Northeast Bank - Q3 2023

Transcript

Operator (participant)

Welcome to the Northeast Bank third quarter fiscal year 2023 earnings conference call. My name is Olivia, I'll 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 the northeastbank.com under Events and Presentations. You may find it helpful to download this investor presentation and follow along during the call. This call will be available for replay calls 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.

During the question and answer session, if you have a question, please press star one one on your touch tone phone. 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 (President and CEO)

Thank you, Olivia. Good morning to all of you on the, on the call. Before we talk about the specifics of our results for the quarter that just ended, I wanted to just make a few comments in light of the recent failures of Silicon Valley Bank and Signature Bank, and kind of the main points that are out there. You know, one, I wanna talk about our deposits first. We have $2.13 billion of deposits at March 31, and this is important, of which 92% are insured and 3% of our deposits relating to holdback accounts are in a restricted account. We only have 5% of our deposits that are uninsured and at risk.

Not that anything is going on with them, you know, are just uninsured and not in restricted accounts. You know, as soon as the news broke around those two banks, we contacted all of our deposit customers in descending order based on balance to offer full insurance on their deposits through IntraFi, which is formerly Promontory. Some of our most of the customers, you know, either had it or took us up on that. If we look at the deposits quarter-to-quarter, our deposits decreased by $106 million from December 31 to March 31. Of that, $100 million were broker deposits, which we paid off. Really no change. There's really none of our customers are thinking about taking their deposits out now.

Something we are obviously pleased with and proud of. A second issue that I want to compare our bank with what happened to some of the other two. You know, those banks wound up having a mismatch between their deposits and their investment portfolio, and invested in longer duration treasuries. They didn't have credit risk, but they had interest rate risk. In our case, we've had a different approach, which is to only invest in one or two-year agencies. Our investment portfolio has a weighted duration of 13 months. Currently, the unrealized loss is only $860,000 pre-tax, or $620,000 after tax.

To sum up those points, our deposits have remained sticky, and we do not have any meaningful losses or any at all in our investment portfolio. I did wanna compare us as I have. Second thing, I now wanna go through some of the financial highlights on page three. We have a very wholesome slide deck that we post, and I'm only gonna highlight, you know, certain pages, and then of course, answer any questions that you might have. First, just some basic stats. It was really a great quarter. Our net income was $12.5 million, which excluding those quarters in which we had sold PPP loans and had gains from those, that is a record quarter of net income for us.

That's $1.69 fully diluted earnings per share. A return on equity of 18.5%. It's a very big number, 18.5%. A comparable ROA of 1.8%. Our tangible book value at the end of the quarter, was $37.02, growing a little bit less than $2 from the December 31 quarter. We also sold 160,000 shares of stock under our ATM at the market offering at a average price of $42.78. Finally, our loan volume was purchased and originated $144.5 million. Turning to slide 6, I do wanna talk about what we saw for activity and volume in the quarter that just ended.

First, with respect to purchase loans, we purchased $21.5 million of loans, which is certainly much lower than the preceding quarter where we had the very large purchases of around $1 billion. The first calendar quarter, meaning March 31 or 3rd fiscal quarter, is commonly a low volume quarter. If you look at going back a year, we had that, it was $23.9 million a year ago. Occasionally it's higher, but, you know, we did see less volume in that quarter. Our originated loan book was, we originated $117 million, which was also lower, combination of seeing less loan requests and also being more selective.

I say more selective 'cause we're always selective, but just being, you know, even more so now, so you can see that. Of course, $144 million is a still a very good number, just not as strong as it's been in the preceding quarters. If we go to slide seven, you can see the distribution of our portfolio, and I wanna just point out that only 13% of the portfolio are loans that are more than $15 million, and 9% are loans between $10.5 million, which means that 78% of our portfolio are loans $10 million or less. And again, we have a concentration in New York at 35%, 30% in California, and 5% in Florida. That's 70% in those three states.

You can see on the chart the rest of them, we're in 44 states. Sometimes, this is just a fun fact, people ask which states are we not in, and it's only 'cause we haven't had an opportunity, but in case you were wondering, it's Hawaii, Montana, North and South Dakota, Tennessee, and Vermont. Other than that, we are in all of the other states excluding those. We move to slide eight, these are asset quality metrics, and the port is quite strong. You can see that, at the end of the quarter, the ratio of non-performing loans to total loans is only 58 basis points, which if we go back to June 30, 2021, it was 180 basis points. Two things are occurring.

