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 Bignan, Executive Vice President and Chief Credit Officer. Last night, 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 the 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. The question and answer session for this call will be conducted electronically following the presentation. 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. At this time, I'd like to turn the call over to Rick Wayne. Please go ahead, sir.
Thank you very much. Good morning, everyone. I am Rick Wayne, the chief executive officer of Northeast Bank. And with me on the call are J. P.
LaPointe, our Chief Financial Officer and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments, JP, Pat and I will be happy to answer your questions. Before I start, let me say that our thoughts are with the individuals, families, and communities, health care workers, and first responders affected by COVID nineteen. It is unimaginable the toll the pandemic is taking around the world. We're doing our best to help the many affected by COVID nineteen, including donating n 95 masks to local hospitals, contributing to local food pantries, homeless shelters, and youth programs.
We are providing accommodations to borrowers through payment forbearance and meeting the needs of our employees who face new challenges while working at home. We are participating in the paycheck protection program having originated 194 loans totaling $37,200,000 in the initial phase and hope to originate even more if funds for a second phase are appropriated. Friends, investors and other constituents of the bank often kindly and genuinely ask how we are doing. We are doing well. In order to protect our employees and customers, we only service deposit customers and branches, eight out of the 10 which have drive through windows.
Other than employees working in those branches, almost all other employees are working at home. Thanks to an exceptional IT and operations group, we've been able to conduct business virtually, no pun intended, the same as before the COVID nineteen crisis. On the lending side, we are sourcing and underwriting business, closing and funding loans and managing our portfolio. On the deposit side, we continue to allow for opening new accounts online and continue to service the needs of our customers. It's certainly a different environment, but our professional, hardworking, adaptive and dedicated team has risen to the occasion.
On this call, we would like to cover four topics: a review of financial results for our third fiscal quarter recent changes in our Tier one leverage and total capital ratio limits activity in the share repurchase plan and a deep dive into asset quality. For the 2020, after the close of the market yesterday, we announced quarterly net income of 1,900,000 or $0.21 per diluted common share, a return on average equity of 4.6%, a return of average assets of 0.6% and net interest margin of 5.5%. Earnings were negatively impacted by an increased provision for loan losses of 3,300,000.0 or $0.26 per diluted common share, of which $3,000,000 was allocated to the SBA portfolio, and also a nonrecurring income tax expense of $554,000 or $06 per diluted common share related to the recapture of tax reserve for loan losses triggered by the repurchase of common stock during the quarter ending March 31. Turning to Slide three. During the third quarter, bank wide, we generated $119,700,000 of loans, which brought the quarter end loan portfolio to $1,034,000,000 Loans closed in the third quarter included $113,800,000 in our LASG, of which $48,800,000 were originated and a record $65,000,000 were purchased.
The weighted average yield of the LASG loans originated in the third quarter was 6.8% as of March 31, all of which were variable. The total return on purchased loans for the quarter was 10.05%, which included $2,500,000 of transactional income. Those of you who have followed our story know that in connection with the merger in 2010, the Federal Reserve and the Maine Bureau of Financial Institutions or MBFI imposed numerous conditions on the approval of our merger application. Over the years, some of the conditions have some set, some have been waived. And last May, the then holding company for the bank was dissolved and the conditions with the Federal Reserve were no longer applicable.
I'm very pleased to report that the remaining regulatory conditions have been waived. The bank's board has reduced the Tier one leverage ratio limit from 10% to 9% and the total capital ratio limit from 13.5% to 12%. The impact of this change is shown on Slide four, where based on capital at March 31, loan capacity has increased by 143,000,000 from $255,000,000 to $398,000,000. With this change, we are now in conformity with the capital limits of many other banks, and we have additional capacity to prudently, and I say prudently, lower balance sheet. In October 2019, the bank adopted the share repurchase plan for up to 900,000 shares.
