Usually, when I write a company a “hold,” it’s a statement that I believe that shares are likely to perform more or less in line with the broader market for the foreseeable future. But seeing as how investing is not exactly a perfect science, these kinds of calls don’t always work out as intended. A good example of this can be seen by looking at Northwest Bancshares (NASDAQ:NWBI), a fairly sizable bank with a market capitalization of $1.43 billion and 142 branch offices spread throughout the markets in which it operates. Back in the middle of January of this year, I ended up downgrading the stock from a “buy” to a “hold.” This came after shares had skyrocketed 18.1% since my “buy” rating in October 2023. For context, this was nearly double the 9.6% increase seen by the S&P 500 over the same window of time.
My decision to downgrade the stock was based largely on valuation. However, it’s also true that the firm’s mediocre asset quality played a role in this decision. Fast-forward to today, and the stock has significantly underperformed my expectations, with shares down 1.1% at a time when the S&P 500 is up 17.6%. New data has come out since then, including results for the final quarter of 2023 and for the first quarter of this year. We do see that the firm ended 2023 on a high note from a fundamental perspective. But there has been some weakness revealed as of the most recent quarterly release. This, combined with the house shares are still priced, leaves me thinking that keeping the firm a “hold” still makes sense at this time.
Staying the course
By most measures, 2023 ended up being a pretty good time for Northwest Bancshares. Take net interest income as an example. During that year, net interest income totaled $412.8 million. That was up marginally from the $402.8 million reported one year earlier. In addition to benefiting from an increase in assets, the company also benefited from a slight improvement in its net interest margin from 3.20% to 3.28%. This wasn’t the only improvement that the bank saw from an income perspective. In 2022, non-interest income for the institution was $110.8 million. This rose slightly to $113.8 million last year.

Author – SEC EDGAR Data
This was really the result of gains on certain assets, including an $8.3 million gain on the sale of mortgage servicing rights, a $1.8 million gain on the sale of SBA loans, and a $0.7 million gain on the sale of other loans. An increase in service charges and fees from $55.2 million to $59.2 million, combined with a slight improvement of about $1.4 million when it came to the game on real estate owned, more than offset a drop in other operating income and a loss on the sale of certain investments. The improvement in both net interest income and non-interest income helped the company increase its net profits from $133.7 million to $135 million. The picture here would have been better had it not been for certain cost increases, most notably a jump in compensation and employee benefits from $188.4 million to $195.7 million.

Author – SEC EDGAR Data
Even though 2023 was pretty solid, Northwest Bancshares did experience some weakness in the first quarter of 2024 relative to the same time last year. Net interest income pulled back from $107.5 million to $99.8 million. This was largely driven by a drop in the company’s net interest margin from 3.46% to 3.10%. This, in turn, was driven by a surge in total interest-bearing liabilities from 0.96% to 2.28%. Management attributed much of this increase to a rise in the interest rate that the company had to pay out on deposits. This is not surprising given that many other banks have struggled to keep deposits on the books in light of the current interest rate environment. When interest rates rise, depositors become incentivized to look elsewhere for yield. Fortunately, there was an increase in non-interest income from $24 million to $28 million. But this was not enough to stop net income from falling from $33.7 million to $29.2 million.

Author – SEC EDGAR Data
When it comes to other aspects of the company, data has been mostly encouraging. At the end of 2023, the institution had deposits of $11.98 billion. These grew further to $12.07 billion in the first quarter of this year. Clearly, the higher rates paid on deposits are paying off. What’s also good about this is that 23.3% of all deposits are uninsured. This is below the 30% maximum threshold that I tend to prefer. So that’s encouraging. The value of loans also grew, rising from $11.29 billion to $11.38 billion. The same can be said of securities. They happened to grow from $1.86 billion to just under $1.90 billion. But this is not to say that every balance sheet metric improved. Cash and cash equivalents dipped slightly from $122.3 million to $119.3 million, while debt ticked up from $642.7 million to $644.7 million. Even with this increase, debt looks very manageable.

Author – SEC EDGAR Data
When it comes to valuing the company, shares don’t look expensive. But they also don’t look cheap. In this environment, I prefer banks that are trading at price to earnings multiples of between 6 and 10. Our candidate is just above that at 10.6. It’s worth noting, however, that this is an improvement over the 11.6 that I calculated when I last wrote about it. In the chart above, you can see how this stacks up against five similar banks. On a price to earnings basis, only one of the five firms ended up being cheaper than it is. There are, of course, other ways to value the institution. In the chart above, you can see both the price to book multiple and the price to tangible book multiple of our candidate, as well as of the five companies I am comparing it to. On a price to book basis, Northwest Bancshares ended up being the cheapest of the group. And on a price to tangible book basis, only one of the five firms ended up being cheaper than it.

Author – SEC EDGAR Data
On a relative basis, there’s no denying that Northwest Bancshares is attractively priced. I would also argue that its price book and price to tangible book multiples are reasonably appealing. Having said that, I would also make the claim that these low trading multiples are probably justified. In the first chart below, you can see the return on assets for Northwest Bancshares, as well as for the same five companies I’m comparing it to. With a reading of only 0.81%, Northwest Bancshares ended up being lower than all but one of the five firms. The same holds true in the subsequent chart that looks at each institution’s return on equity. Low asset quality should be met with a lower trading multiple. And that’s what we are seeing here.

Author – SEC EDGAR Data

Author – SEC EDGAR Data
Takeaway
To be clear, I would not make the case that Northwest Bancshares is a bad institution. I think it’s a perfectly decent firm. It actually has some things going for it. Weakness on its top and bottom lines is decent. In addition to this, most of its balance sheet has been growing. Uninsured deposit exposure is solid and shares are attractively priced on a relative basis. Having said that, the low asset quality is a bit of a problem and the price to earnings multiple is a tad higher than what I would like it to be. Given these factors, I don’t think it was a mistake to downgrade the stock to a “hold.” And I would make the case that it still deserves to be there at this time.
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