Northwest Bancshares, Inc. (NWBI) Earnings Call Transcript & Summary

Thank you for standing by. My name is [Carla], and I will be your conference operator today. At this time, I would like to welcome everyone to the Northwest Bancshares, Inc. Q2 2026 Earnings Call. [Operator Instructions] I'd now like to turn the conference over to Michael Perry, Northwest Managing Director of Corporate Development and Strategy and Investor Relations. You may begin.

Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares Second Quarter 2026 Earnings Call. Joining me today are Lou Torchio, President and CEO of Northwest Bancshares; Doug Schosser, our Chief Financial Officer; and T.K. Creal, our Chief Credit Officer. During this call, we will refer to information included in the supplemental second quarter 2026 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 2. Thank you. And now I'll hand it over to Lou.

Good morning, everyone. Thank you for joining us today to discuss our second quarter 2026 results. I'll let Doug take you through the details of our second quarter performance in a moment. But first, I want to reflect on several important milestones, including record net income and how they have contributed to our achievements and momentum in the second quarter, positioning us well for continued growth in 2026. We recently passed the 1-year anniversary of the closing of the Penns Woods acquisition, which has been a very successful accretive transaction for us. And on a static basis, we have achieved the full tangible book value earn-back within 1 year and expect to achieve the full earn-back on a crossover basis by the end of 2026, significantly ahead of our expectations when we announced the transaction. This quarter, we achieved our fourth consecutive quarter of improvement in both our net interest margin and adjusted efficiency ratio, evidence of the growing momentum and continuing transformation at Northwest. Also, tomorrow, we have the official grand opening of our first de novo financial center in Columbus. This is the first of our 4 new financial centers that we plan to open in Columbus this year with more to follow in 2027. We are excited about the growth opportunities that our expansion will bring to our headquarters market. On a personal note, with more than 3 decades in the banking industry, I can say with confidence that our new financial center takes the customer experience to a completely different level. It is aesthetically striking and brings to life the hospitality-led approach [indiscernible] and his team have embedded across our consumer bank. Now turning to Slide 4. You can see some of the financial highlights of the second quarter of 2026. We delivered $54 million in net income for the second quarter, a record in the company's history, resulting in more than 59% year-over-year growth in net income. Also, other than the second quarter of 2021, when we divested our insurance business for a large gain, we delivered diluted earnings per share of $0.36 in the second quarter, which is also a record for the bank. Momentum in our C&I business continued with $148 million of average C&I loan growth in the second quarter, representing 32% year-over-year growth. We continue to grow our nationwide business verticals in a very disciplined manner. And collectively, they now represent approximately 27% of our commercial lending portfolio. We are pleased with the performance of these verticals, which are led by experienced and highly networked industry leaders. In addition, we continue to focus on investing in and growing our in-market regional and middle market commercial lending business. We are also growing our SBA lending business, both locally and nationally, including several key new hires this year with significant industry experience to further build on our momentum from earning a spot among the top 50 originators in the U.S. by volume in 2025. We recorded net interest margin of 375 basis points in the second quarter of 2026, benefiting from our deposit franchise, which continues to be one of Northwest's core strengths. We achieved our fourth consecutive quarter of lower deposit costs, one of the best-in-class among our peers. Our record net income in the second quarter of 2026 drove strong returns with an ROAA of 1.27% and ROTCE of 14.9% and an adjusted ROAA of 1.28% and adjusted ROTCE of 15.03%. We achieved these results while continuing to invest in talent, technology and new financial centers to support our future growth. I'm very pleased with our results, and I'm proud of the team for their continued commitment to driving strong core performance across the bank. As I highlighted earlier, we continue to execute on our plans to transform the consumer bank, including our financial center network. In addition, we recently announced the hiring of our new Chief Information Officer and 3 new hires into leadership roles in our consumer bank to strengthen how we engage customers across our network, digital platforms and product lines. And in the second quarter of 2026, we delivered on our commitment to our shareholders, returning more than half of our profits through a quarterly dividend of $0.20 per share. This is the 127th consecutive quarter in which the company has paid a cash dividend. Also, I'm pleased to announce that Northwest was recently recognized as one of Time's America's Best Companies for 2026. None of this would be possible without the hard work and dedication of our 2,200 associates. I am proud to lead this team. As we look ahead for the rest of 2026, we continue to focus on organic growth initiatives, further optimizing our financial performance, expanding our financial center network, serving our core customers and communities. With that, I'll turn it over to Doug to review our second quarter results in more detail. Doug?