The numbers are only up a little bit, but on a much bigger balance sheet. We're seeing the benefit of that. If we move to slide 15, move a few comments about our deposit costs. Our deposits on slides 15 and 16. I think what I wanna highlight, one, the average cost of deposits for the quarter was 3.23%, and the spot rate, that is to say the rate on March 31, was 3.35%. It's not on this slide, but the spot rate at December 31 was 3.03%, so it's gone up 32 basis points in the quarter. On slide 16, we break out the source of the deposits by channel and the rates.

You know, first I wanna highlight that if we were to aggregate those in the banking center, which is $615 million, I'm doing some rounding, to our national lending customers, which is $61 million, ableBanking, which is $35 million, and the holdback, which are primarily reserve accounts, that is a total of $776 million out of $2.13 billion, or 36%. I highlight these because these have, these have lower rates, a weighted average rate of 1.38%. The balance of the deposits, the other 64% are in higher rate products and what we are focusing... I, and I should say have a weighted average rate of 4.51%.

You know, I would point out that as those roll over, you know, the increase won't be nearly as much as it had been in the past as we have added those in our funding. If we go to slide 19 and we take a look at our revenue compared to our expenses, the revenue was $33.4 million for the quarter, which increased $3.3 million from December 31. Expenses remained reasonably flat. They only went up $100,000 quarter-to-quarter. That's obviously a good thing if we can grow revenue that much and, you know, manage our expenses.

If we go to slide 21, you can see that we have discount on the purchased loans of a shade under $190 million, of which a hundred and sixty-six and a half is accretable, which we bring in over steadily over time. Then on accretable portion of $23 million, we recognize when a loan pays off. That's a lot of discount on our books, a lot of income that we'll be bringing in over time. Then if we go to slide 24 and look at our net income for the quarter, which was $12.517 million. I mentioned that that was the highest amount of net income if we exclude those 3 quarters where we had gains from the sale of PPP.

Finally, if we go to slide 25 and we look at first the blue bar in the first on the left side of the page. You can see that our base net interest income was $29 million. That doesn't include transactional income. That number alone is higher than total net interest income for each of the four preceding quarters. We're really seeing the benefit of a larger loan book as a result, mostly from the purchases that we made in the fourth quarter, that the impact that's having on our income statement. Those are the comments that I have. I should mention that JP Lapointe, our Chief Financial Officer, is here with me, as Pat Dignan, our Chief Operating Officer and Chief Credit Officer. He's a double chief.

We're all here to answer any questions that you might have.

Operator (participant)

Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, press star one one on your touchtone phone. If you wish to remove from the queue, press star one one again. If you are using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, press star one one on your touchtone phone. One moment, please. I'm showing Alex Twerdahl from Piper Sandler is online with a question. Alex Twerdahl, your line is open.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Good morning, guys.

Rick Wayne (President and CEO)

Good morning.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

I wasn't sure if I pressed star one one one once or twice there. A couple questions here for you guys. First off, just on that almost $190 million of discount. Can you talk a little bit about those sort of the life of the portfolio there, and what you saw this quarter in terms of early pay downs, you know, and maybe talk about, you know, whether or not it was expected or unexpected, what happened this quarter. Just I know it's incredibly hard to predict and very choppy, the accelerated portion of that accretable income. You know, any thoughts around whether or not this quarter was typical or if it was maybe light or heavy?

Rick Wayne (President and CEO)

This quarter, I'm just looking at one slide to maybe turn in a second. First on the purchase portfolio, pay downs were, you know, generally slower. You know, the rates are. A lot of the loans that we have purchased, particularly in one of the pools last quarter was $700 million UPB and $600 million to pay for it. There was a lot of discount there. You know, I would have described those loans. They were, when originated, were typically five-year loans that had a low, by today's standard, fixed rate for the first five years and then going to floating after that, of which some of them already are floating and others are going.

The pay downs were not as great, you know, as they had been, I would say historically on those for the, you know, understandable reason if you have a low rate and you have, you know, still term left in which that would be fixed. I know unless there was a life event of some sort, selling the real estate or if it was owner-occupied, selling the business and the real estate, or someone died or otherwise had a need, you know, to deal with that. Or they wanted to take out more money because they have very low LTVs on that in the low 30s, we wouldn't be as inclined to pay it off. I think that it was lower in that. Also lower in our...