As indicated on Slide five, during the third fiscal quarter, the bank repurchased 416,700 shares at an average price of $12.83 The repurchase of shares during the quarter increased tangible book value by 20 six percent $0.26 per share. At quarter end, 483,300 shares under the plan remained available for repurchase. Asset quality is always important for a bank and an understanding of it is critically important at this moment. I will spend the remainder of the presentation discussing our loan portfolio referencing slides six to 14. The remaining slides in the book are those that we typically provide and at your leisure please review those.
I believe today a focus on asset quality is the best use of our time. As you will see, our $980,000,000 LASG portfolio, which represents 80% of our loan book and $76,000,000 of our Community Banking Division portfolio, which represents 7% of our loan book, both have low LTVs. Our $50,000,000 SBA portfolio, which represents 5% of our loan book, not surprisingly consists of weaker credits with higher LTVs, but now with the additional reserve, have substantial allowance to absorb credit losses. Now that I've spoiled the punch line, let's examine the information on the slides. Slide six provides a breakout by group of our $1,034,000,000 portfolio, which consists of 2,384 loans.
Of note, the $9.00 $8,000,000 purchased and originated LASG portfolio has weighted average LTVs ranging from 49% to 56%. The aggregate 76,000,000 commercial and residential and consumer portfolios in our community banking division have weighted LTVs of 5165% respectively. The $50,000,000 SBA portfolio has a weighted average of LTV of 78%. Slide seven breaks out the $9.00 $8,000,000 LASG portfolio by collateral type. Note that we have $83,000,000 of hospitality with a weighted average loan to value of fifty two percent and $179,000,000 of retail with a weighted average LTV of 52%.
You will note that with very few exceptions and very small dollars, we have avoided higher risk collaterals such as raw land, land development and construction, big box retail, shopping malls, and large sale single tenant exposure. Slide eight. Because weighted average by definition is an average, we provide bracketed weighted average LTVs for our $9.00 $8,000,000 LASG portfolio. You will note that only 2% of that portfolio has greater than 80% LTV, 10% between 7079% LTV, and 80% of the LASG portfolio has an LTV of less than 70%. Slide nine examines seasoning in our $395,000,000 purchase portfolio.
Dollars $244,000,000 or 62% of our purchase portfolio was originated before 02/2009. Since origination, these pre 2009 purchase loans have paid down 42% of the original loan amount, and our basis, which reflects our discount on the purchase of those loans, is 52% of the original principal amount. A 152,000,000 or 38% of our purchase portfolio was originated in 2009 or later. Since origination, these post-two thousand and nine purchased loans have paid down 28% of the original loan amount and our basis reflecting our discounted purchase is 66% of the original principal amount. Slide 10, we frequently structure originated loans, both direct and portfolio finance loans with interest reserves.
In the case of our portfolio finance loans, dollars 192,000,000 out of $230,000,000 loan book or 821% have interest reserves with a weighted average duration of six point one months. In the case of direct originations, we have our interest reserves on a 104,000,000 out of 274,000,000 with a weighted average duration of six point four months. Interest reserves on $296,000,000 or 58% of our total LASG portfolio finance provides meaning originations, I should say, provides meaningful payment coverage over the next six months. Slide 11 provides a collateral breakdown of our $76,000,000 community Banking division portfolio. Without spending an inordinate amount of time on this slide, I would point out that the $33,000,000 commercial loan book has a 51% weighted average LTV and $39,000,000 or 92% of the consumer book is one to four family with a very comfortable 65% weighted average LTV.
On the prior six slides, I've discussed our $9.00 $8,000,000 LASG portfolio and $76,000,000 community banking division portfolio demonstrating low weighted LTVs across all collateral types, significant interest reserves to cover payments over the next six months, and substantial seasoning in the case of our purchased loan book. Slide 12 summarizes our SBA loan book. You will note that LTVs are higher with concentrations in hospitality of 26,700,000.0 or 54% of the total book, and retail of 7,900,000.0 or 16% of the book. The higher LTVs and weaker sponsors are hallmark of SBA lending. It is these type of loans that can suffer in a downturn.
