NWBI - Northwest Bancshares: Buy The Next Selloff

Summary

• Northwest Bancshares is growing the topline and enjoying strong margins.
• A strong dividend yield pays you to wait for a bounce.
• Asset quality metrics are strong, but the bank is preparing for recession by upping loan loss provisions.
• We like a Northwest Bancshares, Inc. buy sub-$13.

We have had a huge rally in the stock market the last few weeks. The averages are breaking out, but we believe that this is a bear market rally. We believe earnings as a whole and forecasts will be less than stellar and the market will retrace once again, as the Fed is not done raising rates. Keep in mind, the impacts of the Fed rates have only just begun to be felt. Banks have enjoyed some tailwinds from higher rates, in that the loans they issue are at higher rates, but the concern is that the cost of funds may rise too high, there is competition for deposits, and there are concerns over recession leading to delinquencies on loans.

That said, we foresee a mild recession and minimal impact to the banks. We expect a sizable market pullback from here, so on that selloff, we think you can buy select stocks. Regional banks are a great place to be. One name that we think is a buy on the next selloff to take shares under $13 is Northwest Bancshares, Inc. ( NWBI ). This company has just reported earnings , and we would like to continue our regional bank coverage with this name.

Northwest Bancshares' Q4 headline earnings mixed

We continue to like regional banks going forward thanks to continued loan growth and net interest margin strength. In Q4, Northwest Bancshares saw revenues continue to improve once again. It reported a top line that surpassed consensus estimates by $3 million and rose from Q4 2021.

Revenue here expanded to $144.9 million and was a 17.1% increase in this metric year-over-year. The $3 million beat was strong. The jump in revenues year-over-year did come with some higher expenses as well as some increased loan loss provisions, as banks start to prepare for some delinquencies from last year.

Considering expenses and loan loss provisions, Northwest Bancshares reported net income of $34.6 million, a 15.3% increase from a year ago, but dipped from the sequential quarter. Earnings per share came in at $0.27 and missed estimates by $0.04, but this was up from Q4 2021's $0.24 per share. We think 2023 may see growth stall a bit, but earnings will remain strong. The company has taken measures to reduce expenses and improve efficiency, such as doing an optimization of eight offices to be completed in April 2023. While there have been some severance costs in the quarter, reducing staffing will save money in 2023.

There was also a loan loss provision of $10.9 million that weighed on earnings and has increased from Q3 2022's provision of $8.8 million as the bank prepares for recession. Still, we like the growth here and believe there is an attractive value

Valuation

So, we have a stock trading at $13.20. We still like the stock in the $13 range and lower for a buy as there is an attractive valuation . The bank's stock is now trading at just 1.1x book. There is about a $1.46 premium, or 12.4% premium-to-book. Book value was $11.74 at quarter end, up from $11.50 to start the quarter. Tangible book value rose to $8.67 as well. Overall, we think that if you get shares under $13, or even at $12, you should do some purchasing there.

Loans grow, while deposits fall

When considering a bank stock, we look for growth in loans and deposits. Loans had positive in Q3, as there was organic loan growth of approximately $178.9 million, or 1.7%. Such growth is key for any bank we examine. The bank saw deposits actually dip slightly to $11.5 billion, so this is one small weakness to keep an eye on, but the competition for deposit dollars. In addition, the bank's asset quality continues to improve.

Northwest Bancshares' asset quality

We love to see the loan growth but need to ensure we have strong credit quality. Well, the quality of assets remains strong. Total delinquent loans decreased to $85.9 million, or just 0.80% of loans. This is a great year-over-year improvement, however, this metric creeped up from 0.4% of loans in Q3, but this remains a strong result.

Annualized net charge-offs were down this quarter from a year ago. Net charge-offs were $0.8 million, or 0.03% annualized versus a net charge-off of $5.6 million or 0.22% on an annualized basis. Non-performing assets as a percentage of total assets continue to improve. Non-performing loans are now just 0.75% of all loans and improved from 0.78% last quarter, and improved from 1.59% to start 2022. This is strong.

Further, this bank is operationally efficient. The efficiency ratio was 58.9% this quarter, better than the 66.5% last year. It was slightly worse from the 58.4% to start Q4. Overall, this is a strong result, even with lower deposits and paying more for them.

Northwest Bancshares pays a great dividend

The dividend has been maintained once again at $0.20 quarterly and is now yielding over 6.0%. The dividend is relatively safe as well, but as earnings power remains strong in 2023, get paid a very high yield to wait for a turn.

Take-home

Relative to book, tangible book value, and considering earnings growth to come, we like buying Northwest Bancshares, Inc. on the next market pullback. The 6% dividend yield is exceptional, and Northwest Bancshares, Inc. is cutting expenses and optimizing branches while maintaining strong asset quality.

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