Northeast Bank (NBN) Fiscal Q1 2027 Earnings Call: Record Originations and $29M Net Income

Key Takeaways

• Northeast Bank reported fiscal Q1 2027 net income of $29.0 million, or $3.42 per diluted share, compared with $34.3 million and $4.05 in the linked quarter.
• Return on average assets was 2.21%, while return on average equity reached 18.65%. Tangible book value rose to $73.22 per share, up 22% year over year.
• National Lending recorded its fourth consecutive quarter of record originations at $258.6 million. Total loan generation was $534 million, including purchased, originated and SBA loans.
• Net interest margin declined to 4.57% from 4.80% in the linked quarter, reflecting purchased-loan prepayment timing and a higher proportion of lower-yielding originated loans.
• Asset quality remained favorable: nonaccrual loans were $22.5 million, or 48 basis points of total loans, excluding loans held for sale.
• Management said Northeast Bank has $1.58 billion of additional loan capacity under its existing capital structure, without raising new capital.

Core Financial Data

Business and Operating Performance

Total loan generation reached $534 million. This included $237 million of National Lending purchased loans, $258 million of originated loans and $35 million of SBA loans. Most purchased-loan activity occurred near quarter-end, limiting its contribution to fiscal Q1 earnings.

The purchased-loan portfolio generated a total return of 9.11%, or $62 million. Northeast Bank also released $5.9 million of credit-related purchase discounts through the allowance for credit losses after several loans paid off in full. Management emphasized that this income is presented through the allowance under CECL rather than through interest income.

In the loan-purchase market, the bank reviewed 29 pools containing approximately 3,700 loans and $3.5 billion of balances. It bid on 10 pools totaling about $600 million and won eight pools with $254 million of balances. The acquired pools had a weighted average purchase price of $0.935, an LTV slightly above 60% and an estimated weighted average yield to maturity of approximately 8.5%.

Commercial real estate lending remained active. Northeast Bank reviewed 201 requests totaling around $3 billion and closed $259 million during the quarter. The 23 closed loans averaged $11 million, with an average LTV of 54% and an average interest rate slightly above 7%. Direct loans represented about two-thirds of the balances and generally have longer duration than lender-finance loans.

The loan portfolio excluding held-for-sale loans totaled $4.65 billion. National Lending purchased and originated loans represented $4.51 billion, or 97% of the portfolio.

Deposits increased $95 million, or 2.6%, mainly due to a $152 million increase in brokered CDs, partly offset by seasonal outflows in government banking deposits. Shareholders’ equity increased $24.5 million, or 4.1%, during the quarter.

Management Guidance

Management expects approximately $1.4 billion of CDs to mature and roll over within the next three months. The replacement cost could be about 50 basis points higher, depending on brokered-market rates, adding approximately 15 basis points to the bank’s cost of funds next quarter.

The company identified roughly $35 million per quarter as a reasonable forward run rate for SBA activity. Management also expects an effective tax rate of approximately 29%, assuming no additional tax-credit purchases.

Management said purchased-loan yields from recent acquisitions should support net interest margin if loan paydowns slow. However, the timing of prepayments and discount recognition makes quarterly margin performance difficult to forecast.

The originated-loan portfolio is expected to continue on its current growth path, although net growth will depend on both production and repayments. Management also expressed confidence in another strong lending quarter based on active purchased-loan and origination pipelines.

Risks and Points to Watch

• Purchased-loan prepayments can create significant quarterly volatility in yields, net interest margin and allowance releases.
• A higher proportion of originated loans pressured margin because the originated portfolio yielded 7.70%, compared with 8.24% for purchased loans.
• Funding costs are expected to rise as $1.4 billion of CDs mature and reprice.
• Excluding insured loans, charge-offs were approximately $3 million, primarily within the SBA portfolio.
• Accounting for insured small-business loans increases both provision expense and noninterest income. Management said the two entries offset each other with no net income impact.

Analyst Q&A Highlights

Management said it hopes purchased-loan repayments will slow as rates rise. Slower paydowns and the healthy yields on recently purchased portfolios could allow net interest margin to recover modestly, but the timing and size of discount recognition remain unpredictable.

