Q2 2024 Northeast Bank Earnings Call
Participants
Rick Wayne; President & CEO; Northeast Bancorp
Pat Dignan; COO; Northeast Bancorp
Alexander Twerdahlwith; Analyst; Piper Sandler & Co.
Presentation
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.
(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 very much and good morning and to those of you listening to the call this morning, I wanted to go over from a few of the EM interesting and important I results during the quarter, and I'm not going to go over line by line what's already in the earnings release because I am sure you have read that or that you will read that, but I just wanted to spend a little bit on page 3 of the slides.
First, talking about loan volume in the quarter of the purchased loans activity of $186.1 million invested on $208 million of UPB or an 89.5% purchase price is our second strongest purchase quarter only behind the approximate $1 billion of loans purchased one year ago. So very, very strong. And on that topic, on the purchased loan market, we're seeing a fair amount of fair amount of good, very good supply in the marketplace. And so we're looking at a lot of I'd caution you that they're binary, you bid and you win or you don't win, but there seems to be a fair amount of supply in the marketplace.
On the origination slide perspective, we originated $63.5 million of loans, which is it's not that it's a bad number, but it's kind of a low number consistent with the trends over the prior quarters. I can say that as we sit here today, the origination volume is picking up and down. I would expect that we will have higher numbers in the current quarter than we had in the quarter that ended December 31. And the weighted average rate on our entire loan portfolio originated loan portfolio was 9.45%, which is very strong.
And then just to take a look at some of the quick stats, our net income was $14.1 million, and that was after we charged off $957,000, about almost $1 million of a deferred tax asset due to changes in the way of Massachusetts sets out there will set out their apportionment factor so that the income was very strong and the EPS was 185% return on equity was 17.35%, return on assets was 1.93% and tangible book value has grown to just a few pennies under $42 at $41.97.
If we go now to slide 8, and I'm going to I want to make a few comments on of asset quality. First, you can see that there was a jump in nonperforming loans in the quarter that just ended from the previous quarter. That's principally due to three loans that went on nonaccrual in the quarter. Kind of the headline is we don't think that we're going to have on those and it will be resolved without any principal loss. A couple of them were kind of typical purchased loans that are typical loans in national lending where they do not they go late and then we resolve them plenty of collateral coverage.
And the first one for about $6 million is a dispute over lean position, our mortgage and others in the in the courts and in the event that we were to lose that we have title insurance. That's why I said don't expect to have any principal loss from these loans that are now our nonaccrual.
I also want to bring your attention to the news on the bottom right corner of this page 8, where we take a look at net charge-offs. CECL has caused us that has required that we change the treatment of purchased loans, which has an impact on how we report charge-offs. And I think the best way to make this point is to give you an example, if a pool of loans, let us say there was a loan that had a $50,000 customer balance, well, we when we bid for the loan along with a bunch of other loans, we've allocated $0 to it as regards the loan, but we didn't pay anything forit. Unders CECL so we would just carry that alone at $0because we didn't pay anything for it. But in the case of CECL. So we are now required to carry that loans showed a loan at $50,000 with a corresponding allowance of $50,000. So it nets to $0. And at some point if we charge off that loan, then it shows that $50,000 would show as a charge off, even though we didn't have any principle allocated to that. So keeping in mind those new loans under CECL. So you'll see that in. There's a footnote on this in the case of quarters ending September 30 and also on December 31. And of the 0.07% at nine 30 or seven basis points, 6 basis points of that was the number attributable to CECL, which, as I described, there was no loss of principal, it's just the way you have to report it for accounting.
So there was only one basis of chtarge-offs in September 30 and for December 31, same point. And that we're showing 11 basis points here or 0.11%, but out of that 11 basis points, 9 basis points or as a result of CECL where there was really no loss of principal. So if you strip that out from those two numbers, the charge-offs and for the quarter ending September 30 was 1 basis point. And on December 31st was 2 basis points, not much at all. It's way in the in the weeds, but because it's a change, I just wanted to Sure I can explain that for you.
If we now move on to slide 9, this is a slide that shows the change in the non-performing loans from September 30th to December 30. I mean, from September 30th, 23 to September 30 '23 part server that to December 31st, 2023, you can see it's gone up from 17 point around here from $5 million to $30.7 million. And most of that are the three loans designated 1, 2 and 3, which I spoke about just a couple of minutes ago. And then there's another 1 on it designated as number 4 for $1.1 million, which subsequent to quarter end was paid off in full, which is my expectation for the other ones as well.
But I do want to comment on page on the deposits and interest rates, starting on page 15. And you can see that for the quarter, our quarterly cost of deposits was 4.16% and continuing the upward march of rates and the spot rate and the last day of the quarter was 4.23%. The good news around our funding is we're starting to see our costs coming down. And we have, for example, $700 million of brokered CDs maturing over the next six months, which at today's rates we could replace at a 40 basis point savings, which is quite substantial.
