Northeast Bank (NBN) 2027 Q1 法說會逐字稿

Welcome to the Northeast Bank first quarter fiscal year 2027 earnings call.

My name is Tawanda and I will be your operator for today's call.

This call is being recorded.

With us today from the bank is Rich Wayne, President and Chief Executive Officer, Santino Delmolino, Chief Financial Officer, and Pat Dingnan, Chief Operating Officer and Chief Credit Officer.

(Operator Instructions)

I would now like to turn the call over to Rich Wayne. Mr. Wayne, you may begin.

Thank you.

Good morning.

And welcome to our investor call for the quarter ending September 30.

I'm going to provide an overview of our -- this is our first fiscal quarter.

And after my comments, Santino will discuss our financial results and Pat will review our loan activity.

At the conclusion of our comments.

We will be happy to answer your questions. I'm going to first make some comments on the financial highlights page, which is page number three in the investor deck that was posted last night. Some of the highlights I want to mention are as follows.

We had quarterly net income of USD 29 million.

Return on equity of 18.65% return on assets of 2.21% tangible book value continues per share continues to rise ended the quarter at USD 73.22 representing a 22% increase over a year ago.

And a 58% increase over the last three years.

The total return on our purchase loans in the first quarter was 9.11% or USD 62 million, which includes USD 5.9 million of recovery.

On credit discount on loans we purchased. Let me just pause on this point for a second and just briefly talk about our purchase loan business, which is a very large part of our business.

We purchase loans at a discount either because there is an interest rate mark, that is to say. The coupon that the customer is paying is less than what the current market rates are for interest. Think of this as bond map.

And then we also buy loans where we pay a discount because it may turn out that we won't collect everything.

The entire unpaid principal balance from the customer. And the credit mark is interesting because of the required accounting for it and is not as obvious as to how much that is as it was before CECL. I know that's a lot to understand, so I'll just try and put some numbers to it.

That occurred in the current quarter.

In the current quarter, we had about USD 6 million of discount due to a credit mark that were loans.

That wound up paying off in the quarter. This is primarily for loans which accounted for most of it. So with respect to these four loans, we had USD 6 million of a credit mark, which we didn't accrete into income, then the loans paid off in full and we earned USD 6 million.

The way the accounting for that is now under CECL is that it runs through the allowance.

And so it's not obvious, so obvious on the financial statements because it runs through the allowance along with a bunch of other matters. But that's a core part of our business and I think it's worth highlighting that number and I want to do that by turning to page -- I'm getting there.

Still getting there.

If you turn to the page 32, which is the last page in the deck, you can see that the total return, I mentioned that it was 9.11% on the total portfolio, but there is a line there that says release of allowance for credit losses on purchased loans, USD 5,921,000. Previously, that would have been reported in interest previous, meaning before CECL, that would have been included in our interest income, but now it goes to the allowance. So I did want to highlight that. I think Pino is going to provide a little more granularity on that point.

For the quarter, it was our fourth.

Consecutive quarter of record originations in our national lending business, USD 258.6 million. Our pipeline was very large during the quarter. It continues to be very large, and we're seeing a lot of traction in that business line.

We also highlight on page 3 that we have.

USD 1.58 billion of loan capacity.

And this is without, doing any capital raise. It's just of what's available to us with our existing capital.

So we consider that to be very valuable to us.

Let me now just make a few more points as I turn.

If we take a look at the -- I want to talk about the asset quality next of our purchased and originated loan book.

With the loan portfolio of USD 4,650 million, that's excluding any loans that were holding for sale.

It represents 97% of that number, USD 4.51 billion, are national lending loans.

That's purchased and originated.

And of that, at the quarter end, only USD 22.5 million were on non-accrual, representing 48 basis points of total loans. So, it's really.

A remarkably low number for our loan portfolio, as you can see that. And just for purposes of full picture, we had some Oreo on the balance sheet as well.

And with those comments, I'd like to turn it over to Tino, please.

Santino.

As Rich mentioned, this quarter was a good start to the year and created strong momentum heading into Q2.

Net income for the quarter was USD 29 million or USD 3.42 per diluted share, compared to USD 34.3 million or USD 405 per diluted share in the linked-quarter.

Return on average assets was 2.21% and return on average equity was 18.65%.

Total assets ended the quarter at USD 5.35 billion, an increase of USD 125 million or 2.4% from June 30.

The loan portfolio, including loans held for sale, grew USD 163 million or 3.6% during the quarter.

Loan generation totaling USD 534 million was split between USD 237 million of national lending purchase loans.

