Earnings Call Transcript - NWBI Q2 2025

Operator, Operator

Good morning. Thank you for joining us, and welcome to Northwest Bancshares Second Quarter 2025 Earnings Call. This session is being recorded, and a playback will be available on Northwest Investor Relations website. Now I would like to introduce Michael Perry, Northwest's Managing Director of Corporate Development and Strategy and Investor Relations.

Michael D. Perry, Managing Director of Corporate Development and Strategy

Good morning, everyone, and thank you, operator. Welcome to Northwest Bancshares Second Quarter 2025 Earnings Call. Joining me today are Louis 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 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 Louis.

Louis J. Torchio, President and CEO

Good morning, everyone. Thanks for joining us today to discuss our second quarter results. First, I'd like to start by welcoming Penns Woods customers, employees, and shareholders to Northwest and Richard Grafmyre, Penns Woods former CEO, to our Board of Directors. We completed the legal close of Penns Woods merger after the conclusion of business on Friday, July 25, and subsequently began the customer and data conversion and financial center rebranding over the weekend. As of 8:00 a.m. Monday, July 28, the former Jersey Shore State Bank and Luzerne Bank Financial Centers began operating under the Northwest Bank name. Closing the largest transaction in our company's history, while continuing to deliver strong operational and financial performance is a result of the cumulative effort of many months of hard work by our team. I'm grateful to everyone for their dedication to making this merger and conversion successful. I'd also like to note that the key metrics relating to the merger, including expected cost reductions are on target or better than our original expectations. Our focused execution exemplifies our commitment to disciplined but opportunistic growth. You can see that trajectory on the bottom of Page 5. Northwest now ranks as one of the nation's 100 largest bank holding companies with total assets of approximately $17 billion. We now have more than 150 financial centers across Pennsylvania, New York, Ohio, and Indiana, further enhancing our scale for driving sustainable forward momentum and revenue. Together, we are better positioned to deliver value to our shareholders and to offer an expanded range of products and services to customers and communities across our Pennsylvania footprint. Although we are always evaluating acquisition opportunities for additional scale and strategic benefits, with the Penns Woods acquisition and conversion just behind us, we are primarily focused on optimizing the operations and financial performance of the newly combined entity. We continue to enhance our capabilities, expand our footprint through de novo branch openings and provide personalized services and expertise to our customers and the communities we serve. In June, we opened our first new full-service financial center in 6 years in Fishers, Indiana, and we have plans to open additional new financial centers in key locations in the high-growth Columbus and Indianapolis metro areas over the next 12 to 18 months. Turning to our second quarter, I'll address some of the quarter's highlights on Slide 6. I'm very pleased with our performance this quarter as we balance preparing for the acquisition and conversion of Penns Woods while maintaining our focus on executing our strategy and delivering on our commitment to sustainable, responsible, and profitable growth. Overall, we built on a strong start to the year, including continued strength in our net interest margin and improved fee income, which together resulted in $150 million of revenue for the second quarter. We continue to exercise prudent expense control, and we reported GAAP net income of $33.7 million and earnings per diluted share of $0.26 compared to $0.04 in the second quarter of 2024. If we adjust our second quarter 2025 results for the impact of one-time merger-related expenses on a non-GAAP basis, we are reporting net income of $38.2 million and earnings per diluted share of $0.30 compared to net income of $35.5 million and $0.27 per diluted share in the second quarter of 2024, which has also been adjusted for the impact of the previously disclosed securities restructuring. This impressively would represent a 10% increase in earnings per share compared to the year ago quarter. We made further solid progress on our balance sheet strategy while continuing momentum from our strategic shift towards commercial lending. We drove a 19% increase in average C&I loans compared to the same period last year. In addition, the team's focus on deposit gathering continues. We maintained our near best-in-class deposit franchise with a fourth consecutive quarter of reduced cost of funds, which provides us with a high-quality, stable funding base and improving net interest margin. Our credit costs continue to be in line with our expectations. We increased our ACL coverage while reporting modest credit losses with net charge-offs below our guidance range and no increase in total delinquency percentage this quarter. And finally, as we have for the previous 122 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 August 8, 2025. This quarter's strong results and the successful closing conversion of our largest acquisition to date are the product of an extremely talented team's hard work. I want to thank our entire Northwest team for their continued dedication to our company's success. Looking forward to the rest of the year, we continue to focus on managing the factors within our control, serving our core customers and communities, building on our strong financial foundations, and maintaining cost control and risk management discipline. Now it's my pleasure to introduce Doug Schosser, our Chief Financial Officer, who will take us through our financial results.

