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We continue to believe that as this bear market rally fizzles one sector to deploy capital into will be the regional banks. They are set to benefit strongly from the rising rate environment. While there had been some initial rate shock on consumers which stalled lending for a few months, and housing demand cooled some, we suspect a stabilization as the Fed rate hike cycle ends later this year. The economy is in good shape, despite being in a technical recession. One name that we think you buy on the next pull back is Northwest Bancshares (NASDAQ:NWBI). The stock went on a run off the lows from June, but as it gives gains back, start buying. The $12-$13 level looks solid. This company has just reported earnings, and in this column, we check in with this moderately-sized regional bank.
Strong dividend is the big draw here
We want to point out that one of the largest reasons to own this name is the stellar dividend that it pays. The dividend has been maintained and is yielding over 5.3%, and while the last quarter or two and perhaps the next quarter or two will be tough on banks, we believe this is a space you want to be as there is margin expansion set to occur as banks weathered the storm of low rates all through COVID. The stock would be a good buy under $13 again if it gets there, bringing the yield over 6%. Let us discuss the key metrics you should be looking for in any bank investment.
Headline Q2 earnings mixed
The stock has traded similarly to that of other regional and major banks. Thanks to continued loan growth, deposit strength, and some past acquisitions, the bank saw revenues continue to improve. In Q2 2022, the company reported a top line that beat consensus estimates slightly, and rose from Q2 2021.
The top line expanded to $130.7 million, good for a 4.4% increase in this metric year-over-year. The $8 million beat was welcomed, but this was a tough quarter to handicap. Some banks really struggled while others did very well. Overall, we think this was pretty strong.
However, the bump in revenues year-over-year was not enough to offset expenditures as well as a large increase in loan loss provisions, from last year. Northwest reported net income of $33.4 million, a 31.7% increase from a year ago. Ouch. Earnings per share came in at $0.26, down from Q2 2022’s $0.38 per share. What investors need to decide is if there will be an improvement or not. Frankly, we think 2023 will be even better based on the trends we are seeing for banks, but this was a poor result overall, even though it was ahead of consensus. Why the fall? This was odd given a strong expense management plan, wider net interest income, and increases in loans and deposits. However there was a big dip in noninterest income of 44.3%, mostly due to the divestiture of its insurance business. There was also a loan loss provision of $2.6 million that weighed, though this is somewhat low historically.
Book value suggests an expensive stock
So we have a stock trading at $14.79. We want the stock to be around $13 for a buy. A lot of this is rooted in valuation. The stock’s value proposition is not so attractive when we consider the equity price is actually way above book value now. The bank’s stock trading at a $3 premium, or 25% premium-to-book. Book value was $11.78 at last check which fell from $12.51. Tangible book value fell $8.69 as well. Overall we think that if you get shares under $13 in the near future that is an attractive price.
Growth in Northwest Bancshare’s loans and deposits
Growth in loans and deposits are key. The bank saw deposits about flat from last year at $12.1 billion. In addition, loans were up $150 million versus Q2 2021, or up 1.5%. Growth in loans and deposits is key for any bank, small or large. That is how you make money as a bank. You take in deposits at a low interest rate, and lend at a higher one. This is a model that for centuries has worked, and will continue to do so well into the future.
Northwest Bancshare’s asset quality improving
Loan growth is a strength, but only if they are quality loans. Risky loans may offer a higher return but not if the debt cannot be repaid and turns to toxic debts. From a credit quality perspective, delinquencies continue to be well-maintained. Total delinquent loans decreased to $51.1 million, or just 0.49% of loans. This is great year-over-year improvement. In fact this figure improved from $68.9 million, or 0.70% of loans last year. In addition, annualized net charge-offs were 0.14% during the current quarter compared to 0.26% a year ago.
Non-performing assets as a percentage of total assets had been improving for some time. Non performing loans are now under 1% of all loans for the first time in years, coming in at 0.95% of all loans, down from 2.01% a year ago, and down from 1.23% in the sequential quarter. This is solid progress.
Efficiency is strong
Most of our members know that we must always look for improvement in the efficiency ratio with banks, or at least make sure the ratio is not worsening systematically over time indicating underlying issues with the bank’s operations.
The strongest banks have an efficiency ratio under 60%, with the ideal being around 50%. Well, this is also a strength of the bank, at least in terms of the trend the efficiency ratio is on. The efficient ratio was 64.0% this quarter, better than the 67.35% last year and better than the 66.5% to start 2022. We will continue to be watching this metric closely in the future. We are pleased with what we see and believe that as rates stabilize after the hiking cycle the ratio improves slowly from here.
Take home
It was a bit of a mixed quarter, but followed the trend of some similar banks. We see shares as a good buy if they pull back to $13 where they were just a few weeks ago. The bank pays a solid dividend, with a yield north of 5.3% now, and would be over 6% when you start buying sub-$13. Relative to book value and considering earnings we think this is a level you wait for.
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