And it is for this reason we substantially increased our reserves relating to our SBA portfolio. I would point out, as many of you know, under the CARES Act, the SBA is going to provide payments on SBA portfolio are that that's current, which in our case is around a little bit less than 40,000,000 over the next six months. So that portfolio performed well for the next six months. Then, of course, if appropriate and due to COVID-nineteen, we could also provide a three month deferment. We have a fair amount of time to see ultimately what happens with that portfolio.
But without any particular knowledge, but understanding it had higher LTVs and sponsors that were not as strong as in other parts of our portfolio, we thought it was appropriate at this time to substantially increase our reserves. And with that, I will turn to Slide 13, which is a breakout of our allowance on March 13. I would want to remind you, and I believe most of you know this, that accounting rules do not permit an allocation of the general reserve to purchase loans. The only reserve on purchased loans are those that are impaired and specifically identified. And so I think it's most helpful when analyzing our reserve to look at our originated loans, which have a balance of $637,000,000 at the March, $8,277,000 loans.
The reserve of $8,277,000 is a substantial increase over the 5,000,182 reserve, which is what we had at the last day of our fiscal year, the prior fiscal year, 06/30/2019. I wanna highlight two things. One, that the reserve on our unguaranteed portion of our SBA loan is now 10.6%. And and just a simple illustration, if of how important and how much coverage, I should say more accurately, that reserve provides to our SBA loan. If we originated an SBA loan with an 80% LTV using really simple math, we would have a loan of $80 on collateral worth a 100.
Because that collateral lost half of its value and and was worth a $100 at origination and is now worth $50, which I might add, I'm intentionally overstating to to make this point, that would mean that we would have a loan of $80 with collateral of $50 so there would be a $30 loss. Of that loss, we would need 25% of it as 7.5 and we have 10% on a reserve there. Not every loan is gonna decrease in value. Probably none will decrease that amount. There will be some decrease amounts that will be determined over time, but we believe that 10% reserve is substantial.
And then I would finally add that the overall coverage on our originated loans, now this, of course includes the SBA and excluding the purchases, down from 80 basis points to 130 basis points. Now just on Slide 14, some final observations. Investors asked us about how the what's going on post quarter. And of course, we're only on the twenty third day of the month, so we don't have perfect information. But we will tell you what we do know.
I am now on slide 14. I had mentioned the $296,000,000 of our LASG has an interest reserve. I also mentioned that I said 38, it's actually 34,000,000 of the SBA portfolio will be paid by the SBA over the six months. With respect to modification requests, on our purchase book, we received 97 for $69,000,000 out of a total purchase book of $928,000,000 or 928 loans for $396,000,000. On our originated book, we've received requests for 20 on 28 loans for 64,000,000 out of two twenty loans for five twelve million.
And the community banking division, we've received requests. This is now for both commercial, residential, and consumer of 84 loans for 10,000,000 out of 1,100 loans for 76,000,000. When we have, you know, our forbearance agreements are generally in two flavors. We give our borrowers the option for a complete forbearance for three months or interest only for six months. We do follow the guidance from the regulators and FASB that they're not treated as they won't be treated as TDRs, if they're due solely because of the COVID nineteen crisis.
When we report those in the in the fourth quarter and we will accrue income on those. We will of course provide complete transparency on all of that. With respect to delinquencies so far, as I say, we're in the April, but to make these general observations, delinquencies are slightly elevated on our purchase book, slightly. They're on track on our LASG originated portfolio. I say on track, I'm using where they are compared to a typical thirty day month.
And similarly on track for our community banking division. That's an awful lot of information we provided this morning on asset quality. We thought it would be much better and meaningful presentation to focus on kind of four big things rather than go through line by line on our financial reports. Of course, there's a lot of information in our press release. There will be a lot more information in our queue, and we are available now.
And if you have calls later or think of issues later, feel free to call. And with that, I will open the floor to questions. Thank you very much.
Thank you, sir. If you would like to ask a question, please do so by pressing star key followed by the digit one on your touch tone telephone. If you are using a speakerphone to ask a question, please make sure you mute your mute function is turned off to allow your signal to reach our equipment. We will proceed in order that you signal us and we'll take as many questions as time permits. Once again please press star one on your touchtone telephone to ask a question.