Douglas M. Schosser, Chief Financial Officer

Thank you, Louis, and good morning, everyone. As Louis indicated, we are pleased with our second quarter financial performance. This is the product of the efforts of our entire team working tirelessly to deliver these results while also ensuring that our merger and conversion activities went smoothly for our new customers and colleagues from Penns Woods. Regarding our Penns Woods acquisition, I would like to provide an update on the total equity consideration paid for this transaction. Based on our stock's closing price on July 25, 2025, of $12.63 per share, the total equity consideration paid calculated to be $230 million, which was $30 million less than the equity consideration disclosed at the deal signing in December of 2024. Other key financial metrics are in line with our original expectations and one-time merger charges and cost savings remain on target. See Slide 5 for more details. Now let's continue on Slide 7 of the earnings presentation, where I'll walk you through the highlights of Northwest's financial results for the second quarter of 2025. We reported GAAP net income of $33.7 million or $0.26 per diluted share, inclusive of $4.5 million of after-tax merger-related costs, a decline of approximately $10 million quarter-over-quarter on a GAAP basis. As you recall, we did have a significant nonaccrual interest recovery in the first quarter, which added approximately $9.4 million or $0.08 in after-tax income in that period. We reported net interest margin of 3.56% for quarter 2, 2025, which would compare favorably to the prior quarter's adjusted margin of 3.48% after adjusting for a 39 basis point interest recovery benefit recorded in the first quarter. We continue to manage our funding costs and maintain our loan yields, driving improved margin performance. Noninterest income increased by $2.6 million or 9.1% quarter-over-quarter, driven by improvements in fee income from seasonal changes and some increase in other operating income. Total revenue of $150 million for the second quarter represents a 53.5% increase on the prior year period on a GAAP basis, which included a $39.4 million loss resulting from a securities portfolio restructuring. This was slightly down from the $156 million of revenue reported last quarter, which included a $13 million benefit from an interest recovery. Our noninterest expense increased 6.3% compared to the prior quarter and increased 5.5% versus the second quarter of 2024 due to expenses related to the preparation for and closing of and conversion of the Penns Woods merger. Pretax pre-provision net revenue was $59.1 million, which was down from the first quarter of 2025, again, due to the nonaccrual interest recovery and a 26% increase from the second quarter of 2024, largely due to the impact of the securities repositioning. Now I will highlight some additional details on our quarterly results. Turning to Slide 8 and our loan portfolio. Average loans grew $72 million quarter-over-quarter or 0.6% and were $120 million or about 1% lower than in the second quarter of 2024. Again, we were opportunistic this quarter, taking advantage of some further consumer loan growth as interest rates remain supportive, and we saw some demand returning to the C&I space. We continue to proactively shift our portfolio mix more towards commercial and industrial loans as part of our longer-term strategy. Average C&I loans increased $49.1 million or 2.4% compared to the first quarter, while consumer loans from both our indirect business and our home equity portfolios also grew by $131 million combined. These increases were partially offset by the declines in our CRE portfolio, which was down 1.5% and our residential mortgage portfolio, which was down 2%. Loan yields continue to be stable quarter-over-quarter at 5.55% for the second quarter compared with 6.0% in the prior quarter, which was elevated due to the nonaccrual loan recovery, and we maintain our focus on pricing discipline. On Slide 9, we cover our deposit balances, which remained strong and stable over the prior quarter and prior year period. Average deposits increased $66 million or 0.5% quarter-over-quarter and $67 million or about 0.6% growth versus the second quarter of 2024. Customer average deposits increased $107 million quarter-over-quarter, while brokered deposits declined $41 million over the same period, resulting in a 0.5% overall deposit growth for the second quarter. We saw growth of deposit balances in most categories while maintaining reasonable deposit costs and are pleased with our progress here. Our cost of deposits decreased 4 basis points quarter-over-quarter through proactive management of the overall portfolio as rates have been coming down during this declining interest rate cycle, our relatively short maturity CDs are rolling into lower rates. Our current cost of deposits stands at 1.55%, still near best-in-class relative to our peers. Moving to Slide 10 and our net interest margin. In the summary earlier, I touched on our net interest income and net interest margin performance for the quarter. The progress we've made on this front is a continuing highlight for us over the past year. In 2023 and in 2024, we reported full year net interest income of $439 million. Based on our stand-alone second quarter 2025 performance, one would expect Northwest to report an annualized net interest income of $480 million or an increase of 10%. We will further benefit from the last 5 months of Penns Woods' net interest income and from the first quarter nonaccrual interest recovery. This is clearly a bright spot for our bank and will further improve many