Northeast Bank - Q4 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Northeast Bank Fourth Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I will now hand the conference over to speaker today, Rick Wayne, CEO. Please go ahead.

Rick Wayne (CEO)

Good morning, thank you all for joining us today. I am Rick Wayne, the Chief Executive Officer of Northeast Bank. With me on the call are JP 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. I'm going to reference in my comments the investor deck that was uploaded last night. Starting with slide number three, under the heading Financial Highlights. For the quarter, we purchased $48.8 million of loans with a UPB of $54.3 million. Make a few comments on that volume.

It's a, typically, the June 30 quarter is not the busiest in the year, and if you go back and look at all of the quarters from over the last five years, it's, pretty close to the highest amount for that quarter. It was a $19 million increase over the March 31 quarter. When we take a look at the activity. Let me back up. That's, that I think is a pretty good number. Absent the large transactions that we had in the fourth calendar quarter of 2022, it's more or less the run rate we've been for many years.

We did see during the quarter some big transactions that had come to market, but, and that is generally true, that the bid-ask is pretty wide between sellers and buyers, and so it didn't meet our pricing expectations, and so therefore, we didn't bid on those. You know, we would expect, based on what we see in the market, that the gap between the bid and the ask will narrow and there'll be more opportunities to take a look at those. We originated $84.2 million in the quarter as well.

Our originated loan book, was therefore, you know, our balances were fairly flat with the linked quarter, but over the year, our originated loan book increased $229 million or 30% from the balance on June 30, 2022. What we're seeing is, I would say, a general comment on the market. While $84 million is a good number, it's, you know, it's less than we have done in the earlier part of the fiscal year. You know, I just think there's less transactions in the marketplace right now. Again, a bid-ask gap in a different context. You know, we're also, while we're always careful, as evidenced by the zero charge-offs to date in our originated loan book, we're being even more selective now as we're looking at potential transactions, you know, just some base numbers.

The ROE was 16.7% for the quarter and 16.5% for the year. The ROA was 1.7% for the quarter and 1.9% for the year. Our NIM was up 16 basis points from the linked quarter to 491, and we ended the year with tangible book value of $38.69. All in all, we think it was an excellent quarter and year. Let me just drill down a little bit on asset quality, which is on slide eight. Delinquencies were only $13.1 million, or 52 basis points on total loans, and non-accrual assets for $15.7 million, or 55% of total assets.

You know, also very good. You can see on slide nine, there was a movement in the non-performing asset category. We had $4.3 million of resolutions, and then we put on an additional $5.5 million. To the link quarter, it was up about $1 million, but not meaningful in terms of the size of our balance sheet. The numbers are solid with a low level of non-performing assets. On the funding side. The average cost of our deposits was up 36 basis points from the previous quarter. I should also point out on deposits, ours are 95% insured, between a combination of having deposits under the $250,000 amount and also using IntraFi and reciprocal with two-way sweeps to ensure any of those that are over.

95% insured, obviously a very good number, and we have seen almost no one-off other than normal course activity in our deposit accounts. On slide 21, the non-interest expense was $16.4 million in the quarter, which is $2.6 million over the linked quarter. $2 million of that was incentive comp booked in the fourth quarter, which is what we typically do when we see how the year was. We have a, I think, a really instructive set of new slides in the book. You know, when we meet with investors and others, it's almost the first question that comes up is around our portfolio of office loans.

We have in the slides, which Pat is going to walk through, a lot more color on those slides, to help you get a sense as to the quality of those loans. Our plan is to do that, over the next quarter or two for all of the major food groups of commercial real estate, including retail and hospitality, multifamily, industrial, et cetera. You won't just be looking at one number, but you'll be understanding much better the nature of our portfolio. With that, Pat?

Pat Dignan (EVP and Chief Credit Officer)

Thanks, Rick. Recently we've gone through and harvested a lot of data on our real estate portfolio, particularly in the office space, and broke the portfolio down by a number of different factors. We thought that the best way to illustrate the flavor of office collateral that we have was to illustrate by the number of floors. What we typically tell investors is that the vast majority of our office portfolio is comprised of low-rise buildings with local tenants. That is, tenants serving a local neighborhood or a community, as opposed to more traditional office space that is in central business districts or office parks, that sort of thing.

As you can see from the first table, the vast majority of our office portfolio is in buildings with less than five floors. 189 of the 247 loans are below $1 million, with the remainder above, and 10 loans that are higher than four stories, actually. The other question that we get frequently from investors is concerning the maturity of those loans. Many articles recently talked about the CMBS debt that's maturing over the next year or so, over $1 trillion, and the potential inability of those loans to refinance.