I can put a number on that on slide five, now that I'm looking at it. The purchase runoff was $44 million on a billion and a half dollar loan book. Then I'll come back to the origination for a second. So to answer a little bit more your question, that-- those loans, a lot of them have a long duration on those, going out 15 years, in a lot of cases. So we like to buy loans like that because you get a lot of discount, not due to credit, but due to interest rate. If they do pay off, you pick up a fair amount of income. You know, it started at a-- off at a slow start.

That really wasn't surprising to us in the environment we're in now, our expectation is that, you know, that will pick up. You know, in one of the previous calls, Alex, you had asked about, you know, what our yield on the, or the return on the purchase book was under eight. You know, where did we, where did, you know, we think it was gonna wind up at that time. I said I thought it would be, you know, at least eight for the year. I suspect we'll be pretty close to that. We'll see what happens in the fourth quarter. With respect to the originated book, that also, the pay downs, JP, do you have the numbers on the originated, Rebecca, on the what happened with the originated?

We originated 117. Oh, thank you. JP Lapointe, it was right in front of me. We originated 117. We had $86 million of runoff. Our, while our origination amount of 117 was lower than in previous quarters, it still grew that loan, both originated loan book group as the pay downs were less. I touched on a lot. Is there more on that, Alex, that would be helpful for you?

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

No, I think that's good for that part of the question. I wanna talk about the purchase market. I'm curious if what you're seeing in terms of the loans. I know that a lot of the purchases you did late last year, last calendar year, were driven by interest rates. I'm curious if what you're still seeing is largely driven by rates or if there's some that's starting to be driven by credit quality that's coming into the purchased, you know, available-for-sale portfolio market.

Rick Wayne (President and CEO)

Pat, can you comment on that?

Pat Dignan (EVP and COO)

You know, the first calendar quarter is typically a slow-ish quarter in the purchase market. There's been a fair amount of activity. Obviously, there was a lot involved with both Signature and SVB. Otherwise, we haven't seen too much yet from on the distressed side. Not that that's really our wheelhouse anyway. There's there continues to be most of the stuff we've seen has been mergers or... Yeah, mostly mergers. We'll see. There's talk of pools to come and, you know, we're certainly seeing some activity, but it's not the big shoe to drop that everybody's hoping for.

Rick Wayne (President and CEO)

I have, Alex, I have some numbers that I think might be helpful to answer your question. We put together a, you know, a funnel report on purchase markets to see what we looked at and what we wound up buying. We saw last quarter, 20 pools of loans for $970 million UPB. Out of those, there was almost $300 million of loans that we-- pools that we just didn't do any further work on, that, you know, we tossed out because of either performance, undesirable collateral, or there were underwriting issues for us. We, you know, we couldn't get what we needed. There was $674 million after that we took a closer look at.

Out of those, $645 million we did not do further work on. One, because either undesirable collateral. Two, the yield did not meet our pricing expectations. Three, the seller withdrew the asset for sale. That left us with $29 million or four pools, 50 relationships that we bid on. Out of that, or out of that I should say $5.4 million, we've lost on our bid because of our, you know, we couldn't get to the yield that we needed. We wound up with a UPB of $24 million for 44 loans. We started out at $970 million and wound up closing, I mean, $24 million of loans. You know, the biggest chunks were the

Pat Dignan (EVP and COO)

Well, I'm not sure I can...

Rick Wayne (President and CEO)

I just said to that, yeah. That's what happened with the purchase market.

Pat Dignan (EVP and COO)

That's not an atypical volume for the market. You know, it's a big market, and our piece of it is. Rick touched on an important point, too, that right now there's significant disagreement in the market over what value means. There's a fair number of deals pulled from the market.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Got it. Now it's obviously the FDIC has been public with their intent to sell a huge portfolio of loans coming out of Signature Bank over the summer. I'm sure that you guys will be taking a look at that to some extent. One question I had is, as I kind of go through the FDIC's website and look at historical auctions, there's a lot of situations where the FDIC has partnered with various banks and funds in sort of a structured transaction model. I'm curious if that's something that would be of any appeal to you or if it's really just bringing it on balance sheet that makes the most sense.

