portfolio. We saw some modest growth in end of period loans excluding loans held for sale of $36,000,000 over the quarter compared to the contraction we've been experiencing. For the quarter, we capitalized on stronger consumer demand for indirect loans to offset a potentially slower start on the commercial side and that did pay off. We continue to shift our portfolio mix more towards commercial and industrial loans as part of our longer term strategy. Average commercial loans increased $121,000,000 or 6.2% compared to the fourth quarter.

Speaker 3

Despite some significant payoffs, these increases were effectively offset by the declines in our CRE portfolio, which was down 3.5% and our residential mortgage and home equity portfolios, which were down 1.91.3% respectively. Loan yields increased quarter on quarter by 44 basis points to 6%, again benefiting from an interest recovery where we were up four basis points on a normalized basis despite recent Fed cuts as we have been focused on pricing discipline. On to Slide seven and the bedrock of our financial strength and stability, namely our deposit base. Deposit balances remained strong with average total deposits increasing $60,000,000 quarter over quarter and growing 1.7% or $200,000,000 versus the first quarter of twenty twenty four. Consumer non brokered average deposits increased $68,000,000 quarter over quarter, while brokered deposits decreased $8,000,000 over the same period and the pace of volumes into higher cost CDs continued to slow.

Speaker 3

Our cost of deposits decreased nine basis points quarter over quarter as the impacts of Fed rate cuts flowed through along with proactive management of the overall portfolio. Our current cost of deposit stands at 1.59%, still near best in class relative to our peers. Moving to Slide eight and our net interest margin. We have already covered our NIM improvement for the quarter in the summary, but I also want to highlight that the yield on our security portfolio has continued to improve as we continue to reinvest cash flows at higher yields than the current portfolio and we have seen a reduction in our total cost of funds by 12 basis points this quarter. The next two pages provide some additional details on our funding mix and securities portfolio.

Speaker 3

Moving on to slide 11. Non interest income, as I mentioned earlier, decreased $11,700,000 from the last quarter as it returned to more typical levels following the previous quarter's asset sale gains. Non interest income increased approximately $400,000 compared to a year ago, driven by higher SBA loan sales and improvements in market sensitive revenue streams like trust income compared to prior year periods. Slide 12 details our noninterest expense. In the first quarter, we incurred approximately $92,000,000 of expenses, which was up 2% from the first quarter of twenty twenty four.

Speaker 3

About 1,100,000 of that increase was merger related. So excluding that line item, expenses dropped to around $91,000,000 consistent with the expense run rate in the second and third quarters of twenty twenty four. Our adjusted efficiency ratio improved to 57.7%, an improvement from the 59.6% in the prior quarter. This reflects our continued focus on managing expenses without an impact on our core operations or sacrificing customer service while still investing in talent to support future growth. On the next few slides, we cover credit quality.

Speaker 3

On Page 13, you can see our overall coverage ratio is at 1.09%, up slightly from fourth quarter twenty twenty four due to growth within the commercial lending portfolio and changes within the macroeconomic forecast. Our overall coverage is in line with the first through third quarters of twenty twenty four and we believe this is appropriately prudent given the overall level of market concern and general uncertainty over tariffs. Our annualized net charge offs of eight basis points for the quarter returned to historic levels after the fourth quarter write downs of loans sold and transferred to held for sale and we booked an $8,300,000 provision expense. As we have previously indicated in our 2025 outlook, we expect the longer term over the cycle level of net charge offs will be in the range of 25 to 35 basis points. Turning to Page 14.

Speaker 3

Our credit risk metrics remain stable and well within historic levels. As previously reported, we took several derisking actions in the fourth quarter, including the sale and transfer of certain loans from our books. We saw improvement in both non performing loans and non performing assets at 53 basis points and 52 basis points of loans and assets respectively both at five quarter lows. The thirty day plus delinquency increased 10 basis points in the quarter and is attributed to one commercial real estate loan that had previously been identified as classified and on non accrual. The increase of five basis points in classified loans over the prior quarter was primarily driven by a few small commercial CRE and business banking loans.

Speaker 3

Slides fifteen and sixteen highlight our commercial loan distribution, showcasing a diverse portfolio and some detail on our CRE concentration, including our health care sector focus. In short, our diverse portfolio and strong underwriting has helped us avoid many industry CRE specific issues, and we have minimal exposure to large metro office or rent control markets. We have no significant maturity or interest rate rollover risk. I'd like to now review our 2025 outlook, which we shared earlier in the year and which can be found on Slide 17. As a reminder, our outlook excludes any impact from the previously announced Pennswood acquisition.

