Participants

Michael Perry; Managing Director of Corporate Development and Strategy and Investor Relations; Northwest Bancshares Inc

Louis Torchio; President, Chief Executive Officer, Director; Northwest Bancshares Inc

Douglas Schosser; Chief Financial Officer; Northwest Bancshares Inc

Thomas Creal; Chief Credit Officer; Northwest Bancshares Inc

Tim Switzer; Analyst; Keefe, Bruyette & Woods Inc

Daniel Tamayo; Analyst; Raymond James Financial Inc

Matthew Breese; Analyst; Stephens Inc

Daniel Cardenas; Analyst; Janney Montgomery Scott LLC

Unidentified Participant

Presentation

Operator

Good morning, thank you for joining us, and welcome to Northwest Bancshares's fourth-quarter 2024 earnings call. This session is being recorded, and playback will be available on our Investor Relations website. (Operator Instructions)
Now I would like to introduce Michael Perry, who recently joined Northwest as Managing Director of Corporate Strategy and Development and Investor Relations.

Michael Perry

Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares's fourth-quarter 2024 earnings call. It's great to be here. Joining me today are Louis Torchio, President and CEO of Northwest Bancshares; Doug Schosser, our Chief Financial Officer; Sean Morrow, our Treasurer; and TK Creal, our Chief Credit Officer. During this call, we will refer to information included in the supplemental earnings release 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 2. Thank you. And now I'll hand it over to Lou.

Louis Torchio

Good morning, everyone. Thanks for joining us to discuss our quarterly results. I'm 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. In particular, last quarter, we saw a 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. 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. In addition, we were able to reduce classified loans, helping us further eliminate risk from the balance sheet.
All these results can be attributed to the talent, hard work and thought put forth each day by the middle of our Northwest team. I want to thank them for their continued dedication to our company's success as well as their focus on our customers and communities. As we have reported, at Northwest, we are steadfast in our commitment to responsible growth, both organically and through acquisition.
With that, I'm happy to report that last quarter, we announced that we entered into an agreement to acquire Penns Woods Bancorp. This transaction is expected to be completed sometime in the third quarter of this year. This merger is Northwest's largest to date and marks another milestone in our long-term strategy.
It further connects our Pennsylvania franchise and will make us one of the top 100 largest banks in the nation. Finally, as we have for the previous 120 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 February 3, 2025.
Now it's my pleasure to introduce Doug Schosser, our Chief Financial Officer, who will take us through our financial results.