of our key profitability and return metrics. Slide 11 provides some additional details on our earning asset and funding mix. As you can see, we continue to grow our commercial loan portfolio and the proportion of floating rate earning assets. And on the funding mix, you'll note our time deposits have a very short duration, allowing us to continue to benefit from falling interest rates and lower interest expense. On Slide 12, the yield on our securities portfolio also shows further ongoing improvement as we continue to reinvest cash flows at higher yields than the current portfolio and the benefit from the securities repositioning we completed in the second quarter of 2024. Slide 13 contains detail on our noninterest income, which increased $2.6 million from the last quarter as most line items showed improvement from a normal seasonal rebound from the first quarter and an increase in other operating income, primarily from a gain on an equity method investment. Noninterest income increased $40 million year-over-year, driven by a $39 million loss on securities from the previously mentioned portfolio restructuring in the second quarter of 2024. Slide 14 details our noninterest expense. We incurred approximately $97.5 million of expenses on a GAAP basis for the second quarter. About $5.1 million of that increase from the prior quarter and $4.3 million from the prior year was merger-related. So excluding that line item, expenses are generally consistent with the underlying expense run rate over the past year. Our adjusted efficiency ratio of 60.4% after excluding those merger and restructuring expenses is an improvement from the 65.4% in the prior year period, which has been adjusted for the impact from our securities restructuring and other restructuring charges. 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. On Slide 15, you can see our overall allowance coverage ratio has increased to 1.14%, up slightly from the first quarter of 2025 due to downgrades within the commercial lending portfolio and offset by changes within macroeconomic forecasts. We believe our coverage is appropriate, prudent, and in keeping with our rigorous credit risk management approach. Our annualized net charge-offs of 18 basis points for the quarter were below guidance and in line with historic performance. On Slide 16, you will note that our 30-day plus loan delinquencies remained stable at around 1% of outstanding loans, our NPAs as a percent of loans outstanding plus OREO has increased to 91 basis points, which is similar to the levels recorded in 2Q, 2024. We provide some details on the drivers of this change on that slide. Turning to Slide 17. We have included some additional information on the changes within classified loans reported this quarter. The Q2 '25 increase in our classified loans is a result of 3 primary items. The remaining long-term healthcare loans held-for-sale were returned to held-for-investment. Given the specific circumstances of these borrowers and the market's currently dampened interest for loans in this sector, we believe managing these loans on our balance sheet will ultimately minimize incurred losses. Additionally, due to the current excess supply of multifamily units in the Columbus market, several construction projects came on the market with lease-up rates lower than projected. We expect demand to catch up with supply as market absorption rates continue to improve for these projects to exit successfully. The projects are all with strong, well-established developers who are invested in the community. And finally, there are a few larger C&I borrowers whose performance deteriorated based on current macroeconomic uncertainties with tariff policies and other industry-specific headwinds. Slide 18 highlights our $6.4 billion in commercial loan commitments by industry classification, showing a diverse portfolio and has some additional detail on our CRE concentrations. I'd now like to review what we can currently disclose about the remainder of 2025, bearing in mind we just closed our Penns Woods merger less than a week ago. We may release updated guidance for 2025 at a future date. On Slide 19, we provided an updated perspective on our outlook. We continue to be confident about Northwest business and would expect to maintain our net interest margin at 350 basis points for the rest of the year before the accretive benefits of the Penns Woods acquisition. We are not providing specific information on the third quarter as we will need to work through our purchase accounting marks, book expenses related to change in control contracts, and many other one-time merger-related costs. We would expect to earn approximately 2/3 of a quarter's worth of revenue and income from the incorporation of Penns Woods balance sheet and customers into Northwest Bank. For the fourth quarter of 2025, we expect to maintain Penns Woods earnings power and current balance sheet level as we integrate their operations into Northwest. On a combined basis, we would expect to achieve the following fourth quarter 2025 financial results: net interest income in the range of $139 million to $141 million; noninterest income in the range of $32 million to $33 million; noninterest expense in the range of $103 million to $105 million; a flat tax rate of 23%; net charge-offs of $9 million to $11 million per quarter with full year 2025 net charge-offs to average loans slightly below our previously disclosed range of 25 to 35 basis points. We will not have fully realized all cost savings from the Penns Woods acquisition in the fourth quarter of 2025, but we expect to achieve 100% of the savings by the second quarter of 2026.