On loan growth, management viewed the recent annualized pace of National Lending originations as a reasonable framework, subject to payoff activity. The shift toward direct loans may support longer portfolio duration than lender-finance production.

Management said a rising-rate environment can increase purchase opportunities as banks manage fixed-rate assets and liquidity, while higher funding costs can constrain nonbank competitors. Higher rates may also slow refinancing out of Northeast Bank’s portfolio.

Regarding the bank’s $1.58 billion of loan capacity, management said the incremental operating cost of deploying that capacity would be small relative to the potential additional net interest income, highlighting substantial operating leverage.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Welcome to the Northeast Bank First Quarter Fiscal Year 2027 Earnings Call. My name is Towanda, and I will be your operator for today's call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer; Santino Delmolino, Chief Financial Officer; and Pat Dignan, Chief Operating Officer and Chief Credit Officer.

Prior to the call, an investor presentation was uploaded to the bank's website, which we will reference in this morning's call. The presentation can be accessed at the Investor Relations section of northeastbank.com under Events and Presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use.

[Operator Instructions] As a reminder, the conference is being recorded. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon the current expectations of Northeast Bank's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements.

I would now like to turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Richard Wayne

Thank you. Good morning. And welcome to our investor call for the quarter ending September 30. I'm going to provide an overview of our -- this is our first fiscal quarter. And after my comments, Santino will discuss our financial results, and Pat will review our loan activity. At the conclusion of our comments, we will be happy to answer your questions. I'm going to first make some comments on the financial highlights page, which is Page #3 in the investor deck that was posted last night.

Some of the highlights I want to mention are as follows: we had quarterly net income of $29 million, return on equity of 18.65%, return on assets of 2.21%. Tangible book value continues -- per share continues to rise, ended the quarter at $73.22, representing a 22% increase over a year ago and a 58% increase over the last 3 years. The total return on our purchased loans in the first quarter was 9.11% or $62 million, which includes $5.9 million of recovery on credit discount on loans we purchased.

Let me just pause on this point for a second and just briefly talk about our purchase loan business, which is a very, very large part of our business. We purchased loans at a discount either because there is an interest rate mark, that is to say the coupon that the customer is paying is less than what the current market rates are for interest. Think of this as bond math. And then we also buy loans where we pay a discount because it may turn out that we won't collect everything, the entire unpaid principal balance from the customer.

And the credit mark is interesting because of the required accounting for it and it's not as obvious as to how much that is as it was before CECL. I know that's a lot to understand. So I'll just try and put some numbers to it as it occurred in the current quarter. In the current quarter, we had about $6 million of discount due to a credit mark that were loans that wound up paying off in the quarter.

It is primarily 4 loans, which accounted for most of it. So with respect to these 4 loans, we had $6 million of a credit mark, which we didn't accrete into income and the loans paid off in full, and we earned $6 million. The way the accounting for that is now under CECL is that it runs through the allowance. And so it's not obvious -- so obvious on the financial statements because it runs through the allowance along with a bunch of other matters.

But that's a core part of our business. And I think it's worth highlighting that number, and I want to do that by turning to page -- I'm getting there, still getting there. If you could turn to Page 32, which is the last page in the deck, you can see that -- the total return, I mentioned that it was 9.11% on the total portfolio, but there is a line there that says release of allowance for credit losses on purchased loans, $5.921 million.

Previously, that would have been reported in interest rate, meaning before CECL, that would have been included in our interest income, but now it goes to the allowance. So I did want to highlight that. I think Tino is going to provide a little more granularity on that point. For the quarter, it was our fourth consecutive quarter of record originations in our national lending business, $258.6 million.

Our pipeline was very large during the quarter. It continues to be very large, and we're seeing a lot of traction in that business line. We also highlight on Page 3 that we have $1.58 billion of loan capacity, and this is without doing any capital raise. It's just what's available to us with our existing capital. So we consider that to be very valuable to us. Let me now just make a few more points as I turn. If we take a look at the -- I want to talk about the asset quality next of our purchased and originated loan book. With the loan portfolio of $4.650 billion, that's excluding any loans that we're holding for sale.

