We continue our coverage of regional bank performance today with Northeast Bank (NASDAQ: NBN). This is what we stock recommended in teenage years in 2020, so we saw a double from there. However, the regional the banking space was crushed by fears of a recession in 2023. As a reminder, there are concerns about demand for loans at these high interest rates, and margins in the space have been dramatically reduced. Overall, we consider NBN shares a long-term buy on outstanding performance.
In this column, we’ll look at the key metrics we look at for banks like Northeast Bank. The bank just reported earnings for the fiscal quarter. Let’s discuss the key metrics you should look at.
Northeast Bank’s main presentation
The operating results are contrary to the trends we observe at other regional banks. We actually thought so quarter would have taken a bigger hit and perhaps this performance is why the market stabilized the stock price. Thanks to continued loan growth and strong deposits, the bank’s earnings have continued to improve while many others have seen declines. With revenue for the current quarter of $37.9 million, the company recorded a 49% increase in this metric over the prior year. Many other regional banks reported flat to lower earnings compared to last year. It was also a $3.9 million win over projections, which was pretty strong. This led to strong earnings. Net income was $15.2 million, or $2.01 per share, compared with net income of $8.3 million, or $1.12 per share, a year ago. This is a big win.
Why the push? This large movement was primarily due to an increase in interest income earned by the bank’s National Lending division’s originated and purchased portfolios due to higher average balances and rates earned for 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 have seen an increase in the cost of funds. There was an increase in interest expense on deposits of $16.5 million. However, credit growth more than offset this increase. Also, unlike other banks, deposits increased by $29.9 million, or 1.5%, quarter-on-quarter. That’s another win.
The book value is improved
The stock’s value proposition is attractive, considering the $43 share price is only slightly above tangible book value. It’s also worth noting that tangible book value has been rising throughout 2023, contributing to the stabilization of inventories we’re seeing. Tangible book value starts in 2023 at $35.07. At the end of Q1, Q2, and Q3 of calendar 2023, material books expanded to $37.03, $38.69, and $39.96, respectively. These are stellar results.
While we like that loans are increasing, we need to be on the lookout for asset quality metrics. While the performance here is stellar, at the end of the day it’s still a bank and there are risks involved. This quarter saw an increase in loan loss provisions compared to the previous year. Well, loan loss provisions are also down from last year. This is stellar. The provision for credit losses decreased by $660 thousand to $190 thousand by the end of fiscal Q1. This compares to a provision of $850 thousand previously.
But not all the news was good. At the end of the fiscal quarter, non-performing assets here stood at $17.4 million, or 0.69% of total assets. This is an increase from the previous quarter. Non-performing assets then totaled $15.7 million, or 0.55% of total assets. So the bank is not immune to macro stress, but all things considered, it is ahead of the pack, and by a significant margin. So why the rise in non-performing assets? Well, delinquent loans totaled $25.6 million, or 1.01% of total loans, compared to delinquent loans totaling $13.1 million, or 0.52% of loans. That’s almost doubling, so we have to be a little cautious here.
While these are certainly trends to watch, it wasn’t enough to offset the return metrics. Folks, while other banks are seeing the pain in average assets and return on capital, these metrics have also expanded for the bank. It’s impressive. Return on average assets reached 2.12%, improving from 1.70% in the previous quarter and now unchanged from the year-to-date figures. That’s a win. Return on average equity expanded to 19.73%, up 306 basis points from 16.67% in the prior quarter and from 17.48% at the start of the year.
The only thing that offsets this growth you can get with the bank is the low dividend yield. We like certain regional banks for income while we wait for recovery. Still, this bank outperforms many regionals on its key metrics. While not immune to the macro situation, the stock is much more stable than most in the space. With an expanding material book, strong returns and still strong quality metrics, we rate the stock as a buy.