Operator, Operator

Your first question comes from Daniel Tamayo with Raymond James.

Daniel Tamayo, Analyst

Thanks for all the color on the prepared remarks there. That was really helpful. You covered a lot of my questions. But so on the expenses, sorry, I'm just kind of thinking out loud. It sounds like you're going to continue to have cost savings next year through the second quarter. Maybe you could just give us a sense for once we get past that run rate of $103 million to $105 million in the fourth quarter, how much savings is left and as much as you can, the timing on that in the first half of next year?

Douglas M. Schosser, Chief Financial Officer

Yes. So I would put it this way, Daniel. I mean we just closed this transaction 48 hours ago, 72 hours ago, whatever. We'll provide much fuller guidance when we release fourth quarter earnings in January, like we would always do, at which point we'll be able to give you much more color. I would just say, originally, we announced that we would have 40% cost savings as a result of the transaction. And we originally had indicated that we'd get about 75% of that in 2025, with the remainder coming through the second quarter of '26. So you would expect to get a little bit more efficient as we roll, but we'll give more specific guidance on that aggregate expense number next year.

Daniel Tamayo, Analyst

Understood. Okay. And another one that maybe you might not have kind of the full information on given the timing of the close. But just curious if you have an initial updated estimate on what the accretion might be in the margin? And then I know you touched on it, but just remind us if you can, the kind of the core change to the core margin from the acquisition.

Douglas M. Schosser, Chief Financial Officer

We're still finalizing the purchase accounting and adjustments, so we can't provide an update on margin guidance at this time. I tried to give you an overview of what to expect for aggregate net interest income in the fourth quarter. We will have opportunities to update our guidance during the third quarter, including at some upcoming conferences, and we will issue an 8-K and a new investor deck if we do. We appreciate your patience as we gather accurate information. Regarding the investment portfolio, there will be changes, especially with the transition of Penns Woods. They had some securities that didn't align with our return and risk profiles, which we will sell. We'll use that cash to reduce some excess borrowings and gradually manage the rest of the portfolio. We need a bit more time to provide detailed information, but this gives you a sense of our current position. Additionally, on Slide 5, when we mentioned guidance, we referred to things being on target or better than expected. I want to clarify that when we said better than originally anticipated, we didn't mean the final number would necessarily be accretive. I hope that clears things up for everyone on the call.

