Northeast Bank
NASDAQ:NBN
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Northeast Bank
Earnings Call Analysis
Q2-2024 Analysis
Northeast Bank
The company has adapted to changes in accounting for purchased loans under the Current Expected Credit Loss (CECL) standard. One major impact is the treatment of loans acquired at no cost, which now must be reported at face value with a corresponding allowance. This has contributed to a net charge-off rate of 0.11% for the quarter, with the vast majority of this—0.09%—attributable to CECL, and therefore representing no real loss of principle.
On the balance sheet, there has been a significant increase in deposits, especially from the banking centers, which grew by $216 million or 38% compared to the previous year. This robust growth in core deposits is part of a strategic move to replace higher-cost deposits and has been successful to date.
On the expense front, there was an uptick of approximately $300,000 from the last quarter, driven mainly by compensation, including a special $1,000 end-of-year bonus for employees (excluding certain executives) and a full quarter reflecting stock compensation expenses that only partially impacted the preceding quarter. This reflects the bank's commitment to sharing success with its team and maintaining morale.
Despite competitive pressure and sellers' reticence to sell performing loans at a discount, the company has maintained a consistent approach to loan pricing. The bank paid $0.895 on the dollar for the loans purchased this quarter, which aligns with historical pricing trends. Looking ahead, the bank anticipates growth in its originated loan portfolio, signaling a potential shift back from a recent trend where purchases have outpaced originations.
Most of the company's loans are floating rate, tied to prime rates or SOFR, with many having floors set at closing rates. This structure provides significant protection against potential declines in interest rates. While these floors don't always match the current rate at loan closure, they still offer considerable safeguards for the loan portfolio's yield.
There has been a notable increase in gain on sale of Small Business Administration (SBA) loans, with the quarter's volume reaching about $14 million—an uptick from previous years. The executive expressed caution in predicting future volumes or earning contributions from this product line, preferring to report outcomes as they occur rather than speculating on future performance.
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Welcome to the Northeast Bank Second Quarter Fiscal Year 2024 Earnings Call. My name is Daniel, 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, the 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 obligations to update any forward-looking statements.
I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.
Thank you very much. Good morning to those of you listening to the call. This morning, I want to go over a few of the interesting and important results during the quarter, and I'm not going to go over line by line what's already in the earnings release because I'm sure that you have read that or that you will read that. But I just want to spend a little bit on Page 3 of the slides.
First, talking about the loan volume in the quarter. The purchased loans activity of $186.1 million invested on $208 million of UPB or 89.5% purchase price is our second strongest purchase quarter only behind the approximate $1 billion of loans purchased 1 year ago. So very, very strong. And on that topic on the purchased loan market, we're seeing a fair amount of good -- very good supply in the marketplace. And so we're looking at a lot. I would caution you that they're binary, you bid and you win and 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 loan number consistent with the trend over the prior quarters. I can say that as we sit here today, the origination volume is picking up. And I would expect that we will have higher numbers in the current quarter than we had in the quarter that ended December 31. 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 Massachusetts sets out there or will set out their apportionment factor. So the income was very strong. And the EPS was $1.85, 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 which I am going to, I want to make a few comments on 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 3 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 we think it will be resolved without any principal loss. A couple of them were kind of typical purchase loans that -- or typical loans in National Lending where they go -- they go late and then we resolve them, plenty of collateral coverage.
And the first one for about $6 million is a dispute over lien position, our mortgage and others and in the courts. And in the event that we were to lose that, we have title insurance. That's why I say I don't expect to have any principal loss from these loans that are now are nonaccrual. I also want to bring your attention to the bottom right corner of this, Page 8, where we take a look at net charge-offs. CECL has caused us to -- 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. Given a pool of loans, let us say there was a loan that had a $50,000 customer balance. But when we bid for the loan, along with a bunch of other loans, we've allocated $0 to it. We got the loan, but we didn't pay anything for it. Under pre-CECL, we would just carry that loan at 0 because we didn't pay anything for it. But in the case of CECL, you're now required to carry that loan, show the 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 principal allocated to that.
So keeping in mind those new rules under CECL, you'll see that and there's a footnote on this in the case of quarters ending September 30 and also on December 31, out of the 0.07% at 09/30 or 7 basis points, 6 basis points of that was the a 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 1 basis of charge-offs in September 30. And for December 31, the same point that we're showing 11 basis points here or 0.11%. But out of that 11 basis points, 9 basis points are as a result of CECL, where there was really no loss of principle. So if you strip that out from those 2 numbers, the charge-offs for the quarter ending September 30 was 1 basis point and on December 31 was 2 basis points not much at all. That's way in the weeds, but because it's a change, I just wanted to try and explain that for you.
If we now move on to Slide 9. This is a slide that shows the change in the nonperforming loans from September 30 to December 30 -- I mean from September 30, '23 to -- September 30, '23, sorry for that to December 31, '23. And you can see it's gone up from 17 points around here, $5 million to $30.7 million, and most of that are the 3 loans designated #1, #2 and #3, which I spoke about just a couple of minutes ago. And then there's another one designated as #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.
I do want to comment on page -- on the deposits -- on 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 on 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 6 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 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 banking centers, we have 7 that our deposits in those banking centers have went up by $216 million or 38% from the -- from a year ago, which we're really, really happy about. And we're continuing to build those core deposits in our branches as a way of replacing higher cost deposits in other categories.
Finally, I do want to comment on the expenses on Page 19 that have 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 Pat and me, $1,000 each for the end of the year, it was about $200,000. Well-deserved by our great team and built morale -- increased morale. Everyone was excited about that. And then also, in this quarter, we had a full quarter of stock compensation. 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 -- the quarter ending December 31, 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 -- it's -- this is, in some ways, it's a bittersweet day for us. It's sweet because we had another really great quarter. It's bitter because JP is who many of you have talked to, I know and like and respect it, is leaving our bank to take a position at another bank after being with us 6 years. He will be missed by everyone. He's really built a great group. We have the privilege of working with him day in and day out. He's really first-rate person. He is a good father and a good husband. His colleagues like and respect him and the quality of his work is extraordinary.
