Northeast Bank Q1 2027 Earnings Call Transcript

Northeast Bank (NASDAQ:NBN) reported first-quarter financial results on Tuesday. The transcript from the company’s first-quarter earnings call has been provided below.

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Summary

Northeast Bank reported a quarterly net income of $29 million with a return on equity of 18.65% and a return on assets of 2.21%.

The tangible book value per share rose to $73.22, marking a 22% increase over the past year.

The company achieved its fourth consecutive quarter of record originations in national lending, totaling $258.6 million, with a large loan capacity of $1.58 billion.

Loan portfolio grew by $163 million during the quarter, while net interest income was $58.9 million, showing a slight decrease from the previous quarter.

Asset quality remains strong, with only $22.5 million on nonaccrual, representing 0.48% of total loans.

The company expects continued strong loan production and healthy purchased loan returns, with a favorable outlook on future loan growth and strategic initiatives.

Management highlighted a significant operating leverage with the potential to deploy $1.6 billion in additional loans with minimal additional operating costs.

Full Transcript

Tawanda (Operator)

Welcome to the Northeast Bank first quarter fiscal year 2027 earnings call. My name is Tawanda, and I will be your operator for today’s call. This call is being recorded. With us today from the bank is Rick Wayne, Chief Executive Officer; Santino Delmolino, Chief Financial Officer; and Pat Bingham, 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. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star 11 to ask a question. To remove yourself from the queue, press star 11 again. 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.

Rick Wayne (Chief Executive Officer)

Thank you. Good morning, and welcome to our investor call for the quarter ending September 30th. I’m going to provide an overview. 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 number three 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 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 three years.

The total return on our purchase 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 purchase 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 is 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’s primarily four loans which accounted for most of it.

So with respect to these four loans, we had $6 million of a credit mark which we didn’t accrete into income. Then 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 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, getting there.

If you 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 purchase loans, $5,921,000. Previously, 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 three that we have $1.58 billion of loan capacity. And this is without, you know, 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. I want to talk about the asset quality next of our purchased and originated loan book with the loan portfolio of $4,650,000,000—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, you know, a remarkably low number for our loan portfolio. You know, 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, CPA (Chief Financial Officer)

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 $29.0 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%. 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 purchase 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 results. 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. The quarter’s net interest margin was 4.57% compared to 4.80% in the linked quarter and 4.59% in the prior year. The quarter decrease in margin is largely attributable to yield on the purchased loans, which can be volatile, as we know, due to timing of prepays which cause accelerated accretion—that is transactional income.

While we did have a fair number of prepayments both in the linked 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 had 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 purchased portfolio yielded 8.24% while the originated portfolio yielded 7.72%. 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 yield 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 a $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, so we utilized short-term borrowings to fund growth between brokered CD issuances. 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 non-maturity 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 three 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. There’s a lot to unpack here. First I’ll talk through 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 a million dollars of provision during the quarter as we increased the coverage ratio on both our SBA and our purchased portfolios.

The other side of this that you’ll see at most banks is charge-offs and recoveries, whether it be on purchased or originated 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 two 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, as 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, 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 the insurance separately. 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 two 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 the small balance insured loans during the quarter. The combined gain on sale from both of those items is $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, it came in at $24.2 million compared to $23.5 million in the linked quarter. The 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 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. 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 purchased loan returns, favorable asset quality trends, and continued capital growth. The loan volume we saw this quarter will be the catalyst as we go into the second quarter of the year.

Now I’ll hand it over to Pat.

Pat Bingham (Chief Operating Officer and Chief Credit Officer)

Thanks, Dale. This is 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. Eight of these had balances over $100 million. We bid on 10 of these pools for about $600 million and were successful in eight of them, winning just over 40% of the balances bid, or $254 million, at a weighted average purchase price of 93.5 cents. These pools were sourced mainly from banks who were managing internal concentrations and also one M&A deal.

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 eight pools with balances over $100 million, we passed on half of them due to performance issues, undesirable collateral, or unacceptable price expectations. In three 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-in 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 two-thirds 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 non-bank 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 non-banks in both the purchased and originated space. Both pipelines are currently very active and we’re confident of another strong quarter to come. Rick.

Rick Wayne (Chief Executive Officer)

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

OPERATOR

Thank you. As a reminder, ladies and gentlemen, to ask a question, please press star 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press star 11 again. If you’re using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 11 on your touchtone telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Damon Del Monte with KBW.

Your line is open.