It represents 97% of that number, $4.51 billion are national lending loans, that's purchased and originated. And of that, at the quarter end, only $22.5 million were on nonaccrual, representing 48 basis points of total loans. So it's really a remarkably low number for our loan portfolio, as you can see that. And just for purposes of the full picture, we had some OREO on the balance sheet as well.

And with those comments, I'd like to turn it over to Tino, please. Santino.

Santino Delmolino

Awesome. Thanks, Rick. As Rick mentioned, this quarter was a good start to the year and created strong momentum heading into Q2. Net income for the quarter was $29 million or $3.42 per diluted share compared to $34.3 million or $4.05 per diluted share in the linked quarter. Return on average assets was 2.21% and return on average equity was 18.65%. Total assets ended the quarter at $5.35 billion, an increase of $125 million or 2.4% from June 30. The loan portfolio, including loans held for sale, grew $163 million or 3.6% during the quarter.

Loan generation totaling $534 million was split between $237 million of National Lending purchased loans, $258 million of originated loans and $35 million of SBA loans. It's worth pointing out that most of the purchase loan activity occurred at the tail end of the quarter. Therefore, there is limited impact on the current quarter's earnings. Net interest income for the quarter was $58.9 million compared to $60.3 million in the linked quarter and $48.2 million in the prior year quarter.

Net interest margin was 4.57% compared to 4.8% in the linked quarter and 4.59% in the prior year quarter. The decrease in margin is largely attributable to yields on the purchased loans, which can be volatile, as we know, due to timing of prepays, which caused accelerated accretion, i.e., transactional income. While we did have a fair number of prepayments, both in [ this ] quarter and the current quarter, which caused yields to decrease a little bit, the current quarter prepays were largely on loans that did not have significant rate mark discounts.

As Rick mentioned, most of the prepays we saw this quarter were actually on loans that have credit marks. So we released just under $6 million of credit mark through the allowance within the purchase portfolio. I'll come back to this to discuss in a little more detail later. Yield on the total loan portfolio was 8.11% compared to 8.37% in the linked quarter. Within National Lending, the purchase portfolio yielded 8.24%, while the originated portfolio yielded 7.7%. We saw a little bit of a shift in portfolio mix this quarter with originated loans making up a higher percentage of the balance sheet. Given the yields here, that also put a little bit of pressure that we're seeing on NIM.

Turning over to funding. Total deposits increased $95 million or 2.6% during the quarter, largely driven by $152 million increase in brokered CDs, offset by seasonal runoff in our government banking portfolio. FHLB advances were relatively flat quarter-over-quarter, though average balances were up as we utilized short-term borrowings to fund growth between brokered CD issuances.

As you'll see on Slide 21 of our deck, cost of funds came down 1 basis point from the linked quarter and our spot rate is at the same level. We've made all rate changes that we anticipate making on our nonmaturity deposit portfolio, barring any further changes by the Fed. So the only real movement I'd expect in our cost of funds going forward is as CDs roll over.

On that front, we do have about $1.4 billion of CDs maturing within the next 3 months that we anticipate rolling over. The cost on that likely is going to go up somewhere in the realm of 50 basis points, depending on where rates are in the brokered market at that time. That's going to equate to somewhere around 15 basis points of increase in our cost of funds next quarter.

Now if we could take a look at Slide 30, I'd like to spend a little time on the nuts and bolts of the provision. So there's a lot to unpack here. First, I'll talk through kind of the typical components of the allowance for loan loss. So first is just your typical changes within the allowance, which is a result of loan originations as well as changes in the coverage ratio on the existing portfolio.

This accounts for about $1 million of provision during the quarter as we increased the coverage ratio on both our SBA and our purchase portfolios. The other side of this that you'll see in most banks is charge-offs and recoveries, whether it be on purchase or originating loans. Excluding the insured loans, we had about $3 million in charge-offs this quarter, which you can see are mostly within the SBA portfolio.

The 2 unique components to our provision are as follows: the first is, release of credit discount on purchased loans. So Rick got into this a little bit. But as you look at the allowance roll forward here, you'll see that we have a column for initial ACL on purchased loans. So when we're buying loans at a discount and there's a bit of uncertainty as to whether or not we will be able to fully collect the principal balance of those loans, we actually will set up an allowance that comes out of the purchase price on those.