Speaker 3

As Lou mentioned, the operating environment is one of significant market volatility and there is uncertainty over the economic outlook for the remainder of the year. At this time, we are not modifying the outlook we provided on last quarter's call and we will continue to monitor economic trends and how they impact our firm. I would say we can expect our margin to perform at or somewhat above the high end of our range assuming one to three Fed cuts occur in the back half of the year. Our fee income will likely be at the lower end of the range. We may not fully achieve that level.

Speaker 3

Loan growth will also be dependent on the broader economic environment, which is again unpredictable. We'll focus on controlling expenses in light of the uncertainty. I will now turn the call over to the operator, who will open the lines and facilitate the live Q and A session.

Speaker 4

Thank you. Ladies and gentlemen, at this time, Our first question comes from the line of Daniel Tamato from Raymond James. Sir, please go ahead.

Speaker 5

Thanks. Good morning, guys.

Speaker 6

Good morning.

Speaker 5

Maybe starting, just kind of drilling into the margin guidance a little bit, Doug. I was about to ask you about the conservative nature perhaps of the keeping the guide and then you made the comment right at the end about at or above the range. So just curious kind of how you're thinking about that going forward. I mean, like kind of near term relative to end of the year, you've got the one to three cuts in there. I'm sorry.

Speaker 5

I think you sorry, if you could just clarify the number of cuts that you've got in there. And then just thoughts on how that margin, the core margin may trend and if you've got any updated thoughts on what the acquisition may do to the margin as well, that'd be great.

Speaker 3

Yes. Thanks for the question, Daniel. So I think we closed the quarter kind of on a core margin of 3.48%. I think that it is safe to assume we'll kind of be at the high end of the range. We're leaving a little bit of room because the overall pricing is pretty aggressive right now.

Speaker 3

So to the extent that we want to continue to work through loan growth, that may deteriorate the margin slightly, but I wouldn't anticipate it to be material. There's also still some opportunity on the deposit portfolio as it relates to future rate cuts. We do have one to two rate cuts in our guidance. Again, if we end up with three rate cuts, assuming the last rate cut comes very late in the year, it's really not going to change our margin outlook at all. And we'll update we'll provide more guidance as it relates to Pennswood and the impact of the acquisition in the second quarter after that deal, will be closed, and we'll have much better thoughts around where the, loan marks came in as well as the purchase price.

Speaker 3

So there wasn't a lot of reason to update the guidance given the fact that it really is only good for another quarter anyway and that the performance right now kind of was where it was.

Speaker 5

Okay. And then I guess just looking at the deposits, so kind of really similar question related to the margin, but you had good really pretty strong money market growth in the quarter. Curious the driver there. The overall average rates are still very low at 1.81% in the quarter. Just curious what you were bringing those on in the first quarter and where you're expecting to drive deposit growth going forward?

Speaker 3

Yes. So we continue to have a lot of CDs that are coming due. And we have we are trying to get those into more liquid pricing or more liquid products going forward. So you are seeing some of that transition from CDs in the money markets. I believe the CDs went on at 3.75% on average across the franchise.

Speaker 3

So that's the strategy. We have seen really consistent, strong, stable deposit and slight growth throughout our footprint, and we'll continue to augment that with our de novo strategy. We are opening a new branch this year in Fishers, Indiana. That will be our first branch opening in, like, six years. So I think there's a number of factors that are leading to that confidence in deposit growth as well as the slowdown in the economy happens, you'll tend to see consumers hold deposits a bit longer anyway.

Speaker 5

Okay. And is it safe to assume the new money market I mean, money market rates going up basically, but just moving out of CDs, I'm assuming those are in the threes somewhere?

Speaker 3

CDs would be in the would be higher than that. They'd be in the fours because they would have all gone on last year before the rate cuts came through, and they're all relatively short. So it would be an improvement if they ended up in money market in terms of overall Yeah. Sorry. Deposits.

Speaker 5

Yeah. Just on the money market rates, the new money market rates.

Speaker 3

Yeah. New money market rates around 3.75%.

Speaker 5

Oh, got it. Okay. I understand. Okay. All right.

Speaker 5

Thanks for taking my questions. Thank you.

Speaker 4

Thank you. Our next question comes from the line of Tim Switzer from KBW. Please go ahead.

Speaker 6

Hey, good morning. Thank you for taking

Speaker 7

my questions. Hope you guys are doing well.

Speaker 5

Hey, good morning.

Speaker 7

Congratulations on getting the the approvals for Finswoods. Are you guys able to provide any kind of guidelines on, maybe the the changes to tangible book value dilution and the expected purchase accounting accretion due to the change in rates since you guys have announced the deal?

