Northeast Bank

Welcome to the Northeast Bank first quarter fiscal year 2024 earnings call. My name is Victor 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, J.P. LaPointe, Chief Financial Officer, and Pat Dignan, Executive Vice President and Chief Operating Officer. Yesterday, an investor presentation was uploaded to the bank's website, which will reference end 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 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 session, you will have a if you have a question please press star 1 1 on your touch telephone as a reminder this 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 will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Thank you, and good morning, everyone. Here with me are Pat Dignan, our Chief Operating Officer, and JP LaPointe, our Chief Financial Officer. I want to go over this morning some of the financial highlights as well as talk about our loan activity and our asset quality. JP will then talk about the impact of CECL on the bank, which was adopted on July 1. And then all three of us are available and look forward to answering any of your questions. First, let me start off by saying that the quarter was really an excellent one in so many ways. We earned $15 million, or $2 and a penny earnings per share diluted with a return on equity of 19.73%, a return on assets of 2.12%, and getting very close to $40 per share of tangible book value at $39.96. During the quarter, We purchased $130 million, excuse me, we put on the balance sheet $130.3 million of loans, of which 68 million were originated with an average, a weighted average rate of 9.27%. And we purchased loans with a UPV of 63.2%. $7 million at a price, an invested dollars of 52.4 million, which is an 82% purchase price. Finally, our NIM for the quarter was 5.30. Really all, we think, outstanding results for the quarter. With respect to loan activity, on the originated side, we have seen our volume over the last five quarters declining. I might say almost intentionally, we're being continued to be very selective on what we're willing to commit to and loans that we may have done, you know, a year and a half ago or so our loans that we've not necessarily going to do now, plus or less transactions in the marketplace. But I don't want to diminish $68 million of volume. That's still a lot of volume for us. On the purchase side, really bright skies both in the quarter and in front of us. While we close on $63.7 million, I mentioned in our press release that we signed an agreement to acquire an additional $70 million dollars of loans which closed in the beginning of October with respect to what we see in the marketplace we see lots of opportunities you know I would point out you know it's binary you know you win or you don't win so I don't want to over promise but it seems to be and from what we hear from others in the market time where there ought to be a fair amount of supply of of the kind of loans that we'd like to bid on. That is to say loans that are performing secured by cash flow and collateral located in reasonably liquid markets. And so we will see what happens in this quarter that we're in now and the following quarters. But we are optimistic about our opportunities to purchase loans in this environment. In terms of asset quality, and of course there's a lot in the news about commercial real estate, our portfolio continues to perform very well. Our non-performing, I would say assets, but it's really not performing well since we don't have any Oreo in our portfolio, at the end of September was $17.5 million. which includes a $2.3 million mark from CECL. So excluding that, our non-performing loans are down by about $500,000, and they represent 69 basis points on non-performing loans over our total loans. And with that, I would ask JP to talk about CECL. JP?

Thank you, Rick. On July 1st, we adopted the CECL allowance for credit loss standard. At June 30th, our allowance amounted to $7.3 million. On July 1st, when we adopted CECL, our allowance increased by $19.4 million to $26.7 million. The increase was a combination of $18.3 million of discounts that was transferred from the carrying balance of purchase loans to the allowance for loan losses, and $1.2 million that was transferred from retained earnings which amounted to $870,000 retained earnings impact net of taxes. On September 30th, the allowance had decreased to $25.3 million, and that decrease during the quarter was primarily due to charge-offs related to purchase loans that had been carried at zero, but after the CECL adoption, now had carrying balances and required the loan amount and the related reserves to be charged off. The allowance of total loans now sits at 1%, and more comparable to other institutions than what we had previously recorded in the reserves. Some of the changes that impact the bank's financials after the CECL adoption are, historically, some purchase loans had extensions modeled over into the projected cash flows, allowing the purchase discount to be accreted over a period that extended beyond the contractual maturity. Upon the adoption of CECL, the accounting standards require that the purchase discounts are accreted over the contractual lives of the loans, and extensions are no longer modeled in. which has the impact of accretion being taken over a shorter period of time. This should also make interest income from purchase loans more consistent and may contribute less transactional income than we have historically recognized on this portfolio. While the bank has historically had very low charge-offs, including zero charge-offs on the national lending originated portfolio, under CECL, purchase loans with credit marks are now reserved for in the allowance and then charged off through the allowance, which could give the appearance of increased charge-offs. However, Many of these charge-offs, especially the ones during this quarter, were purchased loan discounts that had previously offset the loan balances and have now moved into the allowance and did not impact the provision for credit losses. Additionally, as Rick indicated, upon the adoption of CECL, the bank transferred $18.3 million from the discount against the carrying balance of loans to the allowance. This had the impact of increasing the carrying balance of those loans. As you can see on slide 9, the adoption increased our non-performing loans by $2.3 million for the quarter. by increasing the carrying balance and the related allowance for those loans. Absent CFO adoption, non-performing loans would have been approximately $500,000 plus in the previous quarter. Thank you.

Excellent. Thank you, JP. And now we turn it back and see if there are any questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star 1-1 on your touchtone phone. If you wish to be removed from the queue, please press star 111 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 111 on your touchtone phone.