So unlike your typical allowance that runs through the provision, there's no net income impact of that initial $4.4 million. Ultimately, as loans go through the process and if we're able to get those loans to pay off without having to take a charge-off or take a charge-off equal to that initial credit mark, we end up taking a release. So we end up recovering a good amount of that allowance. As you can see this quarter, Rick mentioned, we picked up $5.9 million that runs as a credit to the provision.

The other unique component to our allowance relates to the insured small balance business. The way -- all of the loans within this portfolio, we've got a little over $90 million of them right now. Part of them -- most of them are in held for sale and part of them are in the portfolio. The way the accounting works for this is you have to treat -- even though the insurance exists to cover us from a credit loss standpoint, and we believe it's more than ample to cover any expected credit losses within this portfolio.

The accounting standards require you to account for those 2 items completely separate and distinct. So what ends up happening is we book an allowance on the insured small business loans as if we did not have any sort of credit insurance. So that's what you can see here. You can see we booked $2.5 million of provision during the quarter in relation to these loans.

On the flip side of that, because we expect the insurance company to make us whole on any losses we incur here, we end up booking a gain in an insurance receivable and that gain runs through noninterest income. So there's a little bit of grossing up happening between our provision and noninterest income, which is a bit unique.

Switching over to noninterest income. I already discussed the gain on insurance recoveries. The other bigger component here is the gain on SBA sales. So we sold $23.7 million of SBA loans during the quarter. We also sold $9.9 million of small balance insured loans during the quarter. The combined gain on sale from both of those items was $2.7 million. I think where we're at right now from an SBA standpoint, probably is a good run rate for us to think about on a go-forward basis, somewhere in that $35 million a quarter range.

Looking at noninterest expense came in at $24.2 million compared to $23.5 million in the linked quarter. Quarter-over-quarter increase here is spread pretty evenly across the categories with employee and director compensation accounting for the largest dollar increases here as we adjust compensation in Q1 of each year.

Lastly, income tax expense came in at 10.3% (sic) [ $10.3 million ], representing an effective tax rate of 26.2% compared with an effective tax rate of 28.3% in the prior year quarter. The lower effective tax rate is primarily reflected as a result of a greater benefit that we get. So all of our stock vesting grants occur in Q1, and we recognize a tax benefit for that. On a run rate, I'd expect our ETR to be around 29% on a go-forward basis, assuming we do not buy any further tax credits, which is something we are looking at, but not something we would forecast.

Finally, capital remains strong. Shareholders' equity increased $24.5 million or 4.1% during the quarter. Tangible book increased to $73.22 compared to $70.58 at June 30. Tier 1 leverage ratio came in at 12.11%. Overall, the quarter reflected strong loan production, healthy purchase loan returns, favorable asset quality trends and continued capital growth. The loan volume we saw this quarter is a catalyst as we go into the second quarter of the year.

Now I'll hand it over to Pat.

Patrick Dignan

Thanks, Tino. It's another good quarter on the lending front. In the purchase space, we looked at 29 loan pools containing 3,700 loans and $3.5 billion in balances. 8 of these had balances over $100 million. We bid on 10 of these pools for about $600 million, and were successful in 8 of them, winning just over 40% of the balances bid or $254 million at a weighted average purchase price of $0.935.

These pools were sourced mainly from banks who are managing internal concentrations and also M&A deals. Included in the pools we won are 89 loans located primarily in the Northeast, California and Florida, purchased at a weighted average LTV of just over 60% and a weighted average yield to maturity of approximately 8.5%. Of the 8 pools with balances over $100 million, we passed on half of them due to performance issues, undesirable collateral or unacceptable price expectations.

In 3 cases, we bid on and won smaller subsets of larger pools. In some cases, particularly on larger pools where we think we might not be the best all bid and depending upon the loan composition, performance, price expectations and competitive set, we bid on combinations or subsets of loans within larger pools or partner with complementary bidders in order to maximize the chances of winning something. We did win one large pool with balances of just over $100 million. This was a 23 loan pool from a New York area bank that needed to manage its balance sheet and close quickly.

