As the data continues to come in, and with macro pressures building, we foresee a mild recession. Many regional bank stocks have taken it on the chin with the rate increases. While new loans are being issued at higher yields, the banks are paying up big time for new deposits, and competing with one another for said deposits.
We have covered a number of regional banks this earnings season to get a feel for how local economies are doing. For the most part, the fear of loan growth and balances falling has not come to fruition. Some banks are seeing increases in deposits too. Most have seen severe margin compression, with the exception of the strongest banks we have covered. Many quality bank stocks have been hit so hard they are yielding 6-8%.
Today, we highlight Northwest Bancshares, Inc. (NASDAQ:NASDAQ:NWBI) and continue our coverage of this bank’s just-reported Q3 earnings. We think shares are a buy at $10 for long-term growth, as the critical metrics we follow are quite strong.
Northwest Bancshares’ Q3 headline earnings were mixed
In Q3, Northwest Bancshares saw revenues that were flat from a year ago but that beat consensus estimates by $5.9 million. Revenue was $139.3 million, but bigger declines were expected, so that $5.9 million beat was strong. Considering expenses and loan loss provisions, Northwest Bancshares reported net income of $39.2 million, a 5.1% increase from a year ago. In this climate, that is very strong. Earnings per share came in at $0.31 and beat estimates by $0.07. The provision for credit losses was also down from last year, and decreased by $10.3 million, or 91.1%, to $1.0 million. It was also down from $8.9 million in the sequential Q2. This is solid. Further, both loans and deposits grew.
Loans grow, while deposits fall
When considering a bank stock, we look for growth in loans and deposits. Loans were up to $11.2 billion in the quarter, rising from $10.6 billion a year ago, and up from $10.8 billion to start the year. Deposits are up from the start of the year as well to $11.8 billion, having started 2023 with $11.4 billion. This is a solid performance.
Of course, despite the trends there, margins were pressured from last year, with net interest income of $108.4 million, down from $112.7 million last year. However, net interest income was flat from Q2, and that is a very positive sign. Net interest margin was 3.21% just 4 basis points lower than 3.25% in Q2. This was mostly good news. Asset quality was mixed.
Northwest Bancshares’ asset quality
The quality of assets remains strong. Total delinquent loans at 30-59 days decreased to $2.4 million from $2.9 million in Q2. Nonperforming loans to total loans improved to 0.68%. This is the lowest this ratio has been in a year, in this climate. That is just strong, folks. Further, nonperforming assets to total assets also hit the lowest in a year at 0.54%, and down from 0.56% in Q2. The allowance for credit losses held flat at 1.10% from Q2. This is great. Many other regional banks are seeing massive hits to asset quality.
However, it was not all good news, as net charge-offs to average loans did tick up to 0.13% from 0.10% in Q2, but this is still exceptional.
The efficiency ratio was 62.8% this quarter, improving from 64.1% in Q1, but ticking up from Q2’s 62.1% as a result of the slight margin compression. Now, the return on average equity is at a one-year high of 10.27%, and rose significantly from the sequential quarter’s 8.72%. This is remarkable. Further, the return on average assets spiked to 1.08%, also the highest in a year, and was up 15 basis points from the sequential quarter.
All of this improvement comes with a fantastic dividend.
Northwest Bancshares pays a great dividend
The dividend has been maintained once again at $0.20 quarterly and is now yielding 7.8%. The dividend is covered, and while there are concerns over the impact of a mild recession naturally, we just are not seeing it with this bank in anything other than the share price. The valuation is also remarkable.
Valuation
So, we have a stock trading at $10.27. This is really attractive given the valuation. The bank’s stock is now trading below book. Book value was $11.79 at quarter end, up from $11.74 to start the quarter. Tangible book value rose to $8.74 as well. There is about a $1.61 premium, or 17% premium-to-tangible book here. That is pretty cheap. While it is not the cheapest of the banks we have covered, it is pretty close.
Take-home
Relative to book, tangible book value, and considering earnings as well as the fat dividends, we like buying Northwest Bancshares, Inc. here. The 7.8% dividend yield is exceptional, as are the quality metrics we follow.
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