Rick Wayne (President and CEO)

As I do for the benefit of the other listeners, I'm sure you know this, I'll say, point out historically the structure, not every one, but you know, general structure. We don't know what this will be. You know, Newmark is acting as wholesale advisor to the FDIC. If this is a structured transaction, the one historically what they've done is they put them out for bid. Then what they, you know, the highest bid is the value. Then the FDIC transfers those loans at that value into that entity and then provides a, some percentage of financing. To put some numbers to that, there's an $18 billion portfolio in that pool of multifamily loans. And I don't... These are just numbers for explanation. I have no idea what the numbers will be.

Let's say it's traded for $0.50. The FDIC would transfer all those loans into an LLC with a $9 billion value. They would then provide financing for half of that or $4.5 billion. Out of the remaining $4.5 billion, the equity portion, they might sell a portion, maybe 20% of that to a buyer. It would be In my model, that would be a $900 million check that would go to it, and the buyer would own the 20% interest in that LLC. And then there's some other structuring points as typically there's been a third party servicer and sometimes there's been a promote in it.

We'll certainly look at it when it comes out with this. We understand what they've done in the past. There's a lot of unknowns, as to what this will look like.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Okay.

Rick Wayne (President and CEO)

A lot of those loans I said, and Signature was a very big multifamily lender, and a lot of those in New York are loans that have the properties that have rent stabilization or might have a tax abatement under Section 421-a. Those things will have to figure out there.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Okay. A couple more questions. One, when you talk about the LTVs, you know, there's a lot of questions on what has happened with Vs on loans. I was wondering, Pat, if you could give a little bit of color or Rick on when you talk about LTVs, exactly what that means. If that's the V, you know, is that your V, your value that you put in the property and kind of the stress tests that go into, just to making sure that the credit is sound.

Rick Wayne (President and CEO)

Let me just start, Pat.

Pat Dignan (EVP and COO)

Sure.

Rick Wayne (President and CEO)

Answer it. For purposes of the deck, well, we say this in the deck, in the case of purchase loans, we use the calculation of the current balance, and we compare that with the valuation at the time that the loan was originated. Because a lot of these loans, if we go to, page... What is the seasoning page in here?

Pat Dignan (EVP and COO)

Yeah, that would be section eight, yeah.

Rick Wayne (President and CEO)

If we go to page 13, you know, you can see that out of our $1.46 billion total, $440 million. Let me say it differently. About $1 billion was originated before 2019. The paydowns have been, you know, fairly meaningful. We think that that's a pretty safe number for that. Then $440 million was 2019 or later. That's the way we do that calculation. We don't order a new appraisal when we purchase a loan. Our real estate group makes a determination as to what the value is. We're using You know, the appraised value at that time.

In the case of our originated loan portfolio, which for the most part has been originated reasonably currently, we use the value we use is when the appraisal was done. For the most part, that's done in the last year, 18 months. You know, you raise a fair point about, you know, values going down since then. Just to be clear, you know, we're explicit as to how we do the calculation in the deck. You know, one of the things we will be taking a look at, and we will update calls for this in the future, you know, to the extent there's, you know, meaningful change in values, we will highlight that as well. Add anything to that?

JP Lapointe (CFO)

No, I think you got it.

Rick Wayne (President and CEO)

Yeah.

JP Lapointe (CFO)

Maybe just that we, you know, we frequently update. We look at valuations quarterly, and we do a lot of stress testing around values. You know, we're aware that cap rates are moving up and expenses are moving up, and there's a lot of factors that influence value. It's kind of a moving target right now, and we're constantly rolling up our own portfolio. We expect there'll be some movement on the valuations. Historically, we've taken a relatively conservative approach.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Okay. Then, I just have a few more questions. One on the deposits. Can you talk a little bit about the laddering in the deposits, the broker deposits that you put on along with the purchases last quarter? Really what I'm trying to get at is, you know, whether or not the bulk of the deposit repricing has already happened, and as that portfolio amortizes or pays off, you know, potentially, you know, there's not a lot more in terms of deposit repricing higher that we could see.

JP Lapointe (CFO)

Thanks, Alex. The majority of the deposits that we put on last quarter for the purchases, especially the big ones, were laddered six, nine and 12 months. Of that purchase, what we funded with broker deposits, about 50% was 6 months, which would mature in June. 25% was nine months, and 25% was 12 months. September and December maturities on those. We did have some other broker deposits that we took out last quarter, with shorter terms. Primarily the bulk of it, the $350 million that we did there was six, nine to 12 months.

