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.