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Northeast Bank (NASDAQ:NBN) Second Quarter 2023 Earnings Call Transcript January 27, 2023
Operator: Welcome to Northeast Bank’s fiscal 2023 second quarter results call. My name is Kevin and I will be your operator for today’s call. This call is being recorded. Joining us from the bank is Rick Wayne, Chairman and CEO; JP Lapointe, CFO; and Pat Dignan, executive vice president and chief operating officer. A presentation for investors was uploaded to the bank’s website yesterday, which will be referred to in this morning’s call. The presentation can be accessed in the Investor Relations section of northeastebank.com under Events and Presentations. You may find it helpful to download this investor presentation and follow along during the call. Additionally, this call will be available for rebroadcast on the website for future use.
At this time, all participants are in listen-only mode. Later we will hold a question and answer session. As a reminder, this conference is being filmed. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based on Northeast Bank management’s current expectations and are subject to risks and uncertainties. Actual results may differ materially from those discussed in any forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statement. Now I’ll turn the call over to Rick Wayne. Mr. Wayne, you can begin.
Rick Wayne: Thanks. Good morning, I’m Rick Wayne and with me are JP Lapointe, our CFO; and Pat Dignan, our executive vice president and chief credit officer. After our presentation, we will of course be happy to answer any questions you may have. I want to refer to the slides in my remarks, starting on Slide 3. The financial highlights for the quarter were net income of $11.3 million, earnings per share of $1.54, return on equity of 17.5%, return on the assets of 2.1%. Of course, the big news, which was included in our earnings release for the last quarter, was that shortly after September 30 of this quarter, we purchased loans with UPB for $1.15 billion at a price of $998.5 million, which represented an investment of 86.6% in the purchase price.
Photo by Clay Banks on Unsplash
So did we — in the quarter we originated $174 million in loans. The weighted average return on originations was 8.72% and we got 8.48% across the book. On acquired loans, we had a return of 8.69%, and when you look at all of this compared to the prior quarter, I’d like to point out that a year ago, we had $6 million in agent fee revenue and only $600,000 in the current quarter, which is great because we’re looking at ways to grow our loan book and replace agent fee income, which we’ve done well. And finally, if that wasn’t enough, it was a busy quarter, we had approved an offer in the market for up to $50 million. We were pretty busy. Now I want to go to Slides 4 and 5 and make some comments about the loan purchases in the quarter.
On slide 4, we provided details by collateral type, the largest collateral types were multi-family, which was $320 million of the $1.1 billion, retail of $312 million. And then we can look at the detail there as other types of collateral, really noteworthy that the weighted average loan to value of the $1.1 billion of loans that we bought was 33.5%. While repeating that number, quite low, 33.5% weighted average loan-to-value on our purchases, always focusing on credit quality, we do that. And then on page 5 it shows the geography of it. And we can see that the biggest part was in California with $570 million from UPB. And then New York $216 million and Washington state $89 million. And then you can see the rest of the UPB on that slide.
If we go to slide 9, we stop focusing for a second on the investment side, thinking about concentration risk per dollar: our total capital was $270 million. And as you can see, at the largest size, we only have 12% of our portfolio with loans of $15 million or more, 10% between $10 million and $15 million. And then you can see the rest. So we do not have a limit on the concentration of dollars. We are very careful with that. Below that, you can see the warranty types. And then we’re… in our portfolio now the largest state is New York at 33% followed by California at 31% of our portfolio is our national loan portfolio of course and then the rest in 42 other states. If we go now to slide 19, we’ll talk about the cost of our deposits in a couple of minutes.
The average cost of deposits, which is what the green line represents, increased by 141 basis points from 0.87% in the first quarter to 2.28% at the end of December 31. And I want to point out that that was primarily the result of financing our loan purchases, where we financed it with broker deposits and some Federal Home Loan Bank loans. So we had a lot of new dollars in terms of the rate on our existing deposits going up 30 basis points. And you can see most of it as a result of adding new deposits and expensive, more expensive deposits. And you can see that our spot rate, which was 303 on the last day of December, was higher than the September 30 spot rate, which is 146 basis points. And that, again, was primarily due to the financing of the loans that we purchased and really primarily with traded CDs. The cost of traded CDs for all of that was 4.43%, and those CDs will mature between June and December of this year, and we hope to replace that with financing around 4%.
So that should go down. Next, I want to go to slide 23, which looks at our non-interest expense. You may remember from earlier calls that we said we expected to get about $52 million for the year. And you can see we’re up this quarter, but we’re down last quarter. In six months, we’re pretty close to that, we’re pretty close to $26 million, which would be what you would expect for half a year. I will say though that as we add $1 billion to our loan book, we will see increased spending in the fiscal third quarter and fiscal fourth quarter as we add more people to service the loan book. It will still be very profitable on that purchase, but we are going to have an increase in non-interest expenses.
On slide 25, you can see that our combined loan discount is now $189.6 million, which is an increase of $150 million from where we were at the end of September as a result of buying the loans at a deep discount this quarter. And finally, before I answer questions, I want to ask you to look at slide 31, which is the last slide, I just want to make a few points about that. As I mentioned at the outset, one of our goals was to replace agent fee income with more net interest income. And if you look at net interest income for the December 31 quarter it was $28.7 million, which is the highest ever, and that’s up to $20 million a year ago. And also, it’s important to note that a lot of the buys, what we report here is the multiple groups, but the biggest one we don’t close until about December 23…
JP Lapointe: twenty-one
Rick Wayne: 21, thanks, J.P. So we only had 10 days of interest income from that. And then, of course, in the future, we’ll have that included, although we did include it. I went to that reasonably quickly, but we’re providing all your information assuming you’ve read it. And of course, if there is something we can clarify, we will. And with that, we’ll be happy to answer questions.
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