I show our first question comes from Alex Twerdahl from Piper Sandler. Please go ahead.
Hey, good morning, guys. Good morning. Hey, first off, Rick, appreciate all this detail on LTVs and credit in all your different portfolios. The LTVs all seemingly look great, but certainly depend on the value of the collateral. Are there any of these segments where the collateral values have either declined recently or over time or may not be fully reflected in the LTVs that we're seeing on these slides?
Thank you, Alex. That's a good question. And I want to make sure everyone's clear on the methodology that we use. We wanted to, for purposes of this, be using the values where there were appraised values. So I'm gonna divide them into two groups.
The purchase loans, the way we calculated the LTV, the way we reported in this slide LTV, we looked at the original valuation at the time the loan was made, which as I indicated in the seasoning conversation, was quite a long time ago. And then we looked at what our basis was because there's been a lot of pay down, and we bought them at a discount relative to that value. And we tested that methodology by looking at the values that we came up with when we determine the value when we purchased the loan. Because, you know, as most of you know, when we buy loans, we're not looking at what the value is in the file. You know, we're making our own determination.
So, you know, we're very comfortable that's a good value. With respect to all of the other and so that's about $400,000,000 of our loan book with the remaining $634,000,000 it's all well, let me break it actually into two groups to be more precise. For the remainder of the LASG portfolio, which is another half a billion, you know, are very recent values because that's a portfolio that we have assembled very recently. With the case of the community banking portfolio, you know, we looked at those values at the time the loans were made. So they're a little bit over, but Maine, you know, and we know this from, well, of all, in, not living, but working in state and analysis we've done over time, Maine values never spiked up or spiked down, pretty steady.
And finally, the SBA values, that's a book that was assembled recently, and we use those values. So I think, you know, it's possible, you know, when we look at it and say, you know, if we say we're 53% LTV on our LASG book. Wanted to look at it and say yes, but maybe the values have gone down some amount since then. But the point we're really trying to make is we have such enormous cushion there that they're gonna go down probably and certainly in the short and medium time, but they're not going down 47%.
That's very helpful, Rick. And then kind of maybe a little bit related, I mean, a big portion of the LASG purchase business is resolving these loans and creating transactional income, which has been relatively consistent over the last couple of years. Do you anticipate any change in the timing or ability recognize some of that transactional income and resolve these loans in the near term?
It's a little bit hard to predict because by its nature, it's transactional. And, you know, we have some where we have big discounts where the borrowers are asking for pay downs, but they don't always or payoffs, but they don't always wind up closing. I think the best way I could comment on that is that we should think about this over the next nine months rather than the next quarter in two regards. One, I I think, you know, it's hard to say what's gonna happen over the next two months on pay downs. Just people are so busy, you know, dealing with the COVID nineteen crisis that, you know, refinancing debt, selling property, which generates transactional income and the kind of typical life events are not the highest thing on people's to do list.
So I would not be surprised if that number was lower in the following quarter, although I really couldn't predict how much. But I and the reason I say nine months, because I think over nine months, those things will just have to they will sort out. And the other comment I would make now, I'm gonna make a forward looking statement. So I'm gonna remind everybody we have a forward looking disclaimer in here. But not that we anybody, of course, absolutely, a 100% not, would ever wish the tragedy that's going on to have occurred, but it is.
And I think that what we're going to see, and we are built for this, There are opportunities to buy loans at better prices. There's going to be more supply, we believe. We believe there's going to be less buyers than there has been. The the funds that were buying distressed debt for the longest time and more recently without distressed debt have been encroaching, you know, in our world are gonna be back to buying distressed debt. There's gonna be less buyers with liquidity to do this.
As you know, there are very few banks to do what we do. And on the origination side, there's gonna be less liquidity and and less banks willing to lend. And we being ever mindful of not being the victim of a falling knife and really tightening our credit box even more so than our already tight credit box, I think we're going to have a lot of opportunities. But I think we should be thinking about nine months. I don't think we should be thinking about the next quarter.