Douglas Schosser

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 for the investment community. We're really excited to add Michael and his extensive knowledge and experience to the Northwest team.
Now let's begin on page 4 of the earnings presentation, where I'll highlight Northwest financial results for the fourth quarter of 2024. We reported a net income of $33 million or $0.26 per diluted share. Our net interest margin expanded by 13 basis points this quarter to 3.42%, aided partially by an interest recovery on a nonaccrual loan, which added 6 basis points to that margin.
We continue to see our margin increase due to our continued pricing discipline on our deposit portfolio and our focus on appropriate pricing on our originated loans, supported by more favorable rate environment. Compared to the same quarter last year, our loan portfolio balances were essentially flat. So we do see improvement in our mix as commercial loans increased and the portfolio becomes more commercially weighted.
Deposit balances grew by 8% compared to the fourth quarter a year ago and cost of funds decreased even further as we saw volumes in the higher-yielding savings products declined. Noninterest income increased $12 million for the quarter, which includes a $6 million gain on the sale of the last tranche of our vis-a-vis shares and a $4 million gain related to a low-income [house] ex-credit investment. Noninterest expense increased by 5% or approximately $3 million from the third quarter.
Credit quality remained strong with overall allowance coverage decreasing to 1.04% of loans from 1.11% 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 1 capital to risk-weighted assets of 13.8% and on December 31 estimated. Now let's delve into additional details. On page 5, you'll see our commercial and industrial loans grew by 6.2% since last quarter and 23.5% year-over-year, while our residential mortgages declined by 6.6% since last year.
The shift underscores our focus on our commercial banking transformation. Our commercial real estate portfolio shrank by 0.4% since last quarter, reflecting a more desirable loan mix with a higher share of C&I compared to CRE. Our loan yields remained steady this quarter at 5.6%.
Moving to page 6. Deposits remained strong through the end of 2024 and having grown 2% in the end of 2023. During the last quarter, we recognized the benefits of lower short-term interest rates with a 10-basis point decrease in cost of months. Most deposit growth occurred in the interest-bearing demand products while volumes and higher cost and higher yield savings products continue to slow. The current cost of deposits stands at 1.68%, again, down 10 basis points from the third quarter and still near best-in-class relative to our peers.
On page 7, we covered the net interest margin, which now stands at 3.42%, up from 3.33% last quarter. Included in the fourth quarter results was an interest recovery on a nonaccrual loan that was paid off in full has added 6 basis points to our margin in the quarter. A more normalized net interest margin in the fourth quarter would be about 3.36%.
The early tax equivalent net interest income grew by approximately 4% from $112 million last quarter to $115 million this quarter. This marks our second consecutive quarter of net interest income growth reflecting reduced borrowings, higher loan yields and a reduction in our cost of funds. We ended the quarter with a cost of funds of 2.27%, a significant improvement from the last quarter. We have included some additional information on the margin on the next few slides.
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 those B2B shares and the low-income housing tax credit I mentioned earlier.
Compared to the year ago quarter, we saw an $11 million increase in noninterest income as a result of our continued growth in trust income, higher gains on sale of SBA loans and BOLI income, partially offset by lower gains on the sale of REO properties and a prior gain on sale of non-SBA loans.
Slide 11 details our noninterest expense. Our adjusted efficiency ratio improved to 59.5%, reflecting our continued focus on managing expenses without impacting core operations or sacrificing customer service. Regarding credit quality on page 12, our allowance to loans coverage decreased to 1.04% with net charge-offs recorded at 87 basis points including the impacts of our derisking activities taken within the quarter. If we exclude those impacts, our charge-offs would be just 35 basis points.
Page 13 shows that overall credit performance remained strong with nonperforming assets holding steady at 0.54%, while 30-day loan delinquencies saw a slight increase 20 basis points. Classified loans decreased to 2.44% of total loans and our coverage ratio on nonperforming loans increased to 188% from 162% recorded in the third quarter.
Slide 14 highlights our commercial loan concentration showcasing a diverse portfolio. Strong underwriting has helped us avoid many CRE-specific issues, and we have minimal exposure to large metro office or rent-controlled markets. With the success of 2024, we have entered 2025 with significant momentum.
I'd like to review our 2025 guidance, which can be found on slide 16. We will still continue to focus on responsible and profitable loan growth in the commercial space, particularly C&I lending. We anticipate low single-digit loan and deposit growth will manage deposit costs while balancing client expectations and market preferences, allowing for continued modest net interest margin expansion.
We expect noninterest income to be in the range of $124 million to $129 million for the full year. We will keep expense growth in the low single digits in 2025 as we shift our focus to creating positive operating leverage and balance expense growth and our long-term investments.
Both our tax rate and net charge-offs are expected to normalize in 2025 as our net charge-offs will remain within our normalized range of 25 to 35 basis points, and our tax rate will remain unchanged. Our guidance excludes any impact from the recently announced acquisition of Pens Woods.
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.

Question and Answer Session

Operator

(Operator Instructions)
Tim Switzer, KBW.

Tim Switzer

Hey, good morning. Thank you for taking my questions. We appreciate the detailed guide you provided in the slide deck here. Can you clarify real quick for the noninterest income outlook. Does that also exclude the impact of Penns Woods and what's driving that growth there?

Douglas Schosser

Yeah. All of the guidance we're providing excludes the impact from Penns Woods, and we are focused on driving better fee income performance and more consistent fee income performance strategically within the firm. So that's an expectation that we'll be able to generate that type of activity through the course of the year.
I think we also provided more of a numerical guide only because we had so many things rolling through fee income this year that were a little bit unique like the securities restructure that we wanted to be transparent with where we were targeting fee income.

Tim Switzer

Yeah. No, it's super helpful. I appreciate you doing that. And if we think about the NII outlook with Penns Woods, 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, you expected tangible book value dilution? And then what's the expected purchase accounting as of most recently with the change in the yield curve.