Moving on to originations. In our small balance loan program, we originated 190 SBA loans and 10 GTL loans for just under $40 million. No significant updates there. For commercial real estate lending, we reviewed 201 loan requests this quarter for around $3 billion. We issued 69 term sheets for $887 million, of which 36 for $457 million were executed and returned. Many of these remain active with $259 million closed within the quarter.

This included 23 loans with an average balance of $11 million, LTVs of 54% and an average interest rate of just over 7%. Direct loans represent about 2/3 of these balances. This is a shift from recent quarters where lender finance was predominant, not surprising given increased market demand and rising funding costs for nonbank lenders. A rising or volatile rate environment has always been good for the purchased loan business and puts us at a competitive advantage relative to nonbanks in both the purchased and originated space. Both pipelines are currently very active, and we're confident of another strong quarter to come. Rick?

Richard Wayne

Thank you, Pat. Thank you, Tino. Now we'd be happy to take any questions that you have.

Operator

[Operator Instructions] Our first question comes from the line of Damon DelMonte with KBW.

Question-and-Answer Session

Damon Del Monte

First question is on the margin. Clearly, lots of moving parts going through each quarter. And as you pointed out, part of the movement this quarter was because of the elevated payoffs. So I guess my question is kind of twofold. Do you expect the pace of payoffs on the purchased loans to slow in the coming quarters? Or do you think we'll continue to see increased activity like we have in the last couple of quarters?

Santino Delmolino

I guess I would say I'm hopeful that the pace of paydown slows down. I mean it's not something we can necessarily forecast very well. I mean with rates going up, that should be favorable for us on that front. The other thing I'd say is, as it relates to the couple of loans that Rick mentioned at higher credit marks, given the fact that we were expecting to take some sort of a loss on those loans, those are probably the types of loans that we're happy to manage out of the bank. But overall, I would hope to see paydowns come down going forward.

Damon Del Monte

Okay. So if all else was like kind of equal, if the paydowns slowed, I mean, do you -- would we see like a rebound in the margin maybe closer back to what we had in the previous quarter? Or do you think you kind of stay in this 4.55% to 4.65% range?

Santino Delmolino

I think it might rebound a little bit. A couple of things there. One is, we do -- depending on the rate mark that's on a given loan that prepays, you could see a bump in margin depending on any level of interest rate mark that we're able to recover at the time of payoff. So there are instances where it is actually beneficial to us, at least in the short term for those loans to pay off. And the other thing I'd say, assuming that paydowns do slow, the yields that we have on the portfolios we purchased this past quarter are all pretty healthy. So it should be net accretive to the margin. So hopefully, it should bounce back a little bit.

Richard Wayne

This is Rick. A feature of our bank, which makes your job more challenging, is that we frequently use the word lumpy in our business. So for example, we could have a loan with a small balance on it and a large credit mark. And then when that loan pays off, we have a big -- a large amount of income running through the allowance.

We could alternatively have a loan that we purchased recently that has a lot of interest rate mark on it, and it pays off early. It could be a loan with, let's say, 5 years remaining. So we anticipate we're going to accrete that interest mark over 5 years, but it pays off in 2 weeks. That happens also. And so it's -- it would be difficult for us to provide you with and the other listeners any help on that.

But I would make the point, that's why -- and maybe this is the fantasy world, but we have to be looked at on a yearly basis where these things sort themselves out. Quarter-to-quarter, that number can jump around. And I would just add for the record, 4.57%, while lower than some of the previous quarters is a very healthy NIM, as you know.

Damon Del Monte

Yes. Totally, totally get that, for sure. Yes. Okay. And then maybe like on the fee income line, you had the insurance recovery gains that were booked. Is this something that we should expect kind of more consistently in future quarters? Or is this kind of an anomaly this quarter?

Santino Delmolino

It's going to occur in future quarters also. I would -- it's hard to tell you guys how to forecast this necessarily because ultimately, what's happening is there's no P&L impact of that because while it shows in noninterest income, it's also an increase in the provision. So the 2 items net to 0, and it just grosses up those 2 line items in the P&L.