USD 258 million of originated loans, and USD 35 million of SBA loans. It's worth pointing out that most of the purchase loan activity occurred at the tail end of the quarter. Therefore, there is limited impact on the current quarter's earnings.

Net interest income for the quarter was USD 58.9 million compared to USD 60.3 million in the linked-quarter and USD 48.2 million in the prior year quarter.

Net interest margin was 4.57% compared to 4.8% in the linked-quarter and 4.59% in the prior year quarter.

Decrease in margins largely attributable to yield on the purchase loans, which can be volatile, as we know, due to timing of prepays, which cause accelerated accretion, i.e., transactional income.

While we did have a fair number of prepayments, both in this quarter and the current quarter, which caused yields to decrease a little bit, the current quarter prepays were largely on loans that did not have significant rate mark discounts.

As Rick mentioned, most of the prepays we saw this quarter were actually on loans that had credit marks.

So we released just under USD 6 million of credit mark through the allowance.

Within the purchase portfolio. I'll come back to this to discuss in a little more detail later.

Yield on the total loan portfolio was 8.11% compared to 8.37% in the linked-quarter.

Within national lending, the purchase portfolio yielded 8.24%, while the originated portfolio yielded 7.72%. We saw a little bit of a shift in portfolio mix this quarter with originated loans making up a higher percentage of the balance sheet.

Given the yield here, that also put a little bit of pressure that we've seen on NIM.

Turning over to funding, total deposits increased USD 95 million or 2.6% during the quarter, largely driven by a USD 152 million increase in broker CDs, offset by seasonal runoff in our government banking portfolio.

FHLB advances were relatively flat quarter-over-quarter, though average balances were up, so we utilized short-term borrowings to fund growth between broker and CD issuances.

So you'll see on Slide 21 of our Debt, cost of funds came down 1 basis point from the linked-quarter, and our spot rate is at the same level.

We've made all rate changes that we anticipate making on our non-maturity deposit portfolio, barring any further changes by the Fed.

So the only real movement I'd expect in our cost of funds going forward is as CDs roll over.

On that front, we do have about USD 1.4 billion of CDs maturing within the next three months that we anticipate rolling over.

The cost on that likely is going to go up somewhere in the realm of 50 basis points, depending on where rates are in the brokered market at that time.

That's going to equate to somewhere around 15 basis points of increase in our cost of funds next quarter.

Now, if we could take a look at slide 30, I'd like to spend a little time on the nuts and bolts of the provision. There's a lot to unpack here.

First, I'll talk through kind of the typical components of the allowance for loan loss.

So first is just your typical changes with the allowance, which is a result of loan originations as well as changes in the coverage ratio on the existing portfolio.

This accounts for about a million dollars of provision during the quarter as we increase the coverage ratio on both our SBA and our purchase portfolios.

The other side of this that you'll see in most banks is charge-offs and recoveries, whether it be on purchase or originating loans.

Excluding the insured loans, we had about USD 3 million in charge-offs this quarter, which you can see are mostly within the SBA portfolio.

The two unique components to our provision are as follows.

The first is release of credit discount on purchased loans.

So Rich got into this a little bit, but as you look at the allowance roll forward here, you'll see that we have a column for initial ACL on purchased loans. So when we're buying loans at a discount and there's a bit of uncertainty as to whether or not we will be able to fully collect the principal balance of those loans, we actually will set up an allowance that comes out of the purchase price on those. So unlike your typical allowance that runs through the provision, there's no net income impact of that initial USD 4.4 million.

Ultimately, as loans go through the process and if we're able to get those loans to pay off without having to take the charge off or take a charge off equal to that initial credit mark, we end up taking a release.

So we end up recovering a good amount of that allowance. As you can see this quarter, Rich mentioned we picked up USD 5.9 million that runs as a credit to the provision.

The other unique component to our allowance relates to the insured small balance business.

The way all of the loans within this portfolio, we've got a little over USD 90 million of them right now.

Part of them, most of them are in held for sale and part of them were in the portfolio.

The way the accounting works for this is you have to treat, even though the insurance exists to cover us from a credit loss standpoint, and we believe it's more than ample to cover any expected credit losses within this portfolio, the accounting standards require you to account for those two items completely separate and distinct.

So what ends up happening is we book an allowance on the insured small business loans as if we did not have any sort of credit insurance.

So that's what you can see here. You can see we booked USD 2.5 million of provision during the quarter in relation to these loans.