Thank you, Lou, and good morning, everyone. As Lou indicated, we are very pleased with our strong financial performance in the second quarter. This is the product of all the efforts of our entire team working together to deliver these results, and I want to thank them for their tireless efforts. Now let's continue on Slide 5 of the earnings presentation, where I'll walk you through the highlights of Northwest's financial results for the second quarter. Our GAAP EPS for the quarter was $0.36 per share. And on an adjusted basis, our EPS was $0.37 per share, an improvement on the prior quarter of $0.02 per share on both a GAAP basis and an adjusted basis, driven by growth in average earning assets, accrued fee income and a decrease in our cost of deposits. Total revenue was $181.2 million for the second quarter, which represented a 3.5% increase quarter-over-quarter and a 20.5% increase year-over-year. Also, we are very pleased that we achieved significant positive operating leverage, 330 basis points quarter-over-quarter, and we maintained our focus on exercising tight expense discipline. This also translated into an improvement in our adjusted efficiency ratio of 56.2%, which was a 158 basis point improvement quarter-over-quarter all of which created an improvement in our pretax pre-provision net revenue in the second quarter 2026, which increased to $77.3 million, an 8% increase from the first quarter of 2026 and a 31% increase year-over-year on an adjusted basis. Turning to Slide 6. I'll spend a moment covering our loan balances. We achieved our third consecutive quarter of period-end loan growth in the second quarter with period-end loans increasing by $174 million to $13.2 billion, while our average loans grew $10 million. Our performance this quarter was from organic loan growth in both our commercial and consumer businesses as we continue to experience runoff in our residential mortgage and legacy CRE portfolios. Our loan yield was relatively stable, decreasing by 1 basis point to 5.61% in the second quarter. Our C&I loan growth continued with strong performance in many of our new verticals and in our other commercial loan portfolios. Average C&I loans increased $148 million or 5.6% quarter-over-quarter and $678 million or 32.2% year-over-year. Our recent CRE loan production levels have been strong, but continue to be offset by elevated levels of runoff in the CRE portfolio. Our overall interest rate sensitivity position continues to remain slightly asset sensitive with continued growth in floating rate commercial loans. However, we feel we are appropriately positioned for the current and expected interest rate environment in 2026. In addition, there is an opportunity to restructure our sub debt by extinguishing it within the next quarter as it already received a 20% regulatory capital haircut last September and will lose an additional 20% of its regulatory capital treatment this September. This action should add approximately 2 basis points to net interest margin going forward, and we would expect all of our regulatory capital ratios to remain strong and above well-capitalized levels. Moving to Slide 7 and our deposit balances, which continue to be a source of strength and stability, our average total deposits grew by $87 million quarter-over-quarter, partially benefiting from growth in money market and savings accounts and deepening customer relationships. Our granular diversified deposit book has an average balance of $19,800 with customer deposits consisting of over 716,000 accounts with an average tenure of more than 12.5 years. For the third consecutive quarter, our cost of deposits declined, down 5 basis points to 1.43%, a product of our proactive management of the overall portfolio. 34% of the CD portfolio matured in the second quarter of 2026 at a weighted average rate of 340 basis points. New volumes, which are coming on with rates in the low 3% are driving an overall decline in CD costs, supporting an overall decline in deposit costs. On Slide 8, we show our fourth consecutive quarter of net interest margin improvement with net interest margin increasing 5 basis points to 3.75% in the second quarter of 2026, benefiting from increased investment security yields and a further improvement in funding costs. Turning to our securities portfolio on Slide 9. New security purchases in the quarter were consistent with the current composition of the portfolio and continue to strengthen an already strong source of liquidity. Our portfolio yield continues to increase as new security purchases came on at higher yields than the runoff portfolio. 24% of this portfolio is held to maturity to protect tangible common equity. Turning to Slide 10. Our noninterest income increased $1.6 million quarter-over-quarter, driven by growth in our wealth management business, resulting in an increase in trust and financial services income. Noninterest income increased $3.3 million or 10.6% year-over-year, benefiting from an increase in trust and other financial services income and an increase in service charges and fees. Regarding noninterest expenses detailed on Slide 11. We achieved our fourth consecutive quarter of improvement in our adjusted efficiency ratio, which was 56.2% in the second quarter of 2026, continuing our expense management focus over the last year. Overall expenses, excluding merger and restructuring expenses remained relatively flat, benefiting from a decrease in non-personnel expenses, including a $3.2 million decrease in FDIC insurance premium. FDIC insurance premium expense in the second quarter was lower due to a prior period assessment rate change driven by the amendment of prior period call reports. On a year-over-year basis, expenses in the second quarter of 2026 were higher, but the year ago quarter did not include the acquired Penns Woods operations. On Slide 12, you'll see our overall ACL coverage was relatively flat at 1.13% in the second quarter 2026, down 2 basis points from the first quarter. Our quarterly annualized net charge-offs of 15 basis points were below the low end of our full year guidance. Our NPAs remained mostly flat this quarter. And while our classified loans did increase this quarter, we have no expectation that the increase would result in higher overall charge-offs. Turning to credit quality on Slide 13. Our credit risk metrics remain within internal expectations given the impact of the loans we acquired. Our total delinquency declined from 1.30% to 0.90% quarter-over-quarter, primarily as a result of the 30-day month effect on the mortgage portfolio and payoffs in the health care portfolio. Our 90-day plus delinquencies increased from 34 basis points to 49 basis points quarter-over-quarter, while NPAs were flat at 70 basis points of average loans in the quarter. Taking a deeper dive into the breakdown of our credit quality on Slide 14. In the second quarter of 2026, we experienced an increase in classified loans as a percentage of total loans and on an absolute basis, which was attributable partly to the continued migration of acquired loans to our credit administration standards and downgrades in the health care book. As we've discussed on earlier calls, our strategy with respect to classified loans has continue to work them down over time. Finally, on Slide 15, we'd like to provide a current full year outlook for 2026, specifically. For loan and deposit growth, our outlook remains unchanged. For revenue, we would expect to be in the middle of our stated range. For net interest margin, we expect to be in the 373 to 375 basis points range, assuming that the Fed funds rate is unchanged. For noninterest income, we expect to be at the high end of our range. For noninterest expense, we expect to be in the middle of our range. And for net charge-offs, based on current economic conditions, we expect to be in the low to middle of our range. We expect the tax rate to drift up to 24% based on stronger earnings. We remain very confident about Northwest's business and are excited about our prospects for the rest of the year. Now I will turn the call over to the operator, who will open up the lines for a live Q&A session.

