NBN - Northeast Bank: Depressed Price Point Paves The Road For A Buy

2023-10-11 07:49:17 ET

Summary

• The share price for Northeast Bank has fallen far enough that the downside is limited, given the positive impact interest rates have on the bottom line.
• The dividend yield is appealing at over 4% and will be a significant driver of shareholder value.
• The upside is strong here as the historical growth numbers shows how well NBN has done over the years.

Introduction

The regional bank's industry may have seen a lot of turmoil this year, but that does not mean there aren't some winners in the industry as well. One of these is Northeast Bank (NBN) which has seen its share price appreciate over 17% in the last 12 months. Much of the cause for this climb has been because of the impressive asset improvements the company has made YTD. The loan portfolio is nearly 2x higher than it was a year prior as national lending purchases have rapidly increased. What seems to have been hurting the earnings slightly though is climbing salaries and employee benefits on a YoY basis. Nonetheless, the valuation is low enough that a buy rating can be established here.

Company Structure

NBN offers a range of banking services to both individual and corporate customers within the state of Maine. The institution provides various deposit products, including demand deposit accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit, individual retirement accounts, and checking accounts. In addition to its deposit services, NBN manages a loan portfolio that encompasses residential mortgage loans, multi-family real estate loans, and other commercial real estate loans, among others. This diverse array of financial offerings caters to the diverse needs of its clientele while contributing to the bank's overall operations.

NBN growth in size has not only expanded its reach but also led to improvements in its return on equity, a positive development for the institution. In addition to this, the bank achieved significant milestones in recent years, with one standout being its active participation in the Paycheck Protection Program ((PPP)). During this initiative, NBN successfully originated a substantial volume of loans, which not only resulted in the earning of corresponding fees but also generated capital gains when these loans were subsequently sold. This strategic involvement allowed the bank to realize exceptional profits during the 2021-2022 period, underlining its ability to leverage opportunities for financial gain. As we have discussed, these improvements have made NBN a rather favorable option right now in the regional banks industry if you are looking for a smaller-sized business that is still able to post strong earnings growth.

On a YoY basis, the net income has climbed by nearly 20% and NBN has continued to buy back shares and boost shareholder value. As we will be looking at more below, the divine opportunity that is present with NBN is quite strong in my opinion.

The growth rates for the company as seen above are incredible quite frankly. The book value has appreciated by double digits over the last decade. If that sort of momentum can be continued, then NBN looks quite undervalued here with a p/b of just 0.98 on an FWD basis. For a company that can grow at double digits like that, it deserves a higher multiple. For the coming years, I think that the book value will grow double digits and that should yield a double-digit ROI for investors as the valuation is staying around 1 for the p/b.

Earnings Transcript

From the last earnings call that the company held, the CEO of NBN, Richard Wayne, had some good comments to share with investors that touch on the current market conditions and where they see the company heading in the near term.

"We did see during the quarter some big transactions that had come to market, but -- and that is generally true that the bid ask is pretty wide between sellers and buyers. And so it didn't meet our pricing expectations. And so therefore, we didn't bid on those. We would expect, based on what we see in the market, that the gap between the bid and the ask will narrow and there'll be more opportunities to take a look at those. We originated $84.2 million in the quarter as well. Our originated loan book which is -- and was therefore -- our balances were fairly flat with the linked quarter. But over the year, our originated loan book increased $229 million or 30% from the balance on June 30, 2022".

It seems that the management is taking a more conservative approach going forward as the appeal on some of the offers entering the market is not there yet. I think it's wise that NBN holds off on rapidly expanding when the conditions aren't right. We have already seen the quick rise over just the last 12 months and for NBN to continue a strong net margin then being conservative and efficient about the purchases and bidding they do is the right route to take. Estimates seem to be a continued climb for the bottom line and this seems reasonable given the asset expansion that has already occurred.

Valuation & Comparison

Playing with the idea that NBN just has a payout ratio of 25% we can see an immense upside potential given the GGM model I have applied for the company. The target price for 2023 would be $78 per share, a near 100% upside from today's levels. This is something I don't think will occur in the near term, but given that NBN has a small payout ratio and yield right now, I think it very well showcases the potential that the company has for investors right now. With a $2.36 dividend in 2023, the FWD yield lands at around 5.5%, a very strong rate that I think most investors would be very satisfied with getting right now.

Risk Associated

Following a tumultuous period in the regional banking industry, NBN share price has experienced a rapid recovery from its previous lows. However, this swift ascent may potentially be signaling the need for a correction in the short term. While such a correction could pose challenges for short-term investors, it is unlikely to significantly impact the long-term outlook of the company.

NBN has made commendable strides in bolstering its asset base, primarily facilitated by its access to affordable loans. This strengthened foundation positions the bank favorably for sustained growth and resilience, mitigating the potential short-term fluctuations in its stock price.

Investor Takeaway

NBN has grown immensely over the last couple of years and it has done so thanks to their quite aggressive loan purchases and acquisitions over the last 12 months alone. This has pushed the net income higher and I think that if the management decides to, the potential dividend opportunity here is very strong, enough to make it a buy when you consider the company is just trading at 6.7x earnings right now.

For further details see: