Northwest Bancshares (NWBI) 4Q24 – 239% increase in Provision for Credit Losses, uncertainty ahead?

$Northwest Bancshares(NWBI)$ released its 4Q24 numbers, which look mostly stable compared to 3Q24. Growth continued to be muted by its conservative approach of reinvesting cash flows from its personal banking portfolio into its commercial banking portfolio.

• Average loans receivable was at $11.2 billion, dropped by 0.2%

• Average deposits were at $12.02 billion, dropped by 0.6%

• Average borrowed funds were at $222 million, increased by 0.8% (the first increase in the last 12 months)

• Net income was $32.75 billion, dropped by 2.6%

The biggest change was in the Provision for Credit Losses which saw an increase of 239% from $4.8 million to $16.5 million, mostly due to steps taken to clean up risky loans to improve their loan book quality going forward and the growth in their commercial banking portfolio (higher yielding lending). During the investor webcast, management indicated that there will likely be increases in the provisions as they expand their portfolio.

For more context, the bank moved some long-term Healthcare loans into the held-for-sale category (loans they plan to sell to other financial institutions soon). In order to make these loans more attractive for buyers they have to sell them at a lower value than what they are worth, which led to a write-down of $15 million in charge-offs.

Loans held for sale increased by 720% from $9.3 million to $76.3 million the highest number in over 10 years. This indicates that the bank might be forecasting worsening economic conditions and bracing for higher defaults.

Non-Performing and Delinquent Loans

The number of non-performing loans has dropped once again by 20% to $62 million quarter over quarter, down 40% in just two quarters. This could be considered excellent news since it can indicate better loan performance and risk management. However, it is hard to believe that underlying credit risk has improved as the reduction was mostly due to writing off/selling off bad loans.

The delinquent loans (loans with missed payments but not yet considered a loss) show us that the borrower's creditworthiness is still poor. There was an increase in delinquent loans of 26% to $100 million compared to 3Q24, primarily driven by loans delinquent between 30 to 59 days where it went from $24.5 million to $56 million (128% increase).

It is important to note that the net charge-offs to average loans ratio for the full year 2024 was 0.32%, the highest level since 2014 when it was 0.35%. While this would typically be considered a warning sign, in the case of NWBI, it was influenced by their strategic charge-offs resulting from loan sales. We can expect this ratio to decrease over time as the quality of their loan portfolio improves.

Yearly Income statement

NWBI reported a net income of $100.27 million in 2024, which is 25% lower than the $134.95 million reported in 2023 and earnings per share were $0.79 against $1.06 in 2023.

This decline was mainly attributed to a loss of $39.4 million on the sale of investments. However, this loss was partially offset by a 13.8% increase in interest income, rising from $587.9 million to $669 million.

Management indicated that the decision to sell these investments was made in order to reinvest the proceeds at higher yields, a strategy that contributed to the positive results seen in the interest income.

Dividend distribution and buybacks

There were no expectations of any dividend increases or share buybacks in the near term. Management indicated that their priorities to deliver higher returns for shareholders are:

1. Ensure they can continue to support the current levels of dividends

2. Seek opportunities for organic growth

3. Engage in strategic M&A (Mergers and Acquisitions)

NWBI announced an agreement to acquire Penns Woods Bancorp, Inc. (Penns Woods)

Merge Overview

Penns Woods is the bank holding for Jersey Shore State Bank and Luzerne Bank, both of which are community banks offering consumer and business banking services across North Central and Pennsylvania. Their key financial highlights are:

• 2.2 billion in assets (~15.27% of NWBI’s)

• 1.9 billion in gross loans (~16.81% of NWBI’s)

• 1.7 billion in deposits (~13.70% of NWBI’s)

The main benefits of the transaction will be:

• Expanding demographic coverage across Southeastern Pennsylvania locations and increasing market share (from 1.43% to 1.74%).

• Increase product offering and cross-selling potential

• Strengthen financial performance and lower NWBI’s dividend payout ratio, which can lead to more cash available for growth or distribution/buybacks.

It will be important to monitor the possible challenges related to the merger, such as system/integration compatibility, employee retention, and potential differences in governance approaches.

Transaction Structure

NWBI will acquire 100% of Penns Woods's ($Penns Woods(PWOD)$) outstanding common stock and there will be a fixed exchange ratio of 2.385x NWBI shares for each PWOD share. The aggregate transaction value will be around $270.4 million ($34.44 per PWOD share), which equals 139% Price/Tangible Book Value per share.

The current CEO of PWOD, Richard Grafmyre, will be added to the NWBI board and the projected ownership will be approximately 87.6% NWBI / 12.4% PWOD.

The merger is expected to close in the third quarter of 2025, making another milestone in the bank’s long-term growth strategy. They provided a nice chart showing a timeline of previous acquisitions which clearly outlines their strategy.

NWBI's Acquisition History