[Operator Instructions] Our first question comes from the line of Daniel Tamayo with Raymond James.

Maybe starting on the deposit book. So we saw a little bit of a decline this quarter, and you mentioned where the new rates are coming on. And obviously, you got some loan growth coming in the back half of the year. Just curious how you're seeing deposit growth expectations in the back half of the year. I see the guidance for the low single digit, but like as the loan-to-deposit ratio moves up a little bit, where is the comfort rate there? And how do you kind of think the -- that could impact deposit pricing? Kind of a lot there, but just looking into deposits.

Yes, happy to answer the question, Danny. Thank you. So the first thing I would point out is when you're looking at spot balances rate, very volatile metric given a lot of different things that can happen at the end of the last day of the month. We look at more critically sort of average deposits, which were up 0.6% for the quarter, $87 million. With a defect the decline in spot balances a little bit between 331 and 630 we'd have been down -- we would have been up for customer deposits and our brokered CDs would have been slightly down. And that was an intentional shift where we took advantage of some lower funding costs on the FHLB desk than we had in our broker deposit book. So again, if you exclude that, balances would actually have been up $19 million from customer deposits and the only decline really was in brokered CDs. So, we continue to look favorably on the rest of the year. That guidance was thoughtfully contrived to make sure that we got to that 2% rate. The other thing I would say is we have more activity that we expect in the last half of the year as we continue to open our branches in the Columbus market, which is a very high-growth market.

