Prepared by Stephanie, Analyst at BAD BEAT Investing

We have been covering a lot of financials lately. A little known bank crossed our desks today. That company is Northeast Bank (NBN). Perhaps at the risk of sounding like a broken record, we have reiterated many times in our recent financial sector coverage how low interest rates have weighed, and pressure on bond yields have kept these stocks down.

Making matters worse, loan loss provisions are a concern, given the economic woes we are seeing right now. There has a been a lot of mixed performance in this regard. That said, our firm believes in taking a contrarian view and starting to build positions in beaten-down names, and there are some good opportunities in the banks. In this column, we will look at the key metrics we look at for banks like Northeast Bank. The bank has just reported earnings. The stock would be a tremendous buy under $19 again, but keep in mind this is a relatively low volume stock so it is subject to big moves. Let us discuss the key metrics you should be looking.

Revenue growth

The bank’s operational results have followed a path similar to that of other regional and major banks. Frankly, we thought the quarter would be worse, though as we will see, EPS was hit but not too hard. Thanks to continued loan growth and deposit strength, the bank saw revenues continue to improve. With the present quarter’s revenues of $21.4 million, the company registered a 26.6% increase in this metric year over year. Many other regional banks have seen flat to down revenues versus last year. The $2.7 million beat against estimates was quite strong. What is more, we saw great performance on earnings.

Earnings performance was very solid

The bump in revenues year over year was offset by expenditures and loan loss provisions. Northeast Bank reported net income of $7.8 million, or $0.94 per share, which was a massive increase of $0.42, or 77.7%, from the same quarter of 2019. What investors need to decide is if there will be continued improvement or not. Frankly, we think 2021 will be even better based on the trends we are seeing for banks.

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The bank really saw a strategic move pay off. Earnings substantially benefitted from our correspondent arrangement with The Loan Source, Inc. and ACAP SME, LLC. For the quarter, Northeast recognized $4.7 million of correspondent fee income in connection with $3.4 billion of Paycheck Protection Program loans purchased by Loan Source through September 30, 2020.

Q4 will get a nice boost. Why? Well, we learned that subsequent to quarter-end, Loan Source purchased an additional $613.8 million of PPP loans for a total of $4.0 billion purchased PPP loans. That is pretty solid.

Book value improved

The stock’s value proposition is attractive when we consider the equity price is actually way below book value now. The bank’s stock is pretty attractive at $19.25 relative to the book value per share at September 30, 2020. It came in then at $21.06, an increase of $3.57 during the year. That is killer. Further, while tangible book value rose substantially too. It rose to $20.78 from $17.17 a year ago and was up over 5% from Q2 2020. We think that if you get shares under $19 in the near future, that is a very attractive price. Much of the book value move came from movement in loan and deposits, as well as asset quality.

Loans and deposits grow

We are pleased with the progress on loans and deposits. Loans generated by the bank’s National Lending Division for the quarter ended September 30, 2020 totaled $45.5 million, which consisted of $4.6 million of purchased loans, at an average price of 78.6% of unpaid principal balance, and $40.9 million of originated loans. Additionally, the bank originated $23.1 million of PPP loans in the first quarter. The bank sold PPP loans with a total principal balance of $53.7 million during the quarter ended September 30, 2020, recording a net gain of $1.1 million on the sales primarily resulting from the recognition of net deferred fees, partially offset by purchase price discounts. Deposits increased by $5.3 million, or 0.5%, from June 30, 2020, attributable to increases in demand deposits of $39.2 million, or 41.3%, savings and interest-bearing checking accounts of $27.5 million, or 19.9%, and money market accounts of $9.2 million, or 3.1%, partially offset by a decrease in time deposits of $70.5 million, or 14.8%.

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Growth in loans and deposits is key for any bank, small or large. That is how you make money as a bank. You take in deposits at a low interest rate, and lend at a higher one. This model has been working for centuries and will continue to do so well into the future. These results should be considered a strength. While the lower rates have impacted returns, as we have said, the main issue here is the loan loss provisions.

Asset quality

Loan growth is a strength, but only if they are quality loans. Risky loans may offer a higher return but not if the debt cannot be repaid and turns to toxic debts. This quarter saw the loan loss provision increase from a year ago. Provision (credit) for loan losses increased by $513 thousand to $377 thousand for the quarter ended September 30, 2020, from a $136 thousand credit in the quarter ended September 30, 2019. The increase in the provision for loan losses reflects increases in certain qualitative factors during the current quarter as a result of continued impacts from the COVID crisis.

Non-performing assets as a percentage of total assets had been improving for some time. They increased in Q1 and Q2, but have come down in Q3. Non-performing assets totaled $25.5 million, or 2.03% of total assets, as compared to $24.4 million, or 1.94% of total assets, as of June 30, 2020. The increase was primarily due to five National Lending purchased loans totaling $1.1 million that were placed on nonaccrual during the quarter ended September 30, 2020.

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Bottom line

This was a great quarter. When we look at loans, deposits, and loan loss provisions, it still looks like a mixed quarter, but followed the trend of some similar banks. Despite the loan loss provisions, the company’s strategic moves significantly boosted earnings. Loans and deposits mostly grew. Considering the share prices relative to book value and tangible book value, this small regional bank is a solid buy under $19.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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