And so we will miss him but he will be part of our alumni club and we will all get to see him a lot I hope. And so today is his last day. He's been totally professional. He gave notice maybe 6 weeks ago or 7 weeks ago and has worked diligently every single day. And so we all wish them every success. I don't have to say the best of luck. He doesn't need luck. He will be successful, but he will be missed. And on that note, I'd like to turn it over and see if there are any questions at all.
[Operator Instructions] And our first question comes from Alex Twerdahl with Piper Sandler.
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 can 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.
Well, the last quarter was also a strong quarter, good quarter for purchases, not like this quarter. This was a much better one. We're seeing loans coming to market from banks for reasons someone of -- some having to do with sales that I don't want to be too specific here, but started with some of the banks that failed in the last year that some of those assets have been now coming to the market to be traded.
It's public information that the Signature assets were sold and bought by a few different groups. We're seeing banks selling who want to shed some commercial real estate assets and that's not unusual. We tend to see that. I'd say we're maybe starting to see it with some banks that are a little bit smaller selling loans as well. I don't mean small banks, 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 rates. So if rates come down again, they will -- 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, so some of those folks can refinance more easily. Pat, do you want to add anything to that in terms of the...
Yes, I think that's a good summary. Last quarter and this quarter, M&A is always a factor, balance sheet repositioning and in some cases, funds who purchased mixed pools last year are trying to trade out of the higher-quality assets now because of the yields on those. Yes. So those are the big reasons. We're not really seeing much distress yet except for the Signature stuff. Yes.
In terms of the pools that you look at, but then you don't wind up buying. I know it's obviously binary, you get it, you don't. But when you're losing those pools, is it because the buyers just not like in the price and keeping it? Or is it because other -- is there other competition out there that's winning those?
I think -- Well, there's always competition out there, and it's always good to know that there's a market and we're not the only buyers so that we can gauge our own pricing. But I'd say that after that, the 2 big factors are that sellers are -- sometimes find it hard to believe that 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 that's also a factor.
Got it. And then I'm just curious, 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 the sort of the sales process and pricing?
So Alex, your question is because of rates declining in the fourth quarter, does that impact the pricing of the loans?
I mean I guess -- yes, I mean -- I would assume it has to impact the pricing, but I'm just curious if there's -- 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.
Yes. I don't think that in the fourth quarter and what we did that was such a big deal, the rate change in the fourth quarter. It would be longer if rates come down a lot, then you would expect that you would be buying loans at a lower yield, but we haven't seen that impact yet.
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 it be fair to assume that the sort of the [ full on ] return on the purchased portfolio based on what your purchasing stays kind of within the range in which it has been in the last 2 quarters?
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 low LTV kind of what we -- our expectation is on yields about the same as we have been in the past. There hasn't been a big -- overall, on any given loan, you can buy something at a lower price and get paid off early and that could 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. You may recall -- of course, there's 2 components of course, so what year and what is the rate on the note. And secondly, how much is the discount and when does the loan pay off that's ultimately generates the yield.
And going back a lot of years, when we started this in 2010 at that very time the FDIC for banks that it closed, we're selling loans at 0.80. And then directionally correct over the next, call it, 5, 6 years or something, we are buying loans between $0.82 and $0.87 or $0.88. And then for a period of time, we were buying them at $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 purchased in this quarter, which is the second largest quarter was at $0.895.
Right. So switching gears to the originate portfolio. 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... .
I think it will grow.
It Will grow?
I think it will grow. Over the last bunch of quarters, there was much less activity, there was less clarity on value, 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 volume coming in. And I expect it will grow our -- and you may remember that before we had the big purchase a year ago, we were mostly an origination shop.
So going back, I may get the -- say June 30, '22 if I'm off by either dollars or when the year was, I apologize. But I think generally, we did like [ 550 ] of originations and 175 million of purchases, something like that, so that was 75% originations and 25% purchases. Now it's kind of flipped. But I expect that -- we're hopeful that the purchase numbers will continue to be meaningful and significant, but the origination numbers will pick up. And we get really good -- I was just saying, we get really good pricing on our originations. It's kind of the same pricing we're getting on our purchase book.
Yes. I mean maybe just kind of sticking on the pricing on the origination portfolio. I know a lot of it is prime-based and you have 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?
No, I think you said it in your preamble to that, which is they're either prime -- they're all floating, either prime or SOFR. Most of the loans have floors and are usually set at the rate when the loan closes. But in some cases, the floor is less than that. So we have not 100% protection on our current rates, but a lot of protection on our current rates on that.
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 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?
It has picked up -- the volume for the 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, we're selling off always the guaranteed portion. And so therefore, the revenue has been going up. How much more -- with this product, even from the beginning, I was -- and I am now very reluctant to make a prediction on volume or contribution to earnings from this product other than just reporting as it happens. So you saw the numbers on what the gain was. And then part of the sale of what we sold and the gain, some was originated last quarter, 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.
So that's not a great answer for you I know, Alex, but I don't want to -- I'm not trying to blink 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 go too far on a limb saying what that will be.
Yes. We'll be happy to see the uptick in the quarters in which we see it. JP, best of luck in your future endeavors and that's it for me.
Thank you. We have no further questions at this time. Now I will turn the call back over to Rick Wayne for closing remarks.
Thank you. All of you that are listening and all of you that will listen when you go online to listen to this, I appreciate your support and look forward to talking again in April. Thank you. Well said, operator. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.