As you can see from the table on slide 12, about 54% of our office portfolio is maturing in the next three years, but the current interest rates on those loans are such that they could refinance at today's rates. On slide 13, we've illustrated all of the loans secured with office space that are above $3 million or 1% of capital. This comprises most of the dollars, and as you can see from this slide, most loans are, again, low rise. There's geographic diversity, low dollars per square foot, and relatively high occupancy.

Rick Wayne (CEO)

Thank you, Pat. We obviously, of course, be happy to answer any questions on these office slides or otherwise, but I think, as I say, we go through the next couple of quarters, we'll have this information on all of our different collateral types. With that, we'd be happy to answer any questions that you have.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile a Q&A roster. One moment for our first question. Our first question will come from the line of Alex Twerdahl from Piper Sandler. Your line is open.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Hey, good morning, guys.

Rick Wayne (CEO)

Morning.

Pat Dignan (EVP and Chief Credit Officer)

Morning, Alex.

Alex Twerdahl (Managing Director and Senior Research Analyst)

First off, Rick, you talked about some, a larger amount of transaction volume that was coming to market in the second quarter. I'm just curious, is that comprised of several larger transactions, or is there a number of more granular transactions? Or maybe just a little bit more on the complexion, of actually what's coming to market.

Rick Wayne (CEO)

You know what? We saw, and this is by no means everything that comes to market, but we saw, let me just get out the right, $2.5 billion of, thank you, of transactions, that were in 34 pools, some small. Do you recall what was the largest one? I want to say it was a $900 million.

Pat Dignan (EVP and Chief Credit Officer)

It was a $900 million pool, yeah.

Rick Wayne (CEO)

One of those, Alex, was a $900 million pool. There were some very large ones, and then there were some smaller ones. There was a big chunk of those that almost 60% of what I'm describing the yield, we just weren't there on, you know, the seller's expectation on price. There was others that were, you know, we didn't bid on because it was undesirable collateral, or we didn't agree with the collateral value. We wound up bidding on $165 million of UPB, and we wound up winning $54 million.

Just to summarize your question, yeah, there were some large ones, there were smaller ones, and we got roughly a third of what we bid on, and there was a lot that we did not bid on because of the seller's pricing expectations. You know, as you mentioned in previous calls, it's a lot of cost and time to do the underwriting that we do on these, and we're not gonna get there on price. You know, we don't do all of that work. Not that we're afraid of hard work. We work hard, but, you know, usually when there's a purpose and it's a goal that's attainable.

Alex Twerdahl (Managing Director and Senior Research Analyst)

What for the ones that look like good collateral that you just weren't there on the price, were those loans, did they actually trade during the quarter, or it was the market just not there for them?

Rick Wayne (CEO)

You know, some did not trade, as I understand it, and, that's, Pat, you want to respond to that?

Pat Dignan (EVP and Chief Credit Officer)

There was a couple of large pools that had a lot of office, big office component. I think there were some banks trying to unload the office, and once they saw the price, prices they were receiving, there were no trades.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Got it. Then can you just spend a couple of seconds or a couple of minutes talking about your appetite and capacity for some of those larger pools? Obviously, you did one in the fourth quarter, very large one relative to you. To the extent that there are some larger pools, like that $900 million pool or some even in the billion-dollar range, you know, in terms of your ability to actually do some of those deals or your appetite, I guess, you know, maybe talk around what the constraints would be and how you might go about, you know, approaching something that's a little bit larger.

Rick Wayne (CEO)

Well, our capacity, loan capacity now, based on our existing capital, is about $450 million. To point out, at the end of December, so as we entered our third fiscal quarter, it was about $100 million, and that capacity increased through a combination of earnings and we and we raised $8 million to our ATM offering. I think that our capacity to do, we have great interest in doing a big transaction. You know, for example, the $1 billion that we bought in the fourth calendar quarter has given us such a base now that just our basic core earnings are up significantly and will be going forward because of that, and we would like to do more. You know, how much more?

It would require us to, depending on the timing of it, I mean, you know, you have your own model, of course, as to what you. We don't put those numbers out as to what we're going to earn, but you could, you know, take a look at, you know, what you project and, figure out how much capacity we would have, which would be augmented by loan payoffs. You know, I'm not saying we're going to do this, so at all, but, you know, we could also raise more money through our ATM offering. You know, fortunately, our stock price has come back very nicely, and, you know, we're trading at a nice price now.

I would just add on what we're seeing and the stuff we like, which is what we bought in the fourth quarter, we're seeing now is really low LTV. We, you know, we don't want to take any undue credit risk at all. We like to say we're not in the business of losing principal here. We're seeing that with low LTV loans that are coming to market. I hope that was helpful enough, but if you have any follow-up on that point, please.