On the flip side of that, because we expect the insurance company to make us whole on any losses we incur here, we end up booking a. Gain in an insurance receivable, and that gain runs through non-interest income. So there's a little bit of grossing up happening between our provision and non-interest income.

It's a bit unique.

Switching over to non-interest income, I already discussed the gain on insurance recoveries. The other bigger component here is the gain on SBA sales.

We sold USD 23.7 million of SBA loans during the quarter. We also sold USD 9.9 million of small balance insured loans during the quarter.

The combined gain on sale from both of those items is USD 2.7 million.

I think where we're at right now from an SBA standpoint probably is a good run rate for us to think about on a go-forward basis, somewhere in that USD 35 million quarter range.

Looking at noninterest expense, came in at USD 24.2 million compared to USD 23.5 million in the linked-quarter.

Quarter-over-quarter increase here has spread pretty evenly across the categories with employee and director compensation accounting for the largest dollar increases here as we adjust compensation in Q1 of each year.

Lastly, income tax expense came in at 10.3%, representing an effective tax rate at 26.2% compared with an effective tax rate of 28.3% in the prior year quarter.

The lower effective tax rates primarily reflected as a result of a greater benefit that we get, so all of our stock vesting grants occur in Q1 and we recognize a tax benefit for that.

On a runway, I'd expect our ETR to be around 29% on a go-forward basis, assuming we do not buy any further tax credits, which is something we are looking at but not something we would forecast.

Finally, capital remains strong. Shareholders' equity increased USD 24.5 million, 4.1% during the quarter.

Tangible book increased to USD 73.22 per USD 73.22 compared to USD 7.58 at June 30.

Tier 1 leverage ratio came in at 12.11%.

Overall, the quarter reflected strong loan production, healthy purchase loan returns, favorable asset quality trends, and continued capital growth.

The loan volume we saw this quarter by the catalyst as we go into the second quarter of the year.

Now I'll hand it over to Pat.

This is another good quarter on the lending front.

In the purchase space, we looked at 29 loan pools containing 3,700 loans and USD 3.5 billion in balances.

Eight of these had balances over USD 100 million. We bid on 10 of these pools for about USD 600 million and were successful on eight of them, winning just over 40% of the balances bid or USD 254 million at a weighted average purchase price of USD 93.5 cents.

These pools were sourced mainly from banks who were managing internal concentrations and also won an M&A deal.

Included in the pools we won are 89 loans located primarily in the Northeast, California and Florida, purchased at a weighted average LTV of just over 60% and a weighted average yield to maturity of approximately 8.5%. Of the eight pools with balances over USD 100 million, we passed on half of them.

Due to performance issues, undesirable collateral or unacceptable price expectations.

In three cases, we bid on and won smaller subsets of larger pools.

In some cases, particularly on larger pools where we think we might not be the best all bid and depending upon the loan composition, performance, price expectations and competitive set.

We bid on combinations or subsets of loans within larger pools or partner with complementary bidders in order to maximize the chances of winning something.

We did win one large pool with balances of just over USD 100 million. This was a 23-loan pool from a New York area bank that needed to manage its balance sheet and close quickly.

Moving on to originations, in our small balance loan program, we originated 190 SBA loans and 10 GTL loans for just under USD 40 million.

No significant updates there.

For commercial real estate lending, we reviewed 201 loan requests this quarter for around USD 3 billion. We issued 69 term sheets for USD 887 million, of which 36 for $457 million were executed and returned.

Many of these remain active with $259 million closed within the quarter.

This included 23 loans with an average balance of USD 11 million, LTVs of 54%, and an average interest rate of just over 7%. Direct loans represent about two-thirds of these balances. This is a shift from recent quarters where lender finance was predominant, not surprising given increased market demand and rising funding costs for non-bank lenders.

A rising or volatile rate environment has always been good for the purchase loan business and puts us at a competitive advantage relative to non-banks in both the purchased and originated space.

Both pipelines are currently very active, and we're confident of another strong quarter to come.

Rich.

(Operator Instructions).

Our first question comes from the line of Damon DelMonte with KBW. Your line is open.

Hey, good morning, guys.

Hope everybody is doing well today.

First question on the. Good morning. On the margin, clearly lots of moving parts going through it each quarter. And as you pointed out, part of the movement this quarter was because of the elevated payoff.

So, I guess my question is kind of twofold. Do you expect the pace of payoff on the purchase loans to flow in the coming quarters? Or do you think we'll continue to see increased activity like we have the last couple of quarters?