Okay. And then I guess maybe on the expense guide. So, you said middle of the range, that implies a pretty big step-up in the back half of the year. Just curious how we should be thinking about besides the rebound in the FDIC premiums where the drivers of that expense increase are and if that run rate is kind of my numbers are shaking out around $109 million, correct me if I'm wrong, but it seems like that maybe takes the exit rate a little bit higher than we were thinking before.

Yes. I would tell you, if you just adjust for the FDIC benefit that we got in the quarter, you would get to like $107 million. So, I would say anywhere in that $107 million to $109 million range is fine. We were thinking more in the $108 million as a continued sustainable level. We continue to look at opportunities to optimize expenses. But as we said, we're investing in the business. We're going to have costs coming online for branches and other things. And we're going to continue to want to look at kind of long-term growth opportunities, which is going to provide a little bit of upward pressure on those expenses. But for the full year, we still have every reason to believe that we're going to generate positive operating leverage year-over-year, reduce our efficiency ratio and continue to be able to invest for the future.

Okay. Sounds like you're making some investments for the future. That's great.

And the next question comes from the line of Jeff Rulis with D.A. Davidson.

On the loan side, just looking at -- it looks like period growth quite a bit above the quarterly average. Just looking at the timing of that. Does that suggest that came on fairly late in the quarter?

Yes. We had a really strong late push in the quarter. The other thing I would point out is commercial real estate in particular. I think a lot of people have commented on it, but we saw some higher levels of runoff in that book, again, a combination of construction loans that end up getting the perm financing off the book as well as some other of the borrowers that were -- that we've worked out like in some of the more classified asset areas contributed to that decline. We feel really good about the pipelines going forward, and we feel really good about sort of the outlook. So again, with a little bit lower levels of runoff, particularly on CRE, everything else was shaking out pretty good, and we did start to see that production turnaround in the last half of the quarter.

Got it. And then I guess a question on the margin. If I think about the 3 legs of the stool, you've got pretty stable loan yields, nice deposit cost decline and increasing securities yields. So, you've got kind of a flattish sort of guide on the margin. I guess, on all 3 fronts, are you expecting those to moderate? I guess the loan yields are fairly flat, maybe those are coming in. But just the thought behind where margins sort of flatten out here given the guide.

Yes. As you would know, it's a very competitive environment out there, both on the loan side. There's a lot of competition looking for loan growth. There's also a lot of competition looking for deposit growth. So I think we're being a little bit realistic on what it's going to take for growth going forward in all those areas. Obviously, when you're opening up new branches and you're attracting customers, you're doing that at relatively higher rates than you would on an existing book of business. So we benefit from the fact that we're a new entrant into the markets in Columbus, but yet those are still going to come on at relatively higher rates. So I think what we're saying is there's a lot of moving parts. You should expect to see loan competition remain as it relates to rate because we're not really to compromise -- we're not really willing to compromise on structure. And then you should expect to see deposit competition continue to be strong. We also, in the opening comments suggested that we still have some opportunities on the liability side as it relates to our sub debt. So again, to your point, we are pulling all the levers to manage the margin, but we are also suggesting that 3.73% to 3.75% as sort of an exit is realistic, and that is above where we started kind of in the low 3.70s if people were thinking 3.71%, 3.72% I want to provide a little bit of clarity that we like the 3.75%, and we think that there's some opportunity to continue to support at those levels as we move forward.

Okay. And just a follow-on, just the securities yield side. That's of the 3 things, that's the one that maybe you could continue to see some incremental progress on that, at least in the short run.

For sure. As those older vintages run off, we are able to put them on at current market rates, which are materially higher. It's just the portfolio overall only has so many cash flowing items in any given quarter, but we are able to invest those at higher rates, and we've been able to pull that up consistently quarter-over-quarter, and we continue to expect that.

And the next question comes from the line of Brian Foran from Truist.

