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, 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's 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 one one to ask a question. To remove yourself from the queue, press star one one 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.
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.
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 purchase loans. 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 purchase 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. 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, 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 non-interest income.
There is a little bit of grossing up happening between our provision and non-interest income, which is a bit unique. Switching over to non-interest income. I already discussed the gain on insurance recoveries. The other bigger component here is the gain on SBA sales. We sold $23.7 million of SBA loans during the quarter, and we also sold $9.9 million of insured small-balance business loans during the quarter. The combined gain on sale from both of those items is $2.7 million. I think where we are 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 non-interest 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%, 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 rates 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 would 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, 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 provides a catalyst as we go into the second quarter of the year. Now I will hand it over to Pat.
Thanks, Tino. It 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 $0.935. 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 whole 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 purchase 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?
Thank you, Pat. Thank you, Tino. Now, we'd be happy to take any questions that you have.
Thank you. As a reminder, ladies and gentlemen, to ask the 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 are 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 touch-tone telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Damon DelMonte with KBW. Your line is open.
Hey, good morning, guys. Excuse me. Hope everybody's doing well today. First question on the, morning. On the margin. Clearly lots of moving parts go into it each quarter, and Tino, as you pointed out, part of the movement this quarter was because of the elevated payoff. I guess my question's 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 will continue to see increased activity like we have the last couple of quarters?
I guess I would say-
You know-
I'm hopeful that the pace of pay-downs slows down. I mean, it's not something we can necessarily forecast very well. 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 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 pay downs come down going forward.
Okay. If all else was equal, if the pay downs flowed, 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 455 - 465 range?
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 pay down is due 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.
Okay, great.
Damon, this is Rick.
Hey, Rick.
A feature of our bank which makes your job more challenging is that we frequently use the word lumpy in our business. 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, so we anticipate we are going to accrue that interest mark over five years, but it pays off in two weeks. That happens also. It would be difficult for us to provide you with, and the other listeners, any help on that.
I would make the point, that is 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.
Got it. Yep, makes sense.
I would just add, for the record, 457, while lower than some of the previous quarters, is a very healthy NIM, as you know.
Yep. Totally get that, for sure. Yep. Okay. Then maybe on the fee income line, you had the insurance recovery gains that were booked. Is this something that we can expect kind of more consistently in future quarters, or is this kind of an anomaly this quarter?
It is going to occur in future quarters also. It is hard to tell you guys how to forecast this necessarily, because ultimately what is happening is there is no P&L impact of that. Because while it shows a non-interest income, it is 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.
Got it. Okay. While our provision or our fee income may be off, the net of those two should hopefully cancel each other out.
Yes, exactly.
Got it. Okay. 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 are probably around 40% growth in that portfolio. Can we kind of expect something that we have seen over each of the last few quarters, something that is comfortably in the 25%-35% quarterly growth rate, or do you think that dials back a little bit?
Let us make sure we are dealing with the same headline. We expect that originated loan book to continue on the path that it is on. Are you saying that you think it increased 25% from the linked quarter?
Linked quarter annualized? Yeah.
Oh, if you annualize it.
Yeah. The National Lending originated loans, if you annualize that, it was like 34% this quarter.
Yeah. I think that's probably a reasonable way to think about it, but it all has to do with the level of payoffs. There are, of course, two 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 non-bank lender who in turn is making bridge loans. So, that number, the net growth, again, could vary.
Got it.
This is why it may be difficult for you. You still like us, Damon, even if things are hard to predict.
I do.
One thing that is 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 and with respect to payoffs.
Got it. Good point there. Okay. Great. That's all that I have for now. I'll step back. Thank you very much.
Thank you.
Thank you.
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.
Hey, good morning, guys. This is Bader for Justin.
Hi, Bader.
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, especially a couple hikes coming in the next 12 months, could impact the opportunity here and how that could create more transaction volume, maybe after the next quarter, heading in the next 12 months.
I think there's two. If you remember back to 2022, 2023, in that rising rate environment, there was a lot of purchased opportunity back then. 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. 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 non-banks. 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.
Right.
Gotcha. That's helpful. Thank you. 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?
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, then it will give you your net interest income. I would expect the operating additional cost to do that, it won't be zero, but it's going to be very small to put on another 1.6 billion of loans.
Got it. That's helpful. That's all for me. Thank you.
Thank you.
Thank you, Bader.
Ladies and gentlemen, I am showing no further questions. Now, we will turn the call back over to Rick Wayne for closing remarks.
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. Look forward to meeting again in January, 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 are able to answer it, we will be happy to. If you have any suggestions on 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 is all for today. Thank you.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Goodbye.