Douglas Schosser

Yeah, we're not intending to provide updated guidance on the Penns 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.

Tim Switzer

Okay. 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, what the credit quality looks like? And then, are you seeing any other areas outside of that book that more cautious about or anything you're seeing in maybe the consumer portfolio?

Douglas Schosser

Yeah. 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 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 in the rest of the book and feel like we're entering the year in a pretty stable position. We 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.

Tim Switzer

Okay, great. Thank you, guys.

Operator

Daniel Tamayo, Raymond James.

Daniel Tamayo

Thank you. Good morning, guys. So I guess my first question, just on the loan growth side. You talked about, I think, a low single digits for the year. You've had strong momentum certainly on the commercial side. Maybe if you could just talk about what you're 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 you're thinking about it kind of segmented out a little bit?

Douglas Schosser

Yeah. So we are looking at decent pipeline strength in our pipelines right now for commercial. So we feel that there's going to be a more constructive environment in 2025 as all of the different changes in administration and all 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 some expense growth this year. We will allow for some additional hiring in the commercial verticals as well just to continue to develop the build-out 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 or the commercial portfolios next year. we'll take advantage of them, and we expect some of that business to be available for us. So that's reflective of the overall guide of some modest balance sheet for next year.

Daniel Tamayo

Got it. That makes sense. So you think it's maybe a little bit slower than what it can be on a total loan growth basis next year and then you could potentially end the year a little bit faster and going into '26, moving towards more of a normalized loan growth rate maybe in the mid or a little bit above that percentage growth, percentage rate.

Douglas Schosser

Yeah. I mean, again, there's fluctuations that you have to deal with all along the way, right? Like all these weather events are certainly going to slow down, for example, the car sale market, right? So when we have opportunities to take advantage, we will, but we can't 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 making sure that we get good pricing and good terms on both consumer and commercial loans. And when those 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 taking significant levels of growth at rates that aren't going to produce a stable and growing margin.

Louis Torchio

Hey, Danny, it's Lou. I would just add the strategy is intact, right? So we're going to have the maturation of the verticals that we've discussed on prior calls and prior meetings as well as we have a renewed focus on the, what we call the core franchise middle market, lower middle market in the four states that we have retail presence.
And so to your point about while it may be a slower start to the year, we're looking to pick up steam in the latter part of the year a little bit as well as, we have a continued focus on deposit gathering in our commercial franchise. And so that will become more evident as we move along through the year as well.
And as Doug pointed out, it's not that we're completely focused on commercial. So notwithstanding, we have these mortgages on the balance sheet that really are low rate and long that we're running off. We'll have some opportunities in the consumer segment. And so we'll look for balanced growth in that area as well.

Daniel Tamayo

Terrific. Thanks for all that color. I guess just one last one, maybe on the securities book. I'm just looking at your slide 9 here on that. You've got the direct duration of five and four years. So I'm just curious kind of what's rolling off this year where you might see some benefit in terms of the margin in 2025, obviously, that book remains a little bit of a drag on the NIM overall from a dollars perspective.

Douglas Schosser

Yeah. I'll turn it over to Sean, if he have any specifics he wants to highlight on things that are rolling off. I mean, we are reinvesting cash flows into higher-yielding securities. So that will continue to help drag that -- or that return up over time. If there is an opportunity over the course of the year to consider a balance sheet -- investment securities reposition, we will probably take advantage of that.
But again, 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 of that portfolio. And as we continue to get positive cash flows from it, we'll obviously be reinvesting at higher rates.
Does that answer your question?

Daniel Tamayo

It does. Yeah. No, thanks for all the color. I appreciate it. I'll step back.

Operator

Matthew Breese, Stephens, Inc.

Matthew Breese

Hey, good morning. I wanted to touch on commercial real estate just for a second. A lot of your peers in similar situations as you with lower CRE concentrations, many of them have been kind of nibbling back into the space as a lot of your higher CRE concentration peers have kind of pulled back. And I'm curious if you've kind of looked at spreads and yields and if there's been any sort of change in thinking there? And is that a book if the yields present themselves that we might see some growth in '25? Thank you.