Damon Del Monte

Got it. Okay. So while our provision or our fee income may be off, the net of those 2 should hopefully cancel each other out.

Santino Delmolino

Yes, exactly.

Damon Del Monte

Got it. Okay. And then if I could just squeeze one more in. On the loan growth outlook, the commentary around the originated loans seems to be very favorable. If you look back over the last 12 months, I think you're probably around 40% growth in that portfolio. Can we kind of expect something that we've seen over each of the last few quarters, something that's comfortably in the 25% to 35% quarterly growth rate? Or do you think that dials back a little bit?

Richard Wayne

Let's make sure we're dealing with the same headline. We expect that originated loan book to continue on the path that it's on. But you're not saying -- are you saying that you think it increased 25% from the linked quarter?

Damon Del Monte

Linked quarter annualized, yes, the...

Richard Wayne

Well, if you annualize it.

Damon Del Monte

Yes, the National Lending originated loans, if you annualize that, it was like 34% this quarter?

Richard Wayne

Yes. Yes, I think that's probably a reasonable way to think about it, but it all has to do with the level of payoffs. So there are, of course, 2 components to that. One, how much do you originate. And two, what are your payoffs. And in that origination business, we're primarily a bridge lender, either directly -- when we're making loans directly to the owner of the property or indirectly if we're providing leverage to a nonbank lender who in turn is making bridge loans. So that number, the net growth, again, could vary. This is what may be difficult for you. You still like us, Damon, they are hard to predict.

Patrick Dignan

The shift -- one thing that's good is the shift toward direct loans tends to have a longer duration than lender finance loans. So the volume of direct loans is encouraging from that perspective and with respect to payoffs.

Operator

Our next question comes from the line of Justin Crowley with Piper Sandler.

Bader Hijleh

This is Bader for Justin. I just had a question on the purchase side. You guys had a pretty healthy amount of activity, and I appreciate the detail at quarter end. I know there are a lot of variables that go into it, but curious how you think higher rates, especially you have a couple of hikes coming in the next 12 months could impact opportunity here and how that could create more transaction volume maybe after the next quarter, heading in the next 12 months?

Patrick Dignan

I think there's 2 -- if you remember back to 2022, 2023 in that rising rate environment, there was a lot of purchase opportunity back then. And I think there's a lot of reasons for it, but one of the principal reasons with banks is they tend to do fixed rate lending and fund short. And so in a rising rate environment, there's some portfolio management there for liquidity purposes. Rising rates also increases the cost of funding for -- more than us for our chief competition, which are nonbanks. So I think those are the 2 basic reasons why a rising rate environment is good for the purchase business.

Richard Wayne

The other thing a rising rate environment tends to do is slow down the pace of refinancing out of our portfolio.

Bader Hijleh

Got you. That's helpful. And then just thinking about the balance sheet capacity here, if we were to hypothetically assume you'd be able to deploy the $1.6 billion, how much In added expense would need to go along with that? And like how would you generally frame the operating leverage that could create?

Richard Wayne

We have tremendous operating leverage. Of course, $1.6 billion depends on the amount of loans that you have there. But relative to the net interest income you would pick up, it would be very small. But you could do the math. You could take the $1.6 billion and assume a spread -- and then it will give you your net interest income. And I would expect the operating additional cost to do that. It won't be 0, but it's going to be very small to put on another $1.6 billion of loans.

Operator

Ladies and gentlemen, I'm showing no further questions. Now I'll turn the call back over to Rick Wayne for closing remarks.

Richard Wayne

Thank you. Thank you, Damon. Thank you, Bader, for your insightful questions. Thank you to those on the call listening and to those who will listen if they go to our website to hear the tape. There is also a transcript published as well. We look forward to meeting again in January, it's towards the end of January when we will be reporting our results for our second fiscal quarter or the fourth calendar quarter ending December 31.

And in the meantime, if you have any questions, feel free to call one of us if we're able to answer it. We will be happy to. And if you have any suggestions or material that you think would be helpful to include both in the investor deck and on the call, let us know that as well. That's all for today. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.