Alex Twerdahl (Managing Director and Senior Research Analyst)

That's, that's good color. I guess just my final question on the purchase market. You know, for some of the transactions that are trading during the quarter, is it other banks as the buyer, or are you competing mostly against private equity and other specialty finance companies?

Rick Wayne (CEO)

We bought, as I mentioned, we bid on $165, and we bought $55 or $54.3 million. There, Pat, do you want to comment? Do you know who the, what you see?

Pat Dignan (EVP and Chief Credit Officer)

It's largely banks. There's also, one or two funds that compete in our space that are have very cheap cost of funding that we often compete with. I know we lost to one of them in one of the bids, but that's largely banks.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Got it. Okay. Then, if I'm remembering correctly, this quarter, I guess, the, your first fiscal quarter of 2024, you guys adopt CECL, if I'm not mistaken. Can you maybe give us an update on what the expectations for that could be?

Rick Wayne (CEO)

JP?

JP Lapointe (CFO)

The expectation there, Alex, is the allowance is going to go up significantly. As you see in our presentation on slide, we have a good amount of credit-related discount, non-accretable discount, about $23 million of non-accretable discount on slide 23 at June 30th. Almost all of that will move into the allowance from the discount, the loan balance will go up, and the allowance will go up accordingly. You know, we'll probably be somewhere around where we are and what's in there now for the originated portfolio. If you take what we have now and add in most of the non-accretable discount, that's approximately where we'll be with our CECL calculation upon adoption.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Okay.

Rick Wayne (CEO)

JP, I'm sorry, just to summarize, you're saying then, we don't expect the, with the adoption of CECL there won't be any meaningful income statement effect on the adoption?

JP Lapointe (CFO)

Right. Right.

Rick Wayne (CEO)

Correct?

JP Lapointe (CFO)

Correct.

Rick Wayne (CEO)

For those that are listening that may not be familiar with that, JP was saying that the allowance, the credit discount that we have, it's a geography decision, will become an allowance. The discount on our books relating to interest expense, we will just continue to treat as we have been.

JP Lapointe (CFO)

Correct.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Okay.

Rick Wayne (CEO)

I know you know that.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Does the $23 million, does that get reclassified from capital to the to the ACL?

JP Lapointe (CFO)

No, just from the discount against the loan. The loans get grossed up, so purchase loans will increase by $23 million, and the allowance will increase by $23 million. No capital impact from that upon adoption.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Okay. Does anything change, you know, with CECL, with the purchase model? Just, you know, remind us in terms of the accounting going forward, I guess, you know, would we see higher levels of provisioning associated with some loan purchases because of that, non-accretable piece?

JP Lapointe (CFO)

I can answer that currently and prospectively. Currently, yes, based on how the CECL guidance is written now, when we purchase loans, you would have to provide for an allowance through the provision for loan losses. However, FASB has a standard that they are finalizing at the end of August, that will allow purchasers of purchased financial assets to take some of the discount and move that into the allowance so there is no provision for loan losses, and that can be applied retrospectively. We figure by the time that is issued, it will have no impact on our financial statements, and we won't have to provide through the provision for loan losses for purchase credits, unless there is no discount allocated to credit at purchase.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Okay. That's really very helpful. Then...

JP Lapointe (CFO)

One, sorry, one other point, Alex, is there will be a difference going forward also because, right now some of that accretion that we see in the total yield related to credit marks upon payoff, that won't go through yield anymore. That will be negative provision for loan losses upon the adoption of CECL. Again, geography on the income statement, but won't be in the yield anymore, but will be in the income statement, so.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Okay. Great. Going back to expenses, I think you said $2 million of expense, $2 million higher on expenses. That kind of puts your run rate on expenses in the next quarter back closer to where it was in the first quarter or the first calendar quarter. Is that correct?

JP Lapointe (CFO)

Yes. About that. Yep.

Alex Twerdahl (Managing Director and Senior Research Analyst)

Great. That's pretty much all my questions for now. I appreciate you taking them.

Rick Wayne (CEO)

Thank you, Alex.

Operator (participant)

Thank you. Once again, as a reminder, that's star one one for questions, star one one. One moment while we compile the Q&A roster. I'm not showing any further questions in the queue. I'd like to turn the conference back to Rick Wayne for closing remarks.

Rick Wayne (CEO)

Thank you for that, and thank you all for listening. We try and make our the information, investor deck, as helpful as possible with as much information as we can provide. As always, if you have any thoughts about information, more information that would be helpful, please let us know, and if we can do it, we will. With that, usually I wish you a nice weekend, but it's a little bit early for that, so have a nice day. Thank you all.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.