NBN - Northeast Bank: Outstanding Performance Bucking The Bank Trend

2023-10-23 18:38:12 ET

Summary

• Northeast Bank operational results have bucked the trend in the banking sector.
• The bank's fiscal Q1 increase in interest income and loan growth offset the increase in deposit interest expense.
• Tangible book value has been consistently improving throughout the year, contributing to the stock's stabilization.
• Northeast Bank has outstanding return metrics.

We continue our coverage of regional bank performance today with Northeast Bank ( NBN ). This is a stock we recommended in the teens in 2020, so we have seen a double from there. However, the regional bank space has been getting crushed by recession concerns in 2023. As a reminder, there are concerns with loan demand at these high rates, and margins in the space have been cut dramatically. Overall, we consider NBN stock a long-term buy on exceptional performance.

In this column, we will look at the key metrics we look at for banks like Northeast Bank. The bank has just reported fiscal Q1 earnings. Let us discuss the key metrics you should be looking at.

Northeast Bank's headline performance

Operational results bucked the trends we are seeing with other regional banks. We actually thought the quarter would have taken more of a hit, and perhaps this performance is why the market has stabilized the price of the stock. Thanks to continued loan growth and deposit strength, the bank saw revenues continue to improve whereas many others are seeing declines. With the present quarter's revenues of $37.9 million, the company registered a 49% increase in this metric year-over-year. Many other regional banks have seen flat to down revenues versus last year. This was also a $3.9 million beat against estimates, which was quite strong. This translated to strong earnings. Net income was $15.2 million, or $2.01 per share, compared to net income of $8.3 million, or $1.12 per share a year ago. That is a big win.

Why the boost? This big move was primarily due to an increase in interest income earned from the bank's National Lending Division's originated and purchased portfolios, due to higher average balances and rates earned on both portfolios. There was also an increase in interest income earned on short-term investments of $2.5 million, primarily due to higher rates earned and higher average balances. However, like other banks, we did see an increase in the cost of funds. There was an increase in deposit interest expense of $16.5 million. However, the loan growth more than offset this increase. On top of that, unlike other banks, from the sequential quarter, deposits increased by $29.9 million, or 1.5%. That is another win.

Book value improved

The stock's value proposition is attractive when we consider the equity price at $43 is only slightly above tangible book value. It is also worth noting that tangible book value has been on the rise all year in 2023, contributing to the stock stabilization we have seen. Tangible book value started 2023 at $35.07. At the end of the 2023 calendar Q1, Q2, and Q3, tangible books expanded to $37.03, $38.69, and $39.96, respectively. These are stellar results.

Asset quality

While we love that loans are on the rise, we have to be on the lookout for asset quality metrics. While performance is stellar here, it is still a bank at the end of the day, and there are risks. This quarter saw the loan loss provision increase from a year ago. Well, provisions for credit losses are also down from last year. This is stellar. The provision for credit losses decreased by $660 thousand to a provision of $190 thousand to end fiscal Q1. This is compared to a provision of $850 thousand previously.

However, it was not all good news. At the end of fiscal Q1 here, nonperforming assets totaled $17.4 million, or 0.69% of total assets. This was an increase relative to the sequential quarter. Back then, the nonperforming assets totaled $15.7 million, or 0.55% of total assets. So the bank is not immune to the stresses in the macro environment, but all things considered, it is outpacing the pack and significantly so. So why the increase in nonperforming assets? Well, past due loans totaled $25.6 million, or 1.01% of total loans, compared to past due loans totaling $13.1 million, or 0.52% of loans. This is a near doubling, so we do have to be somewhat cautious here.

While these are certainly trends to watch, it was not enough to offset the return metrics. Folks, where other banks are seeing the pain in return on average assets and equity, these metrics also expanded for the bank. It is impressive. The return on average assets hit 2.12%, improving from 1.70% in the previous quarter, and now flat with the metrics to start the year. That is a win. The return on average equity widened to 19.73%, a 306 basis point expansion from 16.67% in the previous quarter and up from 17.48% to start the year.

Take home

The one item that offsets this growth you can get with the bank is the low dividend yield. We like certain regional banks for income as we wait for a rebound. Still, this bank is outperforming many regionals on its key metrics. While it is not immune to the macro situation, the stock has been far more stable than most in the space. With expanding tangible book, strong return metrics, and still strong quality metrics, we rate shares a buy.

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