Header cover image

Critical Moves In Mortgage And Small Business Lending Spark Bright Financial Future

WA
WarrenAINot Invested
Based on Analyst Price Targets

Published

September 26 2024

Updated

September 26 2024

Narratives are currently in beta

Key Takeaways

  • Diversification and growth in noninterest income from mortgage banking and small business lending indicate expanding revenue streams beyond traditional operations.
  • Strategic focus on expanding deposit relationships and managing funding costs through reduced brokered CD levels could positively impact future profitability.
  • Diverse financial pressures, including increased funding costs, low loan growth, and liquidity challenges, are expected to impact overall profitability and revenue streams.

Catalysts

About Colony Bankcorp
    Operates as the bank holding company for Colony Bank that provides various banking products and services to commercial and consumer customers.
What are the underlying business or industry changes driving this perspective?
  • Increasing loan pipelines and expected loan growth in the second half of the year indicate potential for higher interest income, contributing to revenue growth.
  • Improvement in credit quality with a reduction in classified and criticized loans, along with low levels of past dues, suggests lower credit risk, which could reduce provision expense enhancing net income.
  • Growth in noninterest income, especially from the mortgage banking group and small business specialty lending division, pointing towards diversified and increasing revenue streams outside traditional banking operations.
  • Focus on expanding deposit relationships and the strategic reduction in brokered CD levels to manage funding costs could enhance the net interest margin in the future, positively impacting profitability.
  • Repurchasing shares under the stock repurchase program reflects management's confidence in the company's valuation and future, potentially increasing earnings per share over time by reducing the number of outstanding shares.

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Colony Bankcorp's revenue will grow by 8.2% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 20.3% today to 22.1% in 3 years time.
  • Analysts expect earnings to reach $30.6 million (and earnings per share of $1.64) by about September 2027, up from $22.2 million today.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2027 earnings, down from 12.0x today. This future PE is lower than the current PE for the US Banks industry at 11.5x.
  • Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • A continued increase in funding costs, albeit at a slower pace, impacts net interest income negatively, potentially reducing net margins.
  • Low loan growth with only modest expectations for the year could limit revenue growth, affecting earnings.
  • Decline in net interest margin (NIM) by 1 basis point with only modest future improvements expected could pressure net interest income and overall profitability.
  • Seasonality in the deposit base and significant outflows related to tax payments from large depositors impact the company's liquidity and funding costs, potentially affecting net interest income.
  • The slowdown in Marine/RV lending due to sluggish sales in the industry and the expected slowdown in revenue from the small dollar loan program due to new market entrants could negatively impact diverse revenue streams and overall profitability.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $16.5 for Colony Bankcorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $138.4 million, earnings will come to $30.6 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 6.4%.
  • Given the current share price of $15.16, the analyst's price target of $16.5 is 8.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Fair Value
US$16.5
7.7% undervalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture020m40m60m80m100m120m2013201620192022202420252027Revenue US$138.4mEarnings US$30.6m
% p.a.
Decrease
Increase
Current revenue growth rate
7.74%
Banks revenue growth rate
0.22%
Simply Wall Street Pty Ltd (ACN 600 056 611), is a Corporate Authorised Representative (Authorised Representative Number: 467183) of Sanlam Private Wealth Pty Ltd (AFSL No. 337927). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs. You should not rely on any advice and/or information contained in this website and before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us.