SBA Loan Expansion And Strategic Funding Propel Exciting Growth Prospects

Key Takeaways

• Strong loan production and SBA program expansion enhance revenue growth and fee income beyond traditional interest sources.
  
• Strategic funding and stable agreements mitigate risks, supporting consistent earnings despite potential rate fluctuations.
  
• Northeast Bank faces potential credit, regulatory, interest rate, and competitive risks due to its loan strategies and market dynamics, threatening margins and asset quality.

Catalysts

Provides various banking services to individual and corporate customers in Maine.

• Northeast Bank's strong loan production, including the second-highest quarter in the bank's history, suggests continued revenue growth as the bank capitalizes on large loan purchases and originations.
  
• The expansion of their small balance SBA loan program, with a significant increase in loan volumes, positions the bank for enhanced fee income, boosting potential earnings outside of traditional interest income.
  
• The extension of the agreement with NEWITY for another potential ten years indicates stable operations and revenue growth prospects, particularly through service fees on SBA loan activities.
  
• The bank's strategic funding approach through laddered brokered CDs aims to better manage interest rate risks, supporting stable net interest margins and consistent earnings despite fluctuating rates.
  
• Potential future loan purchase opportunities and M&A activity could increase Northeast Bank's loan portfolio, potentially accelerating revenue and earnings growth if the bank can continue to efficiently fund these transactions with available mechanisms like the ATM.

Northeast Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northeast Bank's revenue will grow by 19.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 38.2% today to 45.1% in 3 years time.
• Analysts expect earnings to reach $122.3 million (and earnings per share of $14.43) by about November 2027, up from $60.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.2x on those 2027 earnings, down from 13.6x today. This future PE is lower than the current PE for the US Banks industry at 13.3x.
• Analysts expect the number of shares outstanding to grow by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.04%, as per the Simply Wall St company report.

Northeast Bank Future Earnings Per Share Growth

Risks

• The increased reliance on purchased loans, which comprised $733 million of the $942 million loan production, may expose Northeast Bank to credit risk if these loans underperform, potentially impacting net margins and earnings.
  
• Growth in the SBA loan program presents uncertainties, as the demand for small balance loans, technology integration, and marketing spend remain unknowns, potentially affecting future fee income and net margins if the strategy does not produce expected results.
  
• The bank's high commercial real estate (CRE) concentration at approximately 600% presents a risk, as regulators typically advise a 300% concentration. If the real estate market suffers, this could negatively impact revenue and asset quality.
  
• The bank's substantial use of brokered deposits to fund loan purchases introduces interest rate risk. Fluctuations in interest rates could increase funding costs and compress net interest margins, affecting overall earnings.
  
• Market competition from aggressive lenders in the nonbank space could pressure Northeast Bank to lower prices or take on riskier loans to maintain volumes, which would impact net margins and could potentially harm asset quality if risk management falters.

Valuation

• The analysts have a consensus price target of $104.5 for Northeast Bank 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 $271.2 million, earnings will come to $122.3 million, and it would be trading on a PE ratio of 8.2x, assuming you use a discount rate of 6.0%.
• Given the current share price of $99.6, the analyst's price target of $104.5 is 4.7% 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.