Okay. That's helpful. And then just to that point, maybe it's going be a nine month thing and not a next quarter thing. But in terms of your ability to actually transact in the market, can you talk a little bit about whether or not there's any lapses in your abilities considering that the bulk of your workforce is working remotely?
You know, it's we're doing this better than I ever could have hoped. And I mentioned in my scripted comments about our great IT group and our great operations group. I give the same accolades to everybody in the bank. Everybody's working really hard. We've never been busier.
We've never been busier that I recall. And with, you know, technology that's readily available, even to smaller companies like ours, You know, getting into your VPN, having team meetings, using Zoom, we have nCino to manage our commercial. It's a platform to managing our core commercial portfolio. We can keep track of things. We have all of the internal controls in place to do this.
As we sit here, we're sourcing business. We're underwriting business. We're closing deals, we're funding deals, we're managing our portfolio. In fact, we did 65,000,000 of purchased loans in the quarter ending March 3. 20,000,000 of that about was done while people were working at home.
And just as a touchy feeling, you know, the the the whole team is we always worked well together. I think, you know, we have a really great culture, even better now. People are trying to help each other out. People are, you know, talking continually on Zoom. People understand that everyone is important in in what we're doing, and everyone's stepping up.
And so I don't really think there's only one thing. I would say there's probably two practical things. One, people can't get on planes, you know, to go look at purchase look at collateral as we did before. You know, we have, you know, folks in the New York area that, know, work full time for us. They can look kind of in the Mid Atlantic safely.
And we have third parties that, you know, can look at collateral around the country for us. But, you know, any kind of collateral that's you know, Pat and Pat and this group, you know, could tell you in his sleep what a multifamily property is worth in a particular market or, you know, certain kinds of collateral. But if we have collateral, it's tricky. We're passing on that for the time being. I would say in that regard, it's different.
But other than that, we're working really well and as well as we did before.
That's great to hear. And then with respect to the purchase market,
you talked a little bit
about the supply increasing, the demand potentially decreasing. How does that change your internal thought process around the pricing of some of these loans?
Well, we want to there's a couple of things to figure out. One, we're going to want we're going to get higher yields because there's gonna be more supply and and and and less buyers. You know, I can say anecdotally, I don't wanna put numbers or describe it anyway, but we've recently, you know, had a a loan a a pool that we bid on, and there were four bidders who came in fourth, which we thought was unfortunate at the time. As it turned out, the buyer wants to and needs to, you know, resell at a a number that's significantly less than our than our bid was a month ago. And so we expect, you know, we're gonna see lower pricing, you know, how much how much lower we will report in when we reconvene in July.
But I I I think we're gonna start to and just to put it in context, you know, after the financial crisis, the FDIC was selling performing loans for 60¢. You know, we've been recently buying loans like that for 94¢. You know, I expect that number is is gonna be declining. I'm not saying it's gonna be 60¢. I'm not saying that at all, but I think it's it's gonna be less.
Great. And then just you guys did a lot of buybacks this quarter, which was fantastic to see, especially given the stock valuation. What can you think about the capital position? You think about this opportunity having really no way of telling how long or how deep the opportunity is going to be for you guys. How do you stack up buying back stock at 65% of tangible versus saving capital for the opportunity that exists on the purchase through the lending side?
Well, on the stock repurchase side, we were getting investors, smart investors, investors to pay attention to our stock. They were urging us to buy back when our stock was trading above tangible book, buy back at 18, buy back at 19. And the theory that, and it's a rational one, not when we adopted, but it's a rational one, that, you know, the intrinsic value of our stock in their view was worth more than that. So even if you're paying more than tangible book, you know, over time, it's gonna be smart. You know, at that time, we only had, as indicated in the stock repurchase slide, something like $250,000,000 of capacity to grow our balance sheet.
And we thought that at that level, it was much better for us to use our capital to invest in our business. When the stock went down to levels that were just ungodly, I mean, was down to 6 or $7 at one point, It became irresistible. It was the we thought the most profitable thing we could do was to buy back our stock. Now we wouldn't, you know, use all of our capital to buy back our stock because we have a business to run. But, with the relief we got, regulatory relief increasing our loan book now by a $140,000,000, we think we can do both.
