Northwest Bancshares: High-Yield Regional Bank Is A Buy (NASDAQ:NWBI)

We continue to believe that as this bear market continues, it is time to start selectively buying, especially on strong dips. One sector and subsector that we are really bullish on for our members is the financials, and specifically, we really like buying regional bank stocks in this environment. Corporate earnings thus far remain strong, and we think they have largely been better than expected, so the stock market has held up the last two weeks relatively well.

But the banks are a great place to be. We think they are best suited to benefit from the interest rate hikes the Federal Reserve is putting into place to battle inflation. The model of taking in deposits and paying a small interest rate and lending it out to a higher rate has and continues to work. While there had been some initial rate shock on consumers which stalled lending for a few months, and housing demand has slowed, we think any recession that comes out of this fight to lower inflation will be mild. The economy is in good shape, despite being in a technical recession if you look at real GDP.

One name that we think is a buy now is Northwest Bancshares, Inc. (NASDAQ:NWBI). We love the dividend yield here and believe it is another strong choice for a regional bank. This company has just reported earnings, and we like what we see. Do some buying here, get paid to wait for the bounce, and enjoy capital gains over the next few quarters. We would add to shares every 50 cents lower from right here.

Northwest Bancshares’ Q3 earnings mixed

We like the regional banks going forward thanks to continued loan growth, deposit strength, and previous merger and acquisition activity. Further, the bank saw revenues continue to improve once again. In Q3 2022, the company reported a topline that surpassed consensus estimates slightly and rose from Q3 2021.

Revenue for the bank expanded to $139.6 million and was a 9.4% increase in this metric year-over-year. The near $3 million beat was welcomed. We also want to point out that this topline result was about $9 million better than the sequential Q2 2022. So, things are definitely doing very well. However, the bump in revenues year-over-year did come with some higher expenses as well as some loan loss provisions as banks start to prepare for some delinquencies, from last year.

Northwest reported net income of $37.3 million, a 6.4% increase from a year ago. That is pretty solid. Earnings per share came in at $0.29, in line with estimates, and up from Q3 2021’s $0.27 per share. As we look ahead, barring increases in loan loss provisions or a severe recession, we think 2023 will be even better based on the trends we are seeing for banks.

Earnings expanded in part due to management also having a working expense management plan, as well as wider net interest income and increases in loans and deposits. However, there was a big dip in non-interest income of 8.2%, mostly due to mortgage banking fees being down, reflecting the slowdown we all know is happening in housing.

There was also a loan loss provision of $8.8 million that weighed and has increased from Q2 2022’s provision of $2.6 million as the bank prepares like others for possible issues with customer repayment.

Overall, we like the growth we are seeing as well as the valuation here.

Valuation

So, we have a stock trading at $13.80. We like the stock in the $13 range and lower for a buy. A lot of this is rooted in valuation. The stock’s value proposition is quite attractive here as the stock has come down in the last few months and as earnings power has improved. Relative to most other banks we have covered, we think shares are attractive. One key that we like to look for is book value. The bank’s stock is now trading at just 1.17x book. There is about a $2.75 premium, or 25% premium-to-book. Book value was $11.50 at last check, which fell from $12.51 to start the year. Tangible book value fell to $8.42 as well. Overall, we think that if you get shares here and every $.50 lower in the near future, that is an attractive price. While valuation can improve further, we like purchasing here.

Loan and deposit trends

Growth in loans and deposits is key for any bank we examine. The bank saw deposits actually dip slightly to $11.9 billion, so this is one small weakness to keep an eye on. In addition, loans were up. The loan growth momentum seen in Q2 2022 continued here in Q3, as there was organic loan growth of approximately $241.7 million, or 2.3%. Further, the bank’s asset quality continues to improve.

Northwest Bancshares’ asset quality

Loan growth is a strength, but we need to make sure they are high-quality loans, and that the bank is not dealing with a ton of non-performing assets. From a credit quality perspective, delinquencies continue to be well-maintained. Total delinquent loans decreased to $44.7 million, or just 0.40% of loans. This is a great year-over-year improvement. In fact, this figure improved from $64.0 million, or 0.60% of loans last year. In addition, annualized net charge-offs flipped to a credit this quarter. They saw a net recovery of $3.8 million versus a net charge-off of $3.2 million or 0.12% on an annualized basis.

Non-performing assets as a percentage of total assets continue to improve. Non-performing loans are now just 0.78% of all loans. This is incredible progress. It improved from 0.95% last quarter, 1.23% in Q1, and 1.59% to start 2022. This is excellent.

Operational efficiency

This bank is operationally efficient. Anything less than a 60% efficiency ratio with banks is usually strong. The lower the better, generally speaking. The efficiency ratio was 58.4% this quarter, better than the 66.44% last year and better than the 66.5% to start 2022. It also improved from 64.03% to start Q3. This is incredible. The stock looks great as the bank looks great. And you get paid to wait.

Get paid a nice dividend with Northwest Bancshares

We love the dividend here, it is a great yield to own while you wait for capital gains. Along with earnings, we learned that the dividend has been maintained and is yielding over 5.7%. While we could have another tough few months for markets as the Fed raises rates, this is a nice paycheck to receive quarterly for holding shares. The dividend is relatively safe as well, but as earnings power expands next year, it should even be safer.

Take home

This was a pretty solid quarter for Northwest Bancshares. We really like banks for 2023 and think you need to start buying here on market weakness. We see shares as a good buy every 50 cents lower. Northwest Bancshares pays a solid dividend, with a yield north of 5.7% now. Relative to book value and considering earnings growth to come, we like buying Northwest Bancshares, Inc.