Mortgage Purchase Program Expansion Will Drive Durable Earnings Power Over The Long Term

Catalysts

About Northpointe Bancshares

Northpointe Bancshares is a technology enabled, mortgage focused bank that provides nationwide mortgage purchase programs, residential lending and specialized deposit and servicing solutions.

What are the underlying business or industry changes driving this perspective?

• Scaling of the proprietary mortgage purchase program, including expanded client facilities and more participating institutions, is intended to support durable double digit loan growth and higher fee income, which would lift revenue and net interest income.
• A mix shift away from lower yielding legacy first mortgages into higher yielding MPP and AIO portfolios, alongside potential rate cuts, could enhance asset yields and stabilize funding costs, which may widen net interest margin and support earnings growth.
• Ongoing build-out of digital and custodial deposit channels, and pursuit of additional non brokered funding relationships, may position the bank to lower its wholesale funding reliance over time, improving funding mix, cost of funds and net margins.
• Expansion of specialty mortgage servicing and subservicing for AIO like products, combined with selective MSR retention, could help grow a recurring fee based revenue stream and diversify earnings with relatively low incremental expense.
• Planned optimization of the capital structure by calling higher cost preferred stock and replacing it with subordinated debt is intended to reduce capital costs, support balance sheet growth and be accretive to earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Northpointe Bancshares's revenue will grow by 15.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.0% today to 37.5% in 3 years time.
• Analysts expect earnings to reach $123.6 million (and earnings per share of $3.41) by about December 2028, up from $62.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.3x on those 2028 earnings, down from 9.7x today. This future PE is lower than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The strategy is heavily concentrated in the mortgage purchase program and the all in one lending tied to residential real estate. Any prolonged downturn in U.S. housing activity or home prices could reduce loan demand, pressure pricing power and increase loss severity, weighing on revenue growth and net margins over time.
• The business model relies on continued access to low cost deposits, while wholesale funding still makes up 67.6% of funding. If competition for deposits intensifies or custodial and digital deposit inflows slow, the bank may be forced to pay higher rates for funding, compressing net interest margin and limiting earnings growth.
• Gain on sale of mortgages and fair value marks on loans and servicing rights are key profit drivers. If long term mortgage spreads tighten, refinancing waves do not materialize as expected or pricing pressure from other lenders accelerates, fee income could fall and overall earnings would become more volatile and less predictable.
• Planned balance sheet growth in the mortgage purchase program and all in one loans assumes that credit performance remains pristine. However, if unemployment rises or regional housing pockets weaken, net charge offs and provisions could trend back toward or above historical averages and erode net income and returns on equity.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $19.92 for Northpointe Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $330.1 million, earnings will come to $123.6 million, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $17.49, the analyst price target of $19.92 is 12.2% higher.
  
• 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.