Northeast Bank Common Stock 2027 Q1 Earnings Call

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. 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 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 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.

Then we also buy loans where we pay a discount because it may turn out that we will not collect everything, the entire unpaid principal balance from the customer. 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 is a lot to understand, so I will 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 was 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 did not accrete into income.

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. It is not so obvious on the financial statements because it runs through the allowance along with a bunch of other matters. That is a core part of our business, and I think it is worth highlighting that number. I want to do that by turning to page. I am getting there. Still 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 purchased loans, $5,921,000.

Previously, that would have been reported in interest, previous meeting 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 are 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 doing any capital raise. It is just of what is 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.

I want to talk about the asset quality next of our purchased and originated loan book. With a loan portfolio of $4,650,000,000, that is excluding any loans that we are holding for sale. It represents 97% of that number of $4.51 billion are National Lending loans. That is purchased and originated. Of that, at the quarter end, only $22.5 million were on non-accrual, representing 48 basis points of total loans. So it is really a remarkably low number for our loan portfolio, as you can see that. Just for purposes of the full picture, we had some OREO on the balance sheet as well. With those comments, I would like to turn it over to Tino, please.

Santino. 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 at $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 to 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 is 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 margins largely attributable to yield on the purchase loans, which can be volatile as we know, due to timing of prepays, which cause 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 had credit marks.

We released just under $6 million of credit mark through the allowance within the purchase portfolio. I will 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 yields 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 yields here, that also put a little bit of pressure that we are 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.

We utilized short-term borrowings to fund growth between brokered CD issuances. As you will see on slide 21 of our deck, cost of funds came down one basis point from the linked quarter, and our spot rate is at the same level. We have made all rate changes that we anticipate making on our non-maturity deposit portfolio, barring any further changes by the Fed. The only real movement I would 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, because there's a lot to unpack here. First, I'll talk through kind of the typical components of the allowance for loan loss. 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 increase the coverage ratio on both our SBA and our purchase portfolios. The other side of this that you'll see at most banks is charge-offs and recoveries, whether it be on purchase or originating loans.