Daniel Tamayo, Analyst

Yes. I appreciate that. This may be along the same lines, but just get all the questions out now and then you can say to give the same answer if that's the answer. But just on that topic, the tangible book dilution, do you have an updated number or have any kind of approximate amount in terms of what that dilution might end up being relative to the 9% expected originally?

Douglas M. Schosser, Chief Financial Officer

We don't. But again, we did give you an idea of where the equity consideration was, which was down pretty significantly from originally announced. In addition to that, there's some extra cash. So in the original announcement, we suggested that total consideration would be around $270 million. We're probably closer to $235 million by the time we factor in the cash that gets paid for options and partial shares. And then we do believe that the interest rate mark in the aggregate will be a bit lower. All of that would lead you to clearly some less goodwill in the aggregate and slightly less earnings accretion from those interest rate marks, but we'll try to clarify that when we can.

Operator, Operator

Your next question comes from Matthew Breese with Stephens Inc.

Matthew M. Breese, Analyst

I appreciate the detail on the increase in classifieds. I guess I just wanted to prompt a little bit more and see how you felt about the potential for nonaccrual creation or NPA creation on the back of the classified and then potential for loss content there. Do you feel like you're adequately reserved at this point?

Douglas M. Schosser, Chief Financial Officer

I believe we're sufficiently reserved for losses, and starting from that point, we see a good amount of opportunities in the next six months. While it's hard to predict exact market conditions, we anticipate having chances to recover some credits during this time. By the end of the year, we expect to make progress on nonperforming assets without significant losses, and those levels should get much closer to where they were earlier this year.

Matthew M. Breese, Analyst

I was hoping to get more information on deposit growth prospects and their composition. How do you see the potential for growing deposits through the end of the year, and has the shift in the mix started to stabilize?

Douglas M. Schosser, Chief Financial Officer

I would say the mix shift has started to stabilize. We have seen somewhat consistent, albeit relatively low deposit growth consistently since the beginning of the year. I wouldn't necessarily expect that to change. I think generally speaking, we are seeing a less competitive market for deposits. So online deposit-only deposit gathering sources have not been as active on the rate side. So we feel pretty good about deposits going to the end of the year. And then, of course, we get the benefit of all the new Penns Woods customers coming in and being able to see how we can handle that deposit portfolio over time.

Matthew M. Breese, Analyst

And then a couple of business line-specific questions. Home equity loans this quarter talked a more recent trend of declining, saw some growth. Is that a one-off? Or is there a little bit of a change in strategy? And then similar question with consumer loans, which for 2 quarters now has been growing versus previously shrinking?

Louis J. Torchio, President and CEO

Yes, this is Louis. I can address a couple of those questions. While we continue to reshape the balance sheet towards a more balanced consumer and commercial portfolio, we have established a strong consumer-generating machine within the organization. We're refocusing our efforts in the branch network and have aligned lending operations with Urich Bowers, who now leads the consumer bank. This has led to a more targeted sales approach and a different strategy in the market. Additionally, in our indirect lending segment, we can adjust based on the interest rate environment. We believe we can grow that segment this quarter and manage those assets, as we may encounter a declining rate environment in the second half of the year. The positive aspect to note is that we have many strategies available on both the commercial and consumer sides of the bank. We have a balanced approach and will adapt to what the marketplace offers. We're pleased with our ability to pivot, and we have established a national SBA vertical that provides us with flexibility in holding and selling loans. Overall, we believe we're in a strong position to move forward with a balanced strategy in both commercial and consumer lending.

