Northeast Bancorp Q1 Earnings Call Highlights

Key Points

• Northeast Bancorp reported $29 million in fiscal Q1 net income, or $3.42 per diluted share, down from $34.3 million in the prior quarter. Total assets grew 2.4% to $5.35 billion, while the loan portfolio increased 3.6% to record growth supported by National Lending activity.
• Loan generation reached $534 million, including $237 million of purchased loans and $259 million of originated loans. National Lending posted its fourth consecutive quarter of record originations, while commercial real estate closings totaled $259 million.
• Net interest margin fell to 4.57% from 4.80% amid lower purchased-loan yields and a larger share of lower-yielding originated loans. About $1.4 billion of CDs mature within three months, potentially raising funding costs and reducing margin by roughly 15 basis points next quarter.

Northeast Bancorp NASDAQ: NBN reported fiscal first-quarter net income of $29 million, or $3.42 per diluted share, for the quarter ended Sept. 30, as record National Lending originations and loan purchases supported portfolio growth.

Net income declined from $34.3 million, or $4.05 per diluted share, in the preceding quarter. Return on average assets was 2.21%, while return on average equity was 18.65%, President and Chief Executive Officer Rick Wayne said during the company’s earnings call.

Total assets rose $125 million, or 2.4%, from June 30 to $5.35 billion. The loan portfolio, including loans held for sale, increased $163 million, or 3.6%, during the quarter.

Loan production and purchase activity

Loan generation totaled $534 million during the quarter, including $237 million in National Lending purchased loans, $258.6 million in originated loans and $35 million in SBA loans. Wayne said the company’s National Lending operation posted its fourth consecutive quarter of record originations.

Chief Operating Officer and Chief Credit Officer Pat Dignan said Northeast reviewed 29 loan pools containing 3,700 loans and $3.5 billion in balances. The company bid on 10 pools totaling about $600 million and won eight of them, purchasing $254 million of loans at a weighted-average purchase price of $0.935.

The acquired pools included 89 loans, primarily located in the Northeast, California and Florida, with a weighted-average loan-to-value ratio of slightly more than 60% and a weighted-average yield to maturity of about 8.5%, Dignan said. Northeast passed on half of the pools with balances exceeding $100 million because of performance issues, collateral concerns or pricing expectations.

In commercial real estate lending, the company reviewed 201 loan requests totaling roughly $3 billion, issued 69 term sheets for $887 million and received executed term sheets for 36 loans totaling $457 million. It closed $259 million during the quarter, including 23 loans with an average balance of $11 million, average loan-to-value ratios of 54%, and average interest rates above 7%.

Dignan said direct loans accounted for about two-thirds of the commercial real estate balances closed, representing a shift from recent quarters when lender finance had been the predominant activity. He said direct loans generally have longer duration than lender-finance loans.

Margin pressure and funding outlook

Net interest income was $58.9 million, compared with $60.3 million in the prior quarter and $48.2 million a year earlier. Net interest margin was 4.57%, down from 4.80% in the linked quarter and 4.59% in the prior-year period.

Chief Financial Officer Santino Delmolino attributed the sequential margin decline primarily to variability in purchased-loan yields related to the timing of prepayments and accelerated discount accretion. He also said a greater proportion of originated loans in the portfolio contributed to pressure on margin, as the originated portfolio yielded 7.72%, compared with an 8.24% yield for purchased loans.

Delmolino said most purchase activity occurred near the end of the quarter, limiting its contribution to quarterly earnings. He added that loans acquired during the quarter carried “healthy” yields and could be accretive to margin if prepayment activity slows.

Total deposits increased $95 million, or 2.6%, driven largely by a $152 million increase in brokered certificates of deposit, partly offset by seasonal runoff in the government banking portfolio. Cost of funds declined one basis point from the prior quarter, according to Delmolino.

However, approximately $1.4 billion in CDs are scheduled to mature within the next three months. Delmolino said their cost could rise by about 50 basis points when rolled over, depending on brokered-market rates, potentially increasing the company’s cost of funds by roughly 15 basis points in the next quarter.

Credit marks, asset quality and capital

Wayne highlighted $5.9 million of recoveries related to credit discounts on purchased loans. He said four loans that carried approximately $6 million in credit marks paid off in full during the quarter. Under current CECL accounting, the recovery is reflected through the allowance for credit losses rather than interest income.

Delmolino said Northeast recorded about $1 million of provision expense tied to loan originations and changes in portfolio coverage ratios. The company also had roughly $3 million of charge-offs during the quarter, mainly in the SBA portfolio, excluding insured loans.

The company recorded $2.5 million of provision related to insured small-balance loans, even though management expects insurance to cover expected credit losses in that portfolio. A corresponding gain on the insurance receivable is recorded in non-interest income, Delmolino said, resulting in no net income effect while increasing both reported provision and non-interest income.

Northeast sold $23.7 million of SBA loans and $9.9 million of insured small-balance loans during the quarter, producing a combined gain on sale of $2.7 million. Delmolino said SBA sales of about $35 million per quarter could represent a reasonable ongoing level.

Wayne said the company’s loan portfolio, excluding loans held for sale, totaled about $4.65 billion, with National Lending purchased and originated loans representing 97% of the portfolio. Nonaccrual loans totaled $22.5 million, or 48 basis points of total loans.

Shareholders’ equity increased $24.5 million during the quarter, while tangible book value per share rose to $73.22 from $70.58 at June 30. The Tier 1 leverage ratio was 12.11%. Wayne said the company had $1.58 billion in lending capacity without raising additional capital.

About Northeast Bancorp (NASDAQ:NBN)

Northeast Bancorp is the bank holding company for Northeast Bank, a community-focused financial institution headquartered in Lewiston, Maine. Founded in 1872, Northeast Bank provides banking and lending services to individuals, families, businesses and nonprofit organizations.

The bank offers deposit products such as checking, savings and money market accounts, certificates of deposit and business deposit services. Its lending activities include commercial real estate, commercial and industrial, residential real estate, consumer and municipal loans, as well as construction and other business financing.

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