Bonhoeffer Fund: Northeast Bank ($NBN) Investment Case
Introduction
In their Q3 2024 partner letter, Bonhoeffer Fund presents a compelling investment case for Northeast Bank ($NBN), a bank that specializes in acquiring orphan loans and servicing specialized loans like SBA loans. The fund emphasizes Northeast Bank’s strategic acquisitions and innovative loan services as key drivers of its substantial earnings growth, projecting the bank as a growth-oriented investment within its portfolio.
Investment Highlight: Northeast Bank ($NBN)
Business Overview
- Northeast Bank operates from Maine but extends its services nationwide, particularly in the specialized sectors of Small Business Administration (SBA) loans and orphan loans—those compelled to be sold by regulatory actions due to mergers or failures.
- The bank leverages its expertise in these niche areas to foster substantial growth, demonstrating a historical EPS growth of nearly 40% per annum over the past five years.
Performance Analysis
1. Exceptional Financial Performance:
- NBN has maintained a high average loan yield of 8.9% and has achieved an organic loan growth rate of 26% annually over the past five years. This strong performance is driven by its focused acquisition strategy of high-yield orphan loans and government-backed SBA loans during strategic periods like the COVID pandemic.
- Current financial metrics indicate a robust net interest margin (NIM) of 4.9% and a high loan yield, enabling strong profitability levels.
2. Strategic Focus on High-Return Loans:
- The National Lending Group, a specialized division within Northeast Bank, focuses on the acquisition and servicing of orphan loans, capitalizing on a market less saturated by larger banking institutions.
Market Dynamics and Opportunities
- Northeast Bank is strategically positioned to capitalize on regulatory changes that could increase the availability of orphan loans and the ongoing demand for SBA loans.
- The bank’s niche focus provides a competitive edge, enabling it to operate efficiently within a specialized segment of the financial market that offers higher returns and growth potential.
Valuation and Growth Targets
- Bonhoeffer Fund calculates that if NBN maintains a conservative growth estimate of 20%, the stock is significantly undervalued with an implied earnings multiple of 41x, whereas it currently trades at about 10x earnings.
- The fund sets a short-term price target of $145 per share based on these growth estimates and a long-term potential value of $400 per share if the bank continues on its current growth trajectory.
Risks
- Northeast Bank’s specialized focus on orphan and SBA loans, while lucrative, also subjects it to unique market risks, including fluctuations in the availability of these loans and changes in regulatory policies.
- Operational risks are also present, including the management of non-performing loans and maintaining high underwriting standards in a competitive lending environment.
Conclusion
Bonhoeffer Fund’s investment case for Northeast Bank underscores the bank’s innovative approach to banking through its focus on orphan and SBA loans. With a historical EPS growth rate of 40%, and strategic projections for continued robust growth, Northeast Bank is poised for substantial profitability and market expansion. This positions it as an attractive investment with significant upside potential, reinforcing the bank’s strategic value to the fund’s growth-oriented investment strategy.
Click here for the full Bonhoefer Partner Letter.
Disclaimer: The information provided in this blog post is for informational and educational purposes only and does not constitute financial, investment, or other professional advice. The content is based on a third-party investor letter and does not represent an endorsement, recommendation, or solicitation to buy or sell any particular security or investment product mentioned.
Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Investors should carefully consider their investment objectives, risk tolerance, and financial situation before making any investment decisions.