Douglas Schosser

Yeah. I think -- I mean I said 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 and then have good risk profiles, we're going to take advantage and do those deals. 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 that 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 good credit discipline in that space and take advantage when there are good opportunities to do commercial real estate deals, we'll do them. But again, we're liking how the balance sheet is shaping up through the natural flows and the business opportunities that we're taking advantage of.
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 different dynamics on our net interest income also. But if TK has anything to add, you can jump in.

Thomas Creal

No, it's appropriate comments. We've just been really strategic about those opportunities. We obviously have the balance sheet to lean into that space if we want to, when we find the appropriate opportunities.

Matthew Breese

So from our perspective, is it fair to consider that portion of the loan portfolio flattish for the year. Is that a fair statement?

Douglas Schosser

Yes.

Matthew Breese

Thank you. And then I was hoping you could also just go into expectations around loan and deposit betas expectations for the year? And as you exit 2025, do you think there's an upward bias to the NIM, given the shape of the yield curve? And actually 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.

Douglas Schosser

Yeah, I would agree that there's definitely opportunity to lean into the current rate environment and the current rate curve, right? So 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 the consumer portfolio in the first half of the year. Those are going to be when the rate profile of those credits are going to be the strongest.
Similarly, as we get the opportunity to think about our deposit book over time. We had a relatively good amount of CDs that are priced in that year or less. Those as they mature, we might take a pause in issuing CDs until rates come down a little bit and take advantage of issuing later.
And then just naturally, with our deposits being a little bit on the shorter end and our lending tend to be on the little bit of the longer and that uploading 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 two, and I don't know that I would necessarily say if 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 being able to manage through the rate environment in those parameters and even if they didn't come.

Matthew Breese

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/or where you expect the reserve to settle out given the mix shift in the loan portfolio.

Douglas Schosser

Yeah. 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 CECL models begin to (inaudible) future expectations on credit losses. But if we're projecting some balance sheet growth in 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 will just sort of look at it that way.

Matthew Breese

That's all I had. Thanks for taking my questions.

Operator

Daniel Cardenas, Jannie Montgomery Scott.

Daniel Cardenas

Good morning, guys. Just a quick follow-up -- excuse me, on that provision comment. When you say we're looking for a slight increase, I guess, the '24, that's excluding the fourth quarter results.

Douglas Schosser

Yes. Yeah, that would be -- if we're at 1.04% as a percent of loans at the end of the year, if we have loan growth, if you kind of stay consistent with that level of reserving, you would expect to see general levels of growth, but it wouldn't kind of excluding the impact of those transactions.

Daniel Cardenas

Perfect. Okay. Got you. And then on capital deployment front, what are your thoughts on buybacks here in 2025? Are you kind of handcuffed until the deal is done? Or would you guys be in the market looking to buy back stock opportunistically.

Douglas Schosser

Yeah. I think we've been pretty consistent with our capital priorities, but we'll go back to 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 for strategic M&A.
And then last, if we end up not having any of those opportunities that we needed to think about an incremental return to shareholders, we have buybacks kind of in that category. So that has been consistent and will continue to be consistent. So given where our dividend payout ratio is, I wouldn't say buybacks are really contemplated in the near or intermediate future.

Daniel Cardenas

Perfect. All right, all my other questions you've been asked and answered. Thanks. So I'll step back.

Douglas Schosser

Great. Thank you.

Operator

Frank Schiraldi, Piper Sandler.

Douglas Schosser

Morning, Frank.

Unidentified Participant

Hey, good morning, Doug. This is [Bader] just filling in for Frank. I had a question about the deposit base. Are you guys curious as you guys experiencing any pressure or pushback on deposit costs as rates continue to drop, maybe what you're seeing in the different markets with regard to any pressure or any competition? Any color on that would be helpful. Thank you.

Douglas Schosser

Yeah. I mean 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 the market. And in many markets, we have very good, very strong kind of top quartile rates for acquisition products and other things. So I would not say we're experiencing that phenomenon.

Unidentified Participant

Understood. I had a previous question that was answered. So I'll return back to the queue. Thank you.

Douglas Schosser

Okay.

Operator

(Operator Instructions)
I will now turn the call back over to Doug Schosser for closing remarks.

Douglas Schosser

Great. Well, thanks, 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.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.