And I also want to highlight on page 16, yes, that looking at what's happening by channel and our deposits over the last year. And the main point I want to make is that in our in our banking centers, we have seven and that our deposits in those banking centers have gone up by $216 million or 38% from the from a year ago, which we're really happy about. And we're continuing to build those core deposits in our branches as a way of replacing higher-cost deposits and other categories.
Finally, I do want to comment on the expenses on page 19 that has gone up from the linked quarter, about $300,000. It's mostly in the compensation line in December. We gave every employee in the bank, I would say, other than pad and make $1,000 each for the year ended the year was about $200,000 and well deserved by our great team and Phil morale, increased morale. Everyone was excited about that and then also in this quarter, we had a full quarter of stock compensation and we make stock grants typically in August. And so for the preceding quarter, it was only half a quarter that was reported of that expense.
And in the current quarter ending December 31st, it was a full quarter, so that's about $400,000 of the difference and then we had some savings in some other areas. And I do want to say before we turn it over to any questions that they say this is in some ways it's a bittersweet day for us. It's weak because we had another really great quarter. It's some better because JP is some when many of you have talked to, I know and like and respect that is leaving our bank to take a position as a another bank after being with us 6 years, he will be missed by everyone who's really built a great group.
We have the privilege of working with them day in and day out sort of a really first rate person is a good father and a good US and his colleagues like and respect them and the quality of his work is extraordinary. And so we will we will miss him, but he will be part of our alumni club and we will all get to still a lot. I hope and so today is his last day has been totally professional. He gave notice of maybe six weeks ago, seven weeks ago and has worked diligently every single day. And so we all wish him every success. I don't as I say, the best of luck, it doesn't need luck. He will be successful and but will he will be missed. And on that note, I would like to turn it over and see if there are any questions at all.
Question and Answer Session
Operator
Thank you. We will now begin the question and answer session. (Operator Instructions)
Alexander Twerdahlwith, Piper Sandler.
Alexander Twerdahlwith
Good morning, first off, Rick, you said in your prepared remarks that you're seeing a fair amount of good supply in the marketplace for purchases, which seems like an optimistic statement. However, I was hoping maybe you could give us a little bit more context and a little bit more color around what you're really seeing and maybe compare it to what you've seen over the last couple of quarters?
Rick Wayne
Yes. Well, the end of the last quarter was also a strong quarter, a good quarter for purchases, not like this quarter. This was a much better one, we're seeing loans coming to market from banks for Breeze and some one-offs, some having to do with some sales that I don't want to be too specific here, but started with some of the banks have failed in the last year that some of those assets have been now coming to the market to be traded on, you know, it's public information that the signature assets were sold and bought by a few different groups.
And we're seeing banks selling who wanted to shed some commercial real estate assets. And that's kind of usually we tend to see that. I'd say we're maybe starting to see it with some banks are a little bit smaller on selling loans as well. I don't mean small banks are not the not the national banks. And we're seeing the kind of assets that we tend to like in this market, which are low LTV, where a lot of the discount is driven by interest rate. So if rates come down again, they will move on. We're getting them just because the interest rate discount and at good prices. But secondly, there's an opportunity for some upside in those if rates come down until some of those folks can refinance more easily. Pat, do you want to add anything to that?
Pat Dignan
In terms of the I think that's a good summary of the last quarter and this quarter on M&A is always a factor of balance sheet repositioning and done on and in some cases of funds who purchased mixed pools last year are trying to trade out of the higher quality assets. Now is that because of because of the yields on those? Yes. I mean, the sort of the big the big reasons, we're not really seeing much distress yet for the signature stuff.
Alexander Twerdahlwith
Yes, in terms of the pools that you're you look at, but then you don't wind up buying? I know it's obviously buying or you get it, you don't. But when you're losing those pools, is it because the buyers just not liking the price and keeping it or is it because other Is there other competition out there? That's some that's winning those?
Pat Dignan
I think while there's always competition out there and it's always good to know that there's a market. And we're not the only player so that we can gauge our own pricing. But I'd say that after that, the two big factors are the sellers are sometimes find it hard to believe that that the performing loans would trade at that big of a discount and choose not to sell. And another factor is that in some cases with loans that were underwritten at very, very low cap rates in the real estate, there's a disagreement around value and then that's also a factor.
Alexander Twerdahlwith
Got it. And then I'm just curious in a pretty big pullback in rates sort of in the middle section of the curve in the middle of the fourth quarter towards the end of the fourth quarter. How does that impact on the sort of the sales process and pricing the same reality.
Rick Wayne
Your question is because of rates declining in the fourth quarter, does that impact the pricing of the loans?
Alexander Twerdahlwith
I mean, I guess. Yes, I mean, my I would assume it has to impact the pricing, but I'm just curious, you know if there's you know, if that would be an obstacle to having stuff closed in the fourth quarter, just given that the rates are moving down and the volatility maybe is not the friend of the market, but I don't know, so I'm asking.
Rick Wayne
Yes, I don't think that in the fourth quarter, what we did that was such a big deal that they know the other the rate change in the fourth quarter, it was in it and would the longer if rates come down a lot, then you would expect that you would be buying loans that are at a lower yield but we haven't seen that impact yet.
Alexander Twerdahlwith
Yes. I mean, from the pricing, pricing is always a little bit hard to sort of draw real conclusions from because we don't really know what the underlying loans look like, but would be would it be fair to assume that the sort of the fall on return on the purchased portfolio based on what your purchasing stays kind of within the range and which it has been in the last two quarters?
Rick Wayne
Well, we paid $0.895 this quarter for what we purchased. I think it's kind of typical from what we've bought. It's kind of a low LTV and kind of what we our expectation is on yields about the same as we have been in the past as there hasn't been that there hasn't been a big overall in any given loan. You know, you can buy something at a lower price and get paid off early and that can impact it. But looking kind of portfolio wise on what we've purchased, I think it's pretty much as we have in the past. As you may recall, question is two components, of course, still what year and what is the rate on the note? And secondly, how much is the discount and when does the loan payoff that you know, ultimately generates the yield and going back out of a lot of years when we started this in 2010 at that very time, the FDIC from banks that had closed no, we're selling loans at $0.80. And then even though it is directionally correct over the next hill call, it five, six years is something we're buying loans between $0.82 and $0.87 or $0.88. And then for a period of time, we were buying them at some $0.92 or $0.93. And if you look back at the big purchases over the last year, the $1 billion was roughly at $0.87. And what we've purchased in this quarter, which is the second largest quarter, was at $0.895.
Alexander Twerdahlwith
Right. Switching gears to the originated portfolio, just in I think you mentioned that the pipelines have picked up a little bit heading into the first quarter. Is that do you think that that portfolio will stabilize? I mean, I know you're coming off a couple of huge origination years in '22, and you've seen a little bit more amortization maybe as a result of that. But how do you think about sort of the overall size of that portfolio and whether or not production will be able to fully offset it.
Rick Wayne
I think it will grow well, I think it will grow. You know, over the last bunch of quarters there was much less activity. There was less clarity on value, no less deals being done. We're seeing that activity pick up. And during that time period, we saw a lot of things, but we said no a lot and we're seeing more now the kind of deals that we like to do and with a lot of a lot of volume coming in, I expect that we'll grow our And you may remember that before we had the big purchases a year ago, we were mostly an origination shop. So going back, I may get the it's a June 30, '22. If I'm off by a year ago or when the year was, I apologize, but I think generally we did like $550 million of originations and $175 million of purchases, something like that. So that was 75% of originations and 25% of purchases now kind of flipped. But I expect that you were hopeful that the purchase numbers will continue to be meaningful and significant, but the origination numbers will pick up because it's helpful and we get really good results and we get really good pricing on our originations kind of the same pricing we're getting on our on our purchase book.
Alexander Twerdahlwith
Yes. I mean maybe just kind of sticking on the pricing on the origination portfolio. I know a lot of it's prime based on any floors in place. But maybe just given that the outlook for rates now is maybe prime coming down at least several times this year is there any other considerations that we should have in the back of our mind with respect to the trajectory of the yield of that portfolio.
Rick Wayne
So I think you said it in your preamble to that, which is they're either prime or other of a floating, either prime or so for most of the loans have floors. And I'm usually set at the rate when the loan closes, but in some cases, the floor is less than that. So we have we have done a 100% protection on our current rates, but a lot of protection on our on our current rates on that.
Alexander Twerdahlwith
Yes. Great. And then the final thing I wanted to ask about is that it looks like there was a pickup in the gain on sale of SBA loans. And I know that there are some initiatives kind of with SBA port in our product. Is that higher level of gain on sales? Is that indicative of maybe a little bit more success in that product or maybe talk through what you're seeing and kind of expectations we should have from here?
Rick Wayne
It has picked up the volume for this quarter was about $14 million, which is a lot more than it was a year ago. And it's got the potential to continue to grow and so that And so therefore, there were we're selling off always the guaranteed portion. And um And so therefore, the revenues were going up. How much more we did with this product even from the beginning, I was and I am now very reluctant to make a prediction on volume or no contribution to earnings from this product other than just reporting as it happens. So you saw the numbers on what they are and what the gain was and then part of the sale of what we sold. And again, some of it was originated last quarter or a bunch of it this quarter. And then at the end of December, we were holding on balance sheet. Some of the guaranteed portion that we hadn't sold in the quarter, but would have sold in January.
Sorry, Rick, that's not a great answer for you. I know Alex, but I don't want to I'm not trying to link and say things are bad or good. I'm just saying it's a little bit hard to predict and I don't want to it was too far on a limb saying what that will be.
Alexander Twerdahlwith
Yes, we'll be happy to see the uptick in the quarters in which we see it. Thanks for taking my questions, JP. Best of luck in your future endeavors and on And that's it for me.
Rick Wayne
Thank you, Alex.
Operator
We have no further questions at this time. Now I will turn the call back over to Rick Wayne for closing remarks.
Rick Wayne
Thank you. All of you that are listening and all of you that will listen when you go online to listen to this, appreciate your support and look forward to talking again in April.
Thank you. We're all set, operator, thank you.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
