Northeast Bank (NASDAQ:NBN) Q1 2024 Earnings Call Transcript

Northeast Bank (NASDAQ:NBN) Q1 2024 Earnings Call Transcript October 24, 2023

Operator: 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; JP 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 we will reference in 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 on a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] 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.

Rick Wayne: 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, look forward to answering any of your questions. First, let me start by saying that the quarter was really an excellent one in so many ways. We earned $15 million or $2.01 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 a weighted average rate of 9.27%, and we purchased loans with a UPB of $63.7 million at a price and 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 -- continue to be very selective on what we're willing to commit to, and loans that we may have done 1.5 years ago or so are loans that we're not necessarily going to do now, plus there are 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 right size both in the quarter and in front of us while we closed on $63.7 million. I mentioned in our press release that we signed an agreement to acquire an additional $74 million of loans, which closed in the beginning of October. With respect to what we see in the marketplace, we see lots of opportunities. I would point out it's binary, you win and you don't win. So I don't want to overpromise. But it seems to be -- and from what we hear from others in the market, a time where there ought to be a fair amount of supply 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 in 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 non-performing loans since we don't have any already in our portfolio, at the end of September was $17.5 million, which includes a $2.3 million mark on CECL. So excluding that, our non-performing loans were down by about $500,000 and they represent 69 basis points, our non-performing loans over our total loans. And with that, I would ask JP to talk about CECL. JP?

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JP Lapointe: Thank you, Rick. On July 1 we adopted the CECL allowance for credit law standard. At June 30, our allowance amounted to $7.3 million. On July 1, 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 discount that was transferred from the carrying balance of purchased 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. At September 30, the allowance decreased to $25.3 million, and that decrease during the quarter was primarily due to charge-offs related to purchased 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 to total loans now sits at 1% and is 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 discounts to be accreted over a period that extended beyond the contractual maturity. On the adoption of CECL, the accounting standards required at the purchase discounts are accreted over the contractual life 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 had historically recognized on its portfolio.

While the bank has certainly had very low charge-offs, including zero charge-offs on the National Lending originated portfolio, under CECL purchases 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 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 nine, 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 CECL adoption, non-performing loans would have been approximately $500,000 less than the previous quarter. Thank you.

Rick Wayne: Excellent. Thank you, JP. And now we'll turn it back and see if there are any questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from the line of Alex Twerdahl from Piper Sandler. Your line is open.

Alex Twerdahl: Hey, good morning, guys.

Rick Wayne: Good morning.

JP Lapointe: Good morning, Alex.

Alex Twerdahl: 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 given the pricing or if the competition has changed in any way, or just a little bit more on, I guess, the competitive dynamics in the market as well.

Rick Wayne: The -- well, earlier in the year we were seeing sellers -- sometimes we have a pricing exercise. They're [Technical Difficulty] 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 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. And the second one, I would make is that we are seeing more activity again on the kind of loans that we'd 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?

Pat Dignan: 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 as some markets we target.

Alex Twerdahl: Got it. And then 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 I assume that when you're talking about the market trends, it's sort of irrespective of that pool of loans.

Rick Wayne: 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 obviously a big pool with awfully large loans in it. But I don't think I could really comment on more than that. I'd like to, but I cannot.

Alex Twerdahl: Got it. And then JP, just as we try to work through these -- 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 is 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 was just wanted to confirm that.

JP Lapointe: Yes. So what it does is the transactional income really arrive at 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 extensions previously. So it should kind of move it from what would have been available for more transactional income historically into more regularly scheduled accretion over the contractual life of those loans.

Rick Wayne: And therefore, it will smooth out. It's just smooth out of earnings.

Alex Twerdahl: 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. It seems like the pace of increase in deposit cost is certainly slowing. 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.

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

Alex Twerdahl: 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. If you could help us, sort of, figure out sort of the right run rate, I guess, over the next few quarters.

Rick Wayne: I think -- well, first, one point on the -- and additionally, you're right, it was a stock comp. But it was mostly because of the incentives, the equity that was granted at a higher stock price. There were some 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 that was about a good reasonable number for a run rate. Was there anything that you think unusual in this quarter, JP? Or is that a good number going forward?

JP Lapointe: 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.

Rick Wayne: And now, you know this, Alex. So to the benefit of our listeners that are loan book has increased by almost $1 billion since December ‘22. And so therefore, higher operating expenses are not shocking.

Alex Twerdahl: 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? Or are you seeing anything that's being more -- coming to the market from a credit perspective?

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

Alex Twerdahl: Great. Thank you for taking all my question.

Rick Wayne: Thank you, Alex.

Operator: Thank you. [Operator Instructions] And I'm not showing any further questions at this time. Now I'll turn the call over to Rick Wayne for closing remarks.

Rick Wayne: Thank you, and thank you those. Thank you, Alex, for your questions and others for listening in. And we look forward to another -- our next conversation, not for the weather in January, but to reading again to talk about our quarterly results. Thank you all and have a good day.

Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.