Speaker 3

No, not specific. Generally speaking, rates have gone down, so that will tend to benefit us in terms of the marks that go on the portfolio. And the overall, our stock price has been lower across the performance horizon. So we have a fixed exchange ratio. So that would yield a lower purchase price.

Speaker 3

But again, both are volatile and variable. So we're not going to provide incremental guidance because we'd have to constantly update it because of that. So right now, we would be in a better position relative to the originally announced metrics, but, you know, there is time between now and when we actually close the deal.

Speaker 7

I got you. I understand. And are you able to provide a bit of an update on the credit trends you guys are seeing, particularly with a lot of the disruption from the tariffs and macro uncertainty? You know, are there any industries particularly impacted by by tariffs that you guys feel that you're exposed to? And, you know, how have the conversations with those customers been?

Speaker 3

Yeah. I mean, it's still pretty early, and there hasn't been a lot of impact that I think has rolled through even the broader economy or us specifically. We have looked at the exposure, and I think we would look at industries like manufacturing, transportation and warehousing, and hospitality being potentially the most impacted from these current actions. The aggregate exposure to those industries is close to 8% of the loan portfolio. So not massive at this point, but certainly something that we're looking at.

Speaker 7

Okay. I got it. And, last question for me. Are you guys able to provide an update on the commercial loan build out you guys have been working on? And any specific categories where you guys have more recently been, taking share in?

Speaker 3

I think we continue to take share in the newer verticals that we put on. So think about sports finance, franchise finance, etcetera. The overall mix of commercial businesses, it's the same six verticals or so that we had before. So again, we are able to pick some of that up just because those employees have been on now closer to a year. They've had more time to transition, and they have more time to work their books.

Speaker 3

Again, you know, we are part of this overall broader economic slowdown. It's anybody's guess where those volumes continue to go, but we are lucky in that we were building some of those into the softness. So there's a little bit of embedded growth through that.

Speaker 7

Got it. Thank you for all the color.

Speaker 3

You're welcome.

Speaker 4

Thank you. Our next question comes from the line of Manuel Nava. Please go ahead.

Speaker 8

This is Sharon Gee on for Manuel. Good morning.

Speaker 5

Good morning.

Speaker 8

Going, talking about the commercial book a little bit more, what do pipelines look like right now?

Speaker 3

Again, we haven't seen a ton of slowdown just yet. It's still pretty early, and we do have some incremental pipeline growth again because we have the newer verticals out there. So the pipelines right now relative to the first quarter a year ago would show that they are a little bit stronger, but, you know, I still also think some of the tariff effects will continue to roll through the pipeline. So, right, cautiously optimistic on our loan pipelines is how I would phrase it.

Speaker 8

Great. Thank you. And then, one more question on credit. So, charge offs were 80 basis points. Thanks for the guidance.

Speaker 8

Could you give us updates on, like, your provisions slash credit expectations going forward?

Speaker 3

Again, there's so much economic volatility. It's very hard to predict where those levels would be. We'll continue to operate under the current CECL methodologies as everyone will, and we'll have to wait to see where the macroeconomic trends end at the end of the quarter.

Speaker 8

Great. Thank you.

Speaker 4

Thank you. Our next question comes from the line of Matthew Breese from Stephens Inc. Please go ahead.

Speaker 9

Hey, good morning.

Speaker 3

Good morning. I

Speaker 6

was hoping you could talk a little

Speaker 9

bit about the competitive landscape. Where are you seeing the most spread compression? And then I would love to hear a bit about roll on versus roll off yields. Across your lending category, where are you getting the most pickup? Thanks.

Speaker 3

Yep. So I don't know that I have a lot of color to offer on the competitive, environment only because, again, we're not in many, many markets that other larger peers would be. So I kind of refer you back to where they said, new commercial loan yields are coming on at 7.26%, and they're rolling off at around 6.76%. I know that's part of your answer. So there's definitely a decent increase in rates there.

Speaker 3

But, again, from as far as competitive intensity goes, I mean, it's still very competitive out there. You know as well as I do. Everybody was predicting asset growth. So that asset growth does become harder to come by, especially when things slow down, but no specific guidance there.

Speaker 2

I might add for you though that really we're looking at being very disciplined in the credits we're looking at and the pricing that we want to maintain. So I just think naturally that might constrict. And that's why our guidance hasn't really changed on the commercial side, notwithstanding our pipelines are a little stronger than expected. And I think, as Doug mentioned, what the pipelines are and what the pull through rates are might be different sixty, ninety days from now. We're cautiously optimistic there.

Speaker 9

Yeah. Just to follow-up on that last comment. If the pull through isn't as strong, one of the things we saw this quarter was consumer loan growth was a bit stronger than we've seen in a while. That a lever you might pull? And as we think about the composition of growth this year, should we anticipate a bit more consumer growth?

Speaker 2

Potentially. I mean, we're we're balancing that with what we think the future environment is going to be from a credit quality standpoint. We do have that lever in indirect. We currently are out with a home equity campaign pretty significantly throughout the franchise. But if we see that the consumer credit starts to weaken, we can always pull that back.

Speaker 2

So obviously, we're balancing growth and risk and yield. And so we're pretty active around that. And one of the benefits of the organization as we've constructed it in the last few years is we are very diversified, and we do have a lot of levers. So there's there's constantly conversation around the strategy and how we go to market.

Speaker 9

Got it. That's all I had.

Speaker 5

I appreciate taking my questions. Thank you.

Speaker 7

Thank you.

Speaker 5

Thank you. Our

Speaker 4

last question comes from the line of Brian Firaldi from Piper Sandler. Please go ahead.

Speaker 6

Good morning.

Speaker 3

Good morning.

Speaker 6

Just on the obviously, you you already talked about NIM and and and and for the same token, the NII guide seems obviously quite conservative here at this point. You know, I know Pennwood's gonna change that anyway in the back half of the year, but just just trying to think through in terms of you mentioned pipelines a little stronger here. That two to 3% loan growth assumption, is that always kind of been backloaded? Is that still kind of the the way to think about it? And and was that always the the assumption here in terms of loan growth for the year?

Speaker 3

I wouldn't say it was necessarily backloaded. I do think the way the economy started, it was definitely a slower start for commercial because there was a lot of uncertainty there. So we did lean a little bit more heavily to consumer as was discussed earlier. Also, just the way the rate curve is gonna play out. Long lower duration consumer assets that are priced at the high at higher rates today than they would be in the third or fourth quarter seems to make some sense to manage the margin.

Speaker 3

So for all those reasons, you saw us pivot and lean a little bit more heavily into the available consumer loan volume. And then, you know, towards the back half of the year, if things settle down with tariffs and you get a little bit more certainty out there and commercial customers are going to start borrowing, we would hope to take advantage of that as perhaps the consumer if there was pull through of consumer demand upfront, obviously, that lever would sort of slow down for us and everybody. So we're just trying to be very active in the environment that that presents itself.

Speaker 6

Okay. And then, now is probably not gonna be the, the time you start doing it. But, just curious for modeling purposes, if in the past have you did you provide any sort of guidance on, how the Pennswood's acquisition would impact, NIM going forward?

Speaker 3

No. If you go back to what we had originally published, I don't think we provided specific guidance there. Again, it's so volatile with rates. It's very difficult to put guidance out there until we get closer to the closing. So, again, with an anticipated close later in July, when we come to this call in July, we should be able to provide much more clarity around Tenswood and its impact.

Speaker 6

Great. Okay. And then that's fair. And then just, just on act on m and a in general, obviously, you got the the one that's still closed, but, seems like, at this point, seem pretty confident. Makes sense, given you've gotten approvals and so forth to close this thing.

Speaker 6

What just trying to think through how open you are to additional deals. You mentioned this is a larger acquisition, and the rate picture has been very volatile, which makes, obviously, to your point, marks difficult on an even day to day basis to calculate. But, you know, we've seen some banks come back and and do deal after deal. I'm just curious how open you guys could be to additional m and a in the back half of this year. Is that something probably farther out at this point?

Speaker 2

Yeah. Hi. This is Lou. You know, in the current environment, I I think it's it's sort of very tepid, right, given given what's going on with stock prices and and the volatility. But but certainly, as we've sort of communicated to you before, we have a dual strategy.

Speaker 2

In the interim, until the M and A market really becomes more active again, we'll be focused internally on our discipline, on efficiency, on execution, on growing the commercial vertical. So we've got plenty to do. Having said that, I'm still engaged in conversations with other CEOs and and taking meetings, and we will look for transactions in the future that are highly accretive, add to our revenue arc, our earnings per share, and add value to the firm for our shareholders. So I think, from my perspective, the strategy is still in place. But certainly, in this environment, there's a lull.

Speaker 4

Thank you. This concludes our question and answer session. I would like to turn the call back to Mr. Lu for closing remarks.

Speaker 2

Thank you. On behalf of the entire leadership team and the Board of Directors, thank you for joining our call this morning. With strong and stable financial foundations and tight cost controls and risk management discipline, we are ready and well prepared to capitalize on opportunities for driving sustainable, responsible growth when and where they arise in the coming months. I look forward to updating all of you on our progress on our second quarter earnings call later this year.

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