Northeast Bank (NBN) 2023 Q3 法說會逐字稿

Welcome to the Northeast Bank Third Quarter Fiscal Year 2023 Earnings Conference Call. My name is Olivia and 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. Also, this call will be available for replay purpose on the website for future use.

(Operator Instructions)

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.

Thank you, Olivia. Good morning to all of you 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 as kind of the main points that are out there. One, I want to 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 hold back accounts are in restricted accounts.

So we only have 5% of our deposits that are uninsured and at risk, not that anything is going on with that, but we're just uninsured and not in restricted accounts.

As soon as the news broke around those 2 banks, we contacted all of our deposit customers in descending order based on balance to offer full insurance on the deposits through IntraFi, which is formerly Promontory and some of our -- most of the customers either had it or took us up on that.

And then if we look at the deposits quarter-to-quarter. Our deposits decreased by $106 million from 12/31 to March 31. But of that $100 million were broker deposits, which we paid off. So really no change. There's really no -- none of our customers are thinking about taking their deposits out now, something we are obviously pleased with and proud of.

Second issue that I want to compare our bank with what happened to some of the other two. Those banks wound up having a mismatch between their deposits and their investment portfolio and investment in longer-duration treasury. So 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 1- or 2-year agencies, our investment portfolio has awaited duration of 13 months. And currently, the unrealized losses only $860,000 pretax with $620,000 after tax. So to sum up those points, our deposits have remained sticky and we do not have any meaningful losses, hardly any at all in our investment portfolio. I did want to compare us as I have.

Second thing, I now want to go through some of the financial highlights on Page 3. And we have a very fulsome slide deck that we post and I'm going to highlight 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% and the 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 an average price of $42.78. And finally, our loan volume was purchased and originated $144.5 million.

Turning to Slide 6. I do want to 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 a very large purchases of around $1 billion. But the first calendar quarter March 31, third fiscal quarter, it is not -- is commonly a low volume quarter. If you look at going back a year, we have that, it was $23.9 million a year ago. Now occasionally, it's higher. But we did see less volume in that quarter. And our originated loan book was -- we originated $117 million, which was also lower, combination of seeing less loan request and also being more selective -- I say more selective because we're all selective, but just being even more so now. So you can see that -- of course, $144 million is still a very good number. Just not as strong as it's been in the preceding quarters.

If we go to Slide 7, you can see the distribution of our portfolio, and I want to 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 of $10 million or less. And again, we have a concentration in New York at 35%, 30% in California and 5% in Florida. So that's 70% in those 3 states. And then you can see on the chart, the rest of them were in 44 states.

Some of those -- this is just a fun fact. People ask what states are we not in, and it's only because 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.

If we move to Slide 8, these are asset quality metrics and portfolio is quite strong. You can see that at the end of the quarter, the ratio of nonperforming loans to total loans is only 58 basis points, which if we go back to June 30, '21, it was 180 basis points. So 2 things are occurring. The numbers are only up a little bit but on a much bigger balance sheet. So we're seeing the benefit of that.

Turning to Slide 15 with a few comments about our deposit costs. Our deposits on Slides 15 and 16, I think I want to 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%. And it's not on this slide, but the spot rate at December 31 was 3.03%. So it's kind of 32 basis points in the quarter. On Slide 16, we break out of the source of the deposits by channel and the rates. First, I want to highlight that if we were to aggregate builds in the banking center, which is $615 million, I'm doing some rounding to our national lending customers, which is $61 million, ableBanking, which was $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 lower rates, a weighted average rate of $1.38, but the balance of the deposits, the other 64% are in higher rate products and what we are focusing and I should say have a weighted average rate of $4.51. I would point out that as those rollover, the increase won't be nearly as much as it has 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, but expenses remain reasonably flat. They only went up $100,000 quarter-to-quarter. So that's obviously a good thing if we can grow revenue that much and manage our expenses.

If we go to Slide 21, you can see that we have a discount on the purchase loans of a shade under $190 million of which 166.5% is accretable, which we've been (inaudible). The nonaccretable 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 will be going in over time.

And then if we go to Slide 24 and look at our net income for the quarter, which was $12,517 million. I mentioned that was the highest amount of net income if we exclude those 3 quarters where we had gains from the sale of PPP.

And 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. So that doesn't include transactional income. And that number alone is higher than total net interest income for each of the proceeding quarters. And so 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 income -- the impact that's happening 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 and Pat Dignan, our Chief Operating Officer and Chief Credit Officer, he's double Chief. So we're all here to answer any questions that you might have.

(Operator Instructions)

And I'm showing Alex Twerdahl from Piper Sandler.

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

Well, this quarter, I'm still on Slide (inaudible) in a second. But first on the purchased portfolio. Paydowns were generally slower. 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 (inaudible), there is a lot of discount there. I would have described those loans, they were when originated were typically 5-year loans that had a low, by today's standard, fixed rate over the first 5 years and then going to floating after that, of which some of them already are floating and others are going in. But the paydowns were not as great as they had been, I would say, historically, on those, for the understandable reason, if you have a low rate and you have still term left on it, that would be fixed unless there was a life of it 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 to deal with that or they wanted to take on more money because they have very low LTVs on that in the low 30s, they wouldn't be as inclined to pay it off.

So I think there was lower than that and also lower in our -- I can put a number on it on Slide 5 now that I'm looking at it, the purchase runoff was $44 million and $1.5 billion book. Now I'll come back to the origination for a second. But your -- so the answer to your question, that -- those loans -- a lot of them, have a long duration. Those going out 15 years in a lot of cases. And so we like to buy loans like that because you get a lot of discount not through the credit but through the interest rate and if they do pay off, you pick up a fair amount of income.

It started off at a slow start. That really wasn't surprising to us in that environment now but our expectation is that, that will pick up. In one of the previous calls, Alex, you had asked about what our yield or the return on the purchase book was under 8%.

We think it was going to wind up at that time. I said I thought it would be at least 8% for the year. And I suspect it will be pretty close to that. We'll see what happens in the fourth quarter.

And with respect to the originated book, that also, the paydowns -- JP, do you have the numbers on the originated or -- we originated 117, thank you. JP pointed it was right in front of me. So we originated 117. We had $86 million of one-off. So our -- while our origination amount of 117 was lower than previous quarters, it still grew that loan book, originated loan book grew but the paydowns were less. I touched on a lot. Is there more on that, Alex, that would be helpful to you?

I think that's good for that part of the question. I want to 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. And 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 purchase, I guess, available-for-sale market?

Pat, do you want to comment on that?

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

I have some numbers that I think might be helpful to answer this question. We put together a funnel report on purchase market to see what we looked at and what we would up buying. And so we saw last quarter, 20 pools of loans for $970 million UPB. And out of those, there was almost $300 million of loans that we -- pools that we just didn't do any further work on that we've crossed out because of either performance, undesirable collateral or there were underwriting issues for us, but we couldn't get what we needed. And so there were $674 million after that we took a closer look at. And 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; or three, a seller withdrew the assets for sale.

So then that left us with $29 million or 4 pools, 50 relationships that we bid on and out of that, we won -- out of that I should say $5.4 million we've lost on our bid because of our -- we couldn't get to the yield that we needed and we wound up winning a UPB of $24 million for 44 loans. So we started out at $970 million and wound up closing 24 million of those and the biggest chunks were -- well I haven't offered people I just said that -- and that's what happened with the purchase market.

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

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. And 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 are a lot of situations where the FDIC is 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.

[indiscernible] I'm sure you know this but I'll point out, historically, the structure, not everyone, but a general structure, we don't know what this will be in new markets acting as a wholesale adviser to the FDIC. But if this is a structured transactions, the ones historically that they've done is they put them out for a bid. And then the highest bid is the value and then the FDIC transfers those loans at that value into that entity and then provides some percentage of financing, so just to put some numbers to that.

There's an $18 billion portfolio in that pool of multi-family loans and having these numbers for explanation, I have no idea what the numbers will be. But let's say, it's traded from $0.50. So 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 and out of the remaining $4.5 billion, the equity portion, they might sell a portion, maybe 20% of that to a buyer. And so it would be -- in my model, that would be a $900 million check as we go to it and the buyer would own a 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 will certainly look at it when it comes out with this and we understand what they've done in the past, but there's a lot of unknowns as to what this will look like. And a lot of those loans -- like Signature was a very big multi-family lender and a lot of those in the New York are loans that have the properties that have rent stabilization or might have a tax abatement on the Section 421A and so there's a lot to figure out there.