Douglas M. Schosser, Chief Financial Officer

Matthew, I would just add to your question, home equity loan growth was a little bit later than normal for us. So you might typically see that in the early spring. We saw it a bit later, and we did have some nice opportunity there, but not a change in strategy, more just being there for our clients when they ask the bank to provide funding for changes in their homes or what have you.

Matthew M. Breese, Analyst

Understood. Yes. My initial thought was about commercial loans, as balances are increasing, but the growth rate has been slowing for several quarters. I was wondering if the activity we are observing in the consumer and home equity sectors is a response to the more competitive landscape for commercial loans. We have heard quite a bit about that this quarter, or perhaps it reflects some uncertainty among your customers. How do you respond to that?

Douglas M. Schosser, Chief Financial Officer

Yes. I think that's why we tried to say we were as opportunistic as we could be in the beginning half of the year, given all of the uncertainty that Washington sort of interjected into everybody's businesses with tariffs and other things. So to the extent that the back half of the year as some of this stuff gets clarified, might give us some more opportunity for commercial loans, that would be great. To Louis point, we can flex down certainly that indirect book pretty quickly. But if core home equity was still an option for our customers, we will be there for our customers in market, and we continue to extend those loans as well.

Matthew M. Breese, Analyst

Okay. Last one for me. Just maybe some idea of roll-on yield for commercial and the growing consumer categories versus roll-off and how accretive is that today? That's all I have.

Douglas M. Schosser, Chief Financial Officer

Yes, we are observing commercial loans around 7%, with some fluctuations from month to month. Consumer loans will continue to be lower than that, consistent with their recent trends. For the consumer segment, particularly indirect loans, the rates have decreased, and the performance remains stable. Additionally, there is still potential for growth in the commercial loans sector.

Operator, Operator

Your next question comes from Daniel Cardenas with Janney Montgomery Scott.

Daniel Edward Cardenas, Analyst

So just returning to the increase in the classified loans on a sequential quarter basis. Maybe a little bit of color on the construction projects that popped up here in the quarter. What are loan to values looking like for those projects, maybe debt coverage ratios as well? And then on the C&I front, were there any industry concentrations on those fewer larger loans that popped up here?

Douglas M. Schosser, Chief Financial Officer

Yes, we generally haven't provided extensive details on the commercial real estate segment. We want to highlight a few developers with significant loans in Columbus. The challenges we faced were more related to absorption rates and an increase in market supply. As mentioned in our prepared remarks, we anticipate that the market will eventually absorb these changes over the long term. These projects are also backed by strong developers with substantial investments in the Columbus market. Additionally, we noted there was one project in Philadelphia. Without delving into all the specifics of each credit, T.K. may have additional insights to share.

Thomas K. Creal, Chief Credit Officer

Yes, I'd like to add that we have reviewed the loan to values and the coverage for the multifamily projects. The coverage ratios are approaching 1:1 due to the pressure from interest rates and the current soft market conditions. While there is a lot of supply entering the market, we continue to see demand. We will navigate through these challenges over time. However, there is still equity in these projects, and we anticipate support from the sponsors, so there are no concerns on that front.

Daniel Edward Cardenas, Analyst

Are these higher-end type of projects? Or are they kind of mid-market?

Thomas K. Creal, Chief Credit Officer

There's both in there.

Daniel Edward Cardenas, Analyst

Okay. All right. And then on the C&I side, were there any concentrations by industry?

Thomas K. Creal, Chief Credit Officer

No, no material concentrations. One larger one kind of in the electronics space, but not like an industry trend, I would say.

Operator, Operator

That concludes the question-and-answer portion of the call. I'll now hand it back over to Northwest for concluding remarks. Mr. Torchio?

Louis J. Torchio, President and CEO

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 prudent cost control and risk management discipline, we are well prepared to capitalize on the opportunities for driving sustainable, responsible and profitable growth. I look forward to updating all of you on our progress on our third quarter earnings call. Thank you, and have a good day.

Operator, Operator

This concludes today's conference call. You may now disconnect.