Just 2 follow-on questions on the guidance slide on Page 15. So with the NIM a little higher and fees a little higher, but revenue still at the middle of the range, is there something that is a little lower that's balancing those 2 out? Or is it putting too fine a point on it because things round $1 million, et cetera. Just trying to see, was there something balancing out the upgrade to NIM and fees? Or is it just reading too fine a point into it to say the revenue is still in the middle of the range?

No, I think you're right on where revenue is going to be in the middle of the range. I think we're also making sure from an overall earnings standpoint that people look at the expenses and don't get -- don't hold us into that $103 million, $104 million range that we had in the first 2 quarters that we would expect some upward pressure there. But again, right now, if we continue to have reasonable loan growth and a little bit more costly deposits going forward and a little bit of pressure on the loan yield side, again, not pressure relative to what's rolling on, but just kind of keeping it consistent with where we're at, you're going to end up in the middle of that revenue range.

And then I hate to ask about the tax rate, but because it did change, is 24% kind of what you would best guess as we fill out models in the future? Could it drift higher to '25? Just any best guess of like tax rate into the end of this year and '27?

Yes. I mean it's drifting -- we're not all that upset it's drifting higher because it's drifting higher for the right reasons, which is we have better earnings. So yes, we tried to just clarify that as we earn more, that tax rate is going to be impacted as well. But that 24% -- that approximate 24% should be a good number for you guys to use.

If I could sneak in one last one. Did you give an update or can you on just the growth from the specialty national industry verticals, kind of where they stand now and maybe which ones are kind of having the most success in the current environment, both on growth and pricing?

Yes. I think they're all doing quite well. They're right where we would want them to be. I think in the opening comments, Lou suggested they're now making up about 27% of the C&I portfolio, which is up from where it was. Again, they're well balanced. We're seeing success across all of those platforms. And as you would expect, since a number of them have been launched in the last couple of years, that growth isn't -- that growth should be expected as those sales forces come up to speed and we get our overall position in the market better, well known. We also see benefits on the SBA side, of course, which doesn't really lead to balanced growth. but is supportive of the overall fee income-generating capability that we have. So I think we're generally pretty happy with all of those vertical performances, and we see that opportunity continuing in the future. I don't know, Lou, if you have anything to add?

No, I would agree with Doug. I think the important thing to note is while the verticals are representing a larger percentage of our overall commercial book now. We remain disciplined. The growth is measured. We believe that our back office, our underwriting, our portfolio management in those areas is very sound, and we have experienced executives running those verticals. And so the pipelines going into the second half or going into the third quarter are a little above the second quarter. And so we would expect to continue to see that same growth.

And the next question comes from the line of David Bishop with Hovde Group.

I may have missed it, but update on share repurchase activity and remind me where we are in the authorization.

Yes. No, you didn't miss it. So the authorization still stands at the $50 million that we had approved, and we haven't become active in that yet. Again, I'd direct it back to our prepared comments where we talked about next on the list is to work through the sub debt that we have outstanding that continues to lose its capital treatment as we kind of get further out. And we believe that, that will return approximately 2 basis points in margin performance. So that's where we're focused on now.

Got it. And then a little bit of an increase in the substandard. It sounds like maybe in the nursing home category. Maybe just some color in terms of what drove that increase.

Yes. If you go to sort of the credit quality side, you will see some inflows on the some downgrades that were driving that about $146 million as disclosed on Slide 14. And again, we're still working through our new customers from our Penns Woods transaction. And as they get more used to our credit standards and our expectations for documentation and other things, we tend to have a little bit more pressure on their credit grades. But we, again, continue to be happy with where our NPA performance has been overall charge-offs. Those aren't drifting upwards. So we continue to manage through that credit classified book from -- for the rest of the year.

And the next question comes from the line of Matthew Breese with Stephens.

I think I have what I need on the C&I growth outlook front. I guess what I was curious about, can you help me out with commercial real estate expectations, understanding payoffs can be volatile and it sounds like it's been a bit higher than expected. But just considering originations there, it sounds like you've turned them back on to a greater extent. What are your expectations on commercial real estate that category for the rest of the year?