NWBI - NASDAQ

Good morning, thank you for joining us, and welcome to Northwest Bancshares Fourth Quarter 2024 Earnings Call. This session is being recorded, and a playback will be available on our Investor Relations website. All participants are currently in listen-only mode. Towards the end of today's call, we will open the floor for a question-and-answer session. Now I would like to introduce Michael Perry, who recently joined Northwest as Managing Director of Corporate Strategy and Development and Investor Relations.

Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares 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.

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 going 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.

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 fulfill 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. 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 non-accrual loan, which added six 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 a 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 2%, 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. Non-interest 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 investment. Non-interest 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% 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 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, having grown 2% versus 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 our cost of funds. 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 non-accrual loan that was paid off in full. This added six basis points to our margin in the quarter. A more normalized net interest margin in the fourth quarter would be about 3.36%. Fully 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. Non-interest income increased $12.2 million from the previous quarter, driven by an increase in other operating income that included the sale of those Visa B shares and the low income housing tax credit I mentioned earlier. Compared to the year ago, 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, 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 non-interest expense. Our adjusted efficiency ratio improved to 59.5% reflect 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 1.4% 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 non-performing assets holding steady at 0.54%, while 30-day loan delinquencies saw a slight increase 90 basis points. Classified loans decreased to 2.44% of total loans and our coverage ratio on non-performing 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. We'll manage deposit costs, while balancing client expectations and market preferences, allowing for continued modest net interest margin expansion. We expect non-interest 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 Penns 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.

[Operator Instructions]. Your first question comes from the line of Tim Switzer with KBW. Your line is open. Please go ahead.

Hi, good morning. Thank you for taking my questions.

Good morning.

Good morning, Tim.

We appreciate the detailed guide you provided in the slide deck here. Can you clarify real quick, for the non-interest income outlook. Does that also exclude the impact of Penns Woods and what's driving that growth there?

Yes. 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.

Yes. 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?

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

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?

Yes. So I think we dealt with most of the stress that, we saw in the long-term healthcare 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 us 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.

Okay. Great. Thank you guys.

Your next question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Thank you. Good morning, guys.

Danny, good morning.

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?

Yes. 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.

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 2016, moving towards more of a normalized loan growth rate maybe in the mid, or a little bit above that percentage growth percentage rate.

Yes. 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.

Hi 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.

Terrific. But 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 dollar perspective.

Yes. 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 or investment securities reposition, we would 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?

It does. Yes. No. Thanks for all the color. I appreciate it. I'll step back.

Your next question comes from the line of Matthew Breese with Stephens, Inc. Please go ahead.

Hi, good morning.

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.

Yes. 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 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 continue to practice 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, he can jump in.

No. It's just appropriate comments. We're just being 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.

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

Yes.

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?

Yes, 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 a little bit of the longer, and 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 two, and I don't know that I would necessarily say if the two base, that 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 don't come.

Got it. Okay. And then the last one from 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?

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 CECL models begin to that 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 would just sort of look at it that way.

That's all I had. Thank you for taking my questions.

Your next question comes from the line of Daniel Cardenas with Janney Montgomery Scott. Please go ahead.

Good morning, guys.

Hi, Danny.

Just a quick follow-up - 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?

Yes.

Okay.

Yes, that would be - if we're at 1.0 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.

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

Yes. I think we've been pretty consistent with our capital priorities, but we'll go back to the 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 counted 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.

Great. Perfect. All right. How many other questions have been asked and answered? Thanks. I'll step back.

Great. Thank you.

Your next question comes from the line of Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning, Frank

Hi, good morning, guys. This is [Bader] just filling in for Frank.

Hello 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.

Yes. 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 REITs, for acquisition products and other things. So I would not say we're experiencing that phenomena.

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

Okay.

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

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.