One moment for our first question. Our first question will come from the line of Alex Ferdal from Piper Sandler.

Your line is open.

Hey, good morning, guys. Hey, first off, Rick, you commented on seeing lots of opportunities in the purchase market, and obviously, binary, you either win or you don't. I was wondering if you could give us a little color on the ones you're not losing, if it's because the seller just decides to keep the product, you know, given the pricing, or if the competition has changed in any way, or just, you know, a little bit more on, I guess, the competitive dynamics in the market as well.

Well, earlier in the year, we were seeing sellers, it was sometimes more of a pricing exercise. Their and ours were not close. We're seeing that get much closer now, and as you move towards the end of the calendar year, where sellers are more motivated to sell for various reasons, the obvious one is that they're their fiscal year is coming to an end, we're seeing more realistic expectations about pricing and therefore easier for us to buy loans than it had been previously. That's one point I would make. The second one I would make is that we are seeing more activity, again, on the kind of loans that we like to buy. And so... And because, as I've mentioned in other calls, because rates are higher, in some cases we're seeing less competition for that. Pat, do you want to add anything to that?

No, I think those are the two big highlights, the sellers that can't take a hit, and there's also a fair amount of disagreement on value that's still out there in some markets that will be targeted.

Got it. And then, you know, a lot of us have been paying attention to the loans that the FDIC is currently selling, the commercial real estate loans. I was wondering if you had any further thoughts on whether or not that's something you guys would bid on. And, you know, I assume that when you're talking about the market trends, it's sort of irrespective of that pool of loans.

Well, I wouldn't be able to say whether we were bidding or not bidding on the large pool that the FDIC is selling. It's an awfully big pool with awfully large loans in it, but I don't think I can really comment on more than that. I'd like to, but I cannot.

Got it. And then, JP, just as we try to work through the accounting shift from CECL into the model, specifically around how the purchase loans get accounted for, Does it essentially just reclassify transactional income as regularly scheduled income, or does it actually wind up pulling forward some of that transactional income as well just because you can't recognize it over as long a period? And I guess I think you commented in your prepared remarks that it should smooth out earnings, and I just wanted to confirm that.

Yeah, so what it does is the transactional income really arises when a loan pays off. So given the fact that now we have to take these over the contractual life and not some level of modeled extension, there's a possibility that there's going to be less discount available when a loan pays off since we're taking it over a shorter life on some of those loans where we had modeled in extensions previously. So it should kind of move it from you know, what would have been available for more transactional income historically into more regularly scheduled accretion over the contractual life of those loans.

And therefore, it will smooth out. It should smooth out earnings.

Got it. I was wondering if you can give us any thoughts on sort of where you think you are in terms of deposit cost pressures. You know, it seems like the pace of increase in deposit cost is certainly slowing. you know, if you had any sort of thoughts on where that might peak out, if we should expect betas to continue to move higher or what you're thinking there.

Yeah, I think mostly, you know, we've caught up. I think we have a little bit of broker CDs that are maturing towards the end of the quarter that we're in now. So I think once those reprice will kind of be, you know, mostly at the peak for where we should be, you know, barring any, any future potential rate heights, you know, depending on what the Fed decides to do moving forward. But I think, you know, it's definitely slowing down from where we were over the past year. And I think, you know, after next quarter, we should kind of be at the peak.

Got it. And then just as we think through the right level of non-interest expenses, any help that you could provide? I think this quarter was a little bit impacted by stock-based compensation, if I'm not mistaken. you know, if you could help us sort of figure out sort of the right run rate, I guess, you know, over the next few quarters.

Well, first, one point on the additional, you're right, it was a stock comp, but it was mostly because the incentives, the equity that was granted, that was granted at a higher stock price. There were some, you know, slight increase in the number of shares granted. but most of the increase was because the stock price was higher than when the previous ones were granted. But I think the number we have now, JP, we're thinking about now is about a reasonable number for a run rate. Is there anything that you think unusual in this quarter, JP, or is that a pretty good number going forward?

I think that's a pretty good number going forward. I don't think we expect too much one way or the other in the next couple of quarters.

I know you know this, Alex, but the benefit of our listeners that, you know, our – loan book has increased by almost a billion dollars since December 22. So therefore, your higher operating expenses are not shocking.

Got it. And I guess just last question back to the purchase market trends. Is it still safe to say that the bulk of what you're seeing is being driven by the change in interest rates? Are you seeing anything that's being more coming to the market from a credit perspective?

I think that there is the transactions that fit in our sweet spot are largely being driven by liquidity issues and M&A.

Great. Thank you for taking all my questions.

Thank you. Thank you, Alex.

Thank you. And as a reminder, that's star 11 for questions, star 11.

One moment for any further questions. and I'm not showing any further questions at this time.

Now I'll turn the call over to Rick Wayne for closing remarks.

Thank you, and thank you, Alex, for your questions and others for listening in. We look forward to our next conversation, not to the weather in January, but to meeting again to talk about our quarterly results. Thank you all, and have a good day.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.