Okay. A couple of more questions. One, when you talk about the LTVs, there's a lot of questions on what has happened with Vs on loans. And I was wondering, Pat, if you could give a little bit of color or Rick. When you talk about LTVs, exactly what that means, if that's the V, 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.

So the -- let me just start and Pat can add to it. So the purposes of the debt and we say this in the deck, in the case of purchase loans, we used the calculation of the current balance and we compare that with the valuation at the time that the loan was originated. And because a lot of these loans, if we go to Page 13, you can see that out of our $1.460 billion total, $440 million, let me say it differently, about $1 billion was originated before 2019 and the paydowns have been fairly meaningful. So we think that that's a pretty safe number for that. And then $440 million was 2019 or later. But that's the way we do that calculation. We don't order a new appraisal when we purchase a loan, but our real estate group makes a determination as to what the value is, but we're using the appraised value at that time. And 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 and for the most part, it was -- that's done in the last year or 18 months. You raised a fair point about values going down since we're very -- just to be clear, we were exclusive as to how we do the calculation in the deck. One of the things we will be taking a look at and we will update calls for this in the future to the extent there's a meaningful change in values with that as well. Pat, do you have anything to add?

No, I think you've got it. Well, maybe just that we frequently update. We look at valuations quarterly and we do a lot of stress testing on values, where the cap rates are moving up and expenses are moving up and it's a lot of factors that influence value. And so -- and it's kind of a moving target right now. And we're constantly rolling up our own portfolio. And so we expect there will be some movement on the valuations. But historically, we've taken a relatively conservative approach.

Okay. And then I just have a few more questions. One on the deposits. And 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. And really, what I'm trying to get at is whether or not the bulk of the deposit repricing has already happened. And as that portfolio amortizes or pays off, potentially, there's not a lot more in terms of deposit repricing higher that we could see.

Alex, the majority of the deposits that we put on last quarter for the purchases, especially the big one were laddered 6, 9 and 12 months. So of that purchase what we funded with broker deposits, about 50% was 6 months, which would mature in June, 25% was 9 months and 25% was 12 months, so September and December maturities on those. We did have some other brokered deposits that we took out last quarter with shorter terms, but primarily the bulk of it, the $350 million that we did there was 6, 9 and 12 months.

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?

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

And the weighted average rate of the...

For the brokered money at March 31 is 4.47%.

4.47%?

4.47%.

Okay. So we have, Alex, on those that are maturing, maybe -- and that would be about 50 basis points of increase if we had to replace them today at 5%.

Okay. And then on expenses, expense control, as I was -- it's certainly better than I had modeled given the large increase in the balance sheet. Can you talk about expectations for the next couple of quarters?

Yes. Well, first, there were -- they were higher in part, one because of the increase in deposit insurance and that's about, what is that?

345.

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

Got it. And then my final question, just noticed some gain on sale of the SBA loans in the -- in this first quarter or 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. Is this -- can you give us any update on that partnership in that program? And are we starting to see a little bit of that come through on the income statement?

Yes. The group is not where we have a 5-year exclusive marketing agreement with that they've been going to market initially trying to get the borrowers, PPP loans 115,000 that were on loan source but the loans are to market to them a small balance SBA loan under 7A. A lot of them under 25,000 and then more up to 250. They kind of averaging about $75,000 a long -- plus some were at the 25 and some are bigger. It looks like they're only now at a run rate of $3 million to $4 million, where we sit today, $3 million to $4 million a month. So it's improved a lot. It's not where we think it can get to or I should be careful.

No, I'm not going to read the forward statement. But so on the amount, we'll see what happens. It will show some momentum now. The technology has improved dramatically, the marketing has improved a lot as well. And so what that represents is the loans that we sold in the March 31 quarter. I would expect that the June 30 quarter might be a small amount higher, let's say and very round numbers, the gain on those, so for -- it's about 10% as a little bit more maybe 11%. I think that's probably a good average to use.

If they do, say, they think $4 million a month, that's -- that's $12 million a quarter and our share of that's about $600,000. And then we wound up holding on our balance sheet, the part that is the [un-guaranteed] part of the loan that's not sold. And if there are any losses, we would need to [pay] half of them.

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

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

Thank you very much for that and 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 30 and we'll be reporting both on that quarter and on the year. And thank you and wish you all a great day.

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