Rick Wayne (President and CEO)

Alex's question is also the weighted average rate on those deposits and what we would replace them at when they mature in this calendar year. JP.

JP Lapointe (CFO)

Right now, the broker market is, if you had to replace it with brokered deposits, it's around 5% right now. When these mature, they could be anywhere. The broker market jumped up in March given everything that went on with the liquidity front. Depending on what the Fed outlook is and when each of these sets of broker deposits are set to mature, it could be 5% or hopefully lower than that when they, when they go to roll over.

Rick Wayne (President and CEO)

The weighted average rate of that?

JP Lapointe (CFO)

Of the brokered money at March 31st is 4.7%.

Rick Wayne (President and CEO)

4.7?

JP Lapointe (CFO)

4.47.

Rick Wayne (President and CEO)

We have, Alex, on those that are maturing, maybe that would be around 50 basis points of increase if we had to replace them today at five.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Okay. On expenses, expense control I thought was certainly better than I had modeled, you know, given the large increase in the balance sheet. Can you talk about expectations for the next couple of quarters?

Rick Wayne (President and CEO)

Yeah. Well, first they were higher in part, one, because of the increase in deposit insurance. You know, then we had the, what? That's about, what is that, $36,000?

JP Lapointe (CFO)

345.

Rick Wayne (President and CEO)

345, $345,000 for that. We had some higher professional fees in there. In the next quarter, you know, I think that it will be higher most likely because we have incentive comp that we true up in the fourth quarter. You know, there could be more and for that, you know, for all of our employees. I think kind of on a run rate, you know, what you're seeing in the third quarter is, you know, more or less about what we would expect. That was $13.7. We've been adding more people and have to add a few more. It might be, you know, $14 million may be a good number now that the balance sheet's a lot bigger.

Other than that, as I was saying in the fourth quarter, you know, it's kind of, you know, it would be that plus what goes into that for additional incentive comp.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Got it. Then, my final question, just noticed some gain on sale of the SBA loans in the, in this first quarter or for, third quarter for you guys. I know you've been working on, rolling out some new products with the private equity partners that you did the PPP with. Can you give us any update on that partnership and that program? Are we starting to see a little bit of that come through on the income statement?

Rick Wayne (President and CEO)

Yeah. The group is Newity, where we have a five-year exclusive marketing agreement with that they've been going to market and, you know, initially, trying to get the borrowers, triple P borrowers, $115,000 that were on The Loan Source bought the loans on, to market to them, these small balance SBA loans under 7(a). A lot of them under $25,000 and then, you know, more up to $250,000. They're kind of averaging about $75,000 a month plus, you know, some are at the $25,000 and some are bigger. You know, it looks like, you know, they're running now at a run rate of $3 million-$4 million where we sit today, $3 million-$4 million a month. It's improved a lot.

It's not where we think it can get to. I should be care- No, no, I'm not gonna reread it, the forward statement. You know, so you know on the amount, we'll see what happens. It will slow circuit. They've got some momentum now. The technology's improved dramatically. Their marketing has improved, a lot as well. What that represents is, the loans that we sold in the March 31 quarter. I would expect that the June 30 quarter would be, small amount higher. We'll see. In very round numbers, the gain on those sell for it's about 10%. As a little bit more, maybe 11. All 10, I think that's probably a good average to use.

You know, if they do, say they do $4 million a month, you know, that's $12 million a quarter. Our share of that's about $600,000. Then we wind up holding on our balance sheet, the part that is the part that's guaranteed, part of the loan that's not sold. If there are any losses, we'll pays half of them.

Alex Twerdahl (Managing Director and Senior Equity Research Analyst)

Okay. That's all my questions for now. Thank you for taking them.

Rick Wayne (President and CEO)

Alex, that's a lot. Thank you very much.

Operator (participant)

Thank you. We have no further questions at this time. Now I will turn the call back over to Mr. Rick Wayne for any closing remarks.

Rick Wayne (President and CEO)

Thank you very much for that. Thank you all for listening, and Alex for your excellent questions. We look forward to talking to you again, after the end of our, fourth fiscal quarter, June 30th. We'll be reporting both on that quarter and on the year. With that, thank you and wish you all just a great day.

Operator (participant)

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.