We think we can we think we can buy back our stock where the prices make sense, and we can and still have enough capital, you know, to to grow our balance sheet. I'm not saying we're going to do this, but just to as as a math model, you know, if you take a look at what your earnings are and you multiply them by 10 and you and you take that by 80 per let me just use real numbers, but I'm not trying to say we're gonna do this. We may we may do better. We may do worse. I don't know.
So let's say you made, you know, $20,000,000 in the year. So $20,000,000 under a tier one test, we could you divide that by point o nine, actually. And I don't have a calculator in front of me, but I'll call that 225,000,000. I'm probably off a little bit. And if you loan 80% of that, that gives you about a $170,000,000 of additional loan growth from earning, from organic earnings.
You know, so between the 400,000,000 we have ready now, the additional amount we're gonna get as we earn money, the pay downs that we have, you know, we think we can, you know, be we have lots of ability to originate and purchase loans. And if the stock price stays where it is, you know, to buy back stock. I I I I wanted to make one comment also, which I saw in your note, but I think for the broader audience. At the end of the within the third quarter, while the window was open, directors went in the market and bought 75,000 shares. You know, now that we file with the FDIC rather than the SEC, we, of course, put that on our website.
Anybody can find it on the FDIC website, but it's sometimes not readily as available. So I'm just mentioning that for anybody who didn't know it.
That's fantastic. Two more quick questions, if I may. One, just as I look at the funding side of things here and maybe not quite as important as credit today, but the margin is still important for a bank. It seems like your funding is still relatively expensive at 170 basis points cost of deposits versus what the market has done over the last couple of weeks. How quickly do you think that 170 can start heading back down towards 1% or even potentially lower?
JP, you want to take that, please?
Sure. Thank you, Rick. Alex agreed, the cost of deposits was still a little high during the quarter. The cost of interest bearing deposits for the quarter was 186, which was down from $1.98 in the in the previous quarter. However, you know, at the end of the quarter, the weighted average rate of our interest bearing deposits was 1.8%.
So, obviously, lower at the end than it was during the quarter. Additionally, in the first five days of April, we lowered the rates on our money markets, both ABLE and Community Bank by at least 30 basis points. So that's about almost $300,000,000 that we'll have 30 basis point savings on. Also, we have about $72,000,000 of CDs that are scheduled to mature in our fourth fiscal quarter at a weighted average rate of 2.19%, which, you know, either we let the money run off if we don't need it or if we put it back on the books, we're saving about, you know, a 100 basis points on that $72,000,000 over the next quarter. So
that's that's great. Very helpful. And then final question for me. The the income tax expense that you guys the one the nonrecurring item this quarter related to I think related to the stock buyback, is that something that we're going to see every time you guys buy back stock? Or is that some sort of a something that's kind of a onetime thing from here on out, we're not gonna see it?
No. It's a one and done. The really crazy thing in in before 1990, there was, some tax rules that allowed companies and banks to take more bad debt expense than they actually encouraged, kinda like depreciation recapture. So there were triggering events to having to recapture that, one of which was a stock repurchase. But this round, we've used it all up.
So if we were to purchase more shares in the future, we would not have that associated tax cost.
Great. Thank you for taking all my questions.
Thank you very much, Alex.
Thank you. I show no further questions in the queue at this time. Now I'll turn the call over to Rick Wayne for closing remarks.
Thank you. First, thank you, Alex, for all those good questions. I hope that the others on the call found the answers good. They were certainly good questions. I wanna, just on a personal note, wish all of you health and safety and that we all get through this challenging, challenging time in in good shape.
I wanna thank many of you who have either emailed or or called asking how how we're doing. Very, very much appreciated. I hope when we talk again in July, we the world is in much better shape and when we have that conversation. So thank you very much. We always appreciate your input.
We always try and improve our presentation to address any things that you think are would be helpful and that we can do so. I encourage you as you have other thoughts on this to let us know. And with that, we will say goodbye and wish you a nice day and soon to be a nice weekend. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.