Damon Del Monte (Analyst)

Hey, good morning, guys. Excuse me. Hope everybody’s doing well today. First question on the margin. Clearly lots of moving parts go into it each quarter. And as you pointed out, part of the movement this quarter was because of the elevated payoff. So I guess my question is kind of twofold. Do you expect the pace of payoff on the purchase loans to slow in the coming quarters, or do you think we’ll continue to see increased activity like we have the last couple quarters?

Santino Delmolino, CPA (Chief Financial Officer)

I guess I would say I’m hopeful that the pace of paydowns 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, as it relates to the couple loans that Rick mentioned that had 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 (Analyst)

Okay, so if all else was kind of equal, if the paydowns—would we see 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, CPA (Chief Financial Officer)

I think it might rebound a little bit. Couple things there. One is, 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 yield 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.

Rick Wayne (Chief Executive Officer)

Damon, 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 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, five years remaining, and we anticipate we’re going to accrete that interest mark over five years, but it pays off in two weeks.

That happens also. And so it would be difficult for us to provide you and the other listeners any help on that. But I would make the point—that’s why, and maybe this is the fantasy world—we have to be looked at on a yearly basis where these things sort themselves out. Quarter to quarter, that number can jump around.

Santino Delmolino, CPA (Chief Financial Officer)

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 (Analyst)

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

Santino Delmolino, CPA (Chief Financial Officer)

It’s going to occur in future quarters also. It’s hard to tell you 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 two items net to zero, and it just grosses up those two line items in the P&L.

Damon Del Monte (Analyst)

Okay. So while our provision or our fee income may be off, the net of those two could hopefully cancel each other out.

Santino Delmolino, CPA (Chief Financial Officer)

Yeah, exactly.

Damon Del Monte (Analyst)

Got it. Okay. And then if I just squeeze one more in on the loan growth outlook—the commentary around the originated loans seemed 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 expect something that we’ve seen over each of the last few quarters, something comfortably in the 25% to 35% quarterly growth rate, or do you think that dials back a little bit?

Rick Wayne (Chief Executive Officer)

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 are you saying that you think it increased 25% from the linked quarter?

Damon Del Monte (Analyst)

Linked quarter, annualized. Yeah, the—

Rick Wayne (Chief Executive Officer)

Oh, if you annualize it, yeah.

Damon Del Monte (Analyst)

The national lending originated loans—if you annualize that, it was like 34% this quarter?

Rick Wayne (Chief Executive Officer)

Yeah, yeah, 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, two components to that: one, how much you originate, and two, what are your payoffs? 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 the net growth, again, could vary. This is why it may be difficult for you. You still like us, Damon? I do things that are hard to predict. One thing that’s good is the shift toward direct. Direct loans tend to have a longer duration than lender finance loans. So the volume of direct loans is encouraging from that perspective with respect to payoffs.

Damon Del Monte (Analyst)

Got it. Good point there. Okay, great. That’s all that I had for now. I’ll step back. Thank you very much.

Rick Wayne (Chief Executive Officer)

Thank you.

OPERATOR

Our next question comes from the line of Justin Crowley with Piper Sandler. Your line is open. Hi, Justin. Check to see if you’re on mute.

Bader (Analyst)

Hey, good morning, guys. This is Bader for Justin.

Rick Wayne (Chief Executive Officer)

Hi, Bader.

Bader (Analyst)

I just had a question on the purchase side. You guys had a pretty healthy amount of activity and 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—you know, especially if we have a couple 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 into the next 12 months.

Rick Wayne (Chief Executive Officer)

I think there’s two—if you remember back to 2022, 2023, in that rising rate environment, there was a lot of purchase opportunity back then, and 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 increase the cost of funding more for our chief competition, which are nonbanks.

So I think those are the two basic reasons why a rising rate environment is good for the purchase business. The other thing a rising rate environment tends to do is slow down the pace of refinancing out of our portfolio.

Bader (Analyst)

Gotcha. That’s helpful, thank you. 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 how would you generally frame the operating leverage that could create?

Rick Wayne (Chief Executive Officer)

Well, 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, assume a spread, and then that will give you your net interest income, and I would expect the additional operating cost to do that—it won’t be zero, but it’s going to be very small to put on another billion-six of loans.

Bader (Analyst)

Got it. That’s helpful. That’s all for me. Thank you.

Rick Wayne (Chief Executive Officer)

Thank you. Thank you, Bader.

OPERATOR

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

Rick Wayne (Chief Executive Officer)

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, also a transcript published as well. Look forward to meeting again 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. 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—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. Goodbye.

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