I guess I would say I'm hopeful that the pace of the pay down slows down. I mean, it's not something we can necessarily forecast very well. I mean, with rates going up, that should be favorable for us on that front.

The other thing I'd say as it relates to the couple of loans that Rich mentioned and higher credit marks.

Given the fact that we were expecting to take some sort of a loss on those loans, those are probably the types of loans that we're happy to manage out of the bank.

But overall, I would hope to see pay downs come down going forward.

If all else was like kind of equal if the paydowns flowed, I mean, do you, would we see like a rebound in the margin maybe closer back to what we had in the previous quarter? Or do you think you kind of stay in this, 455 to 465 range?

I think it might rebound a little bit.

A couple of things there.

One is.

We do, depending on the rate mark that's on a given loan that prepays, you could see a bump in margin depending on any level of interest rate mark that we're able to recover at the time of payoff.

So there are instances where it is actually beneficial to us, at least in the short-term, for those loans to pay off.

And the other thing I'd say, assuming that paydowns do slow.

The yield that we have on the portfolios we purchased this past quarter are all pretty healthy.

So it should be net accretive to the margin.

So hopefully it should bounce back a little bit.

Okay.

A feature of our bank, which makes your job more challenging. Is that we frequently use the word lumpy in our business. So, for example, we could have a loan with a small balance on it and a large credit mark, and then when that loan pays off, we have a large amount of income running to the allowance. We could alternatively have a loan that we.

Purchased recently that has a lot of interest rate mark on it, and it pays off early. It could be a loan with, let's say, five years remaining, but so we anticipate we're going to accrete that interest mark over five years, but it pays off in two weeks. That happens also. And so it would be difficult for us.

To provide you with, and the other listeners, any help on that? But I would make the point, that's why, and maybe this is the fantasy world, but we asked to be looked at on a yearly basis where these things sort themselves out quarter to quarter, that number can jump around.

Got it. And I would just add for the record. 457 while lower than some of the previous quarters is a very helping nim, as you know.

Yes. I totally get that for sure. Yes.

Okay. And then maybe like on the fee income line, you had the insurance recovery gains that were booked. Is it something that we can expect kind of more consistently in future quarters or is this kind of an anomaly this quarter?

It's going to occur in future quarters also.

It's hard to tell you guys how to forecast this necessarily because ultimately what's happening is there's no P&L impact of that because while it shows a non-interest income, it's also an increase in the provision.

So the two items net to zero and it just grosses up those two line items in the P&L.

Got it. Okay.

So while our provision or our fee income may be off, the net of those two could hopefully cancel each other out.

Yes, exactly.

Got it. Okay. And then if I just squeeze one more in, on the loan growth outlook, the commentary around the originated loans seems to be very favorable if you look back over the last 12 months.

Think you're probably around 40% growth in that portfolio. Can we kind of expect something that we've seen over each of the last few quarters, something that's comfortably in the 25% to 35% quarterly growth rate, or do you think that dials back a little bit?

Let's make sure we're dealing with the same headline. We expect that originated loan book to continue on the path that it's on.

But you're not saying -- are you saying that you think it increased 25% from the link quarter?

Link quarter annualized? Yeah, the -- Oh, if you annualize it. Yeah, the national lending originated loans. If you annualize that, it was like 34% this quarter.

Yeah. Yeah, I think.

That's probably a reasonable way to think about it, but it all has to do with the level of payoffs. So there are, of course, two components to that. One, how much they originate and two, what are your payoffs?

And in that origination business, we're primarily a bridge lender, either directly when we're making loans directly to the. Owner of the property or indirectly if we're providing leverage to a non-bank lender who in turn is making bridge loans. So, that number, the net growth, again, could vary.

This is why it may be difficult for you. You still like us, Damon?

I do. They're hard to predict.

I do.

One thing that's good is the shift toward direct loans tend to have a longer duration than lender finance loans. So the volume of direct loans is encouraging from that perspective with respect to payoffs.

Our next question comes from the line of Justin Crowley with Piper Sandler. Your line is open.

Hi, Justin. Check to see if you're on mute.

Hey, good morning guys. This is Bader for Justin.

I just had a question on the purchase side.

You know you guys had a pretty healthy amount of activity and appreciate the detail.

At quarter end. I know there are a lot of variables that go into it, but curious how you think higher rates, especially have a couple hikes coming in the next, 12 months, could impact opportunity here and how, that could create more transaction volume maybe, after the next quarter, heading in the next 12 months?

I guess there's two. If you remember back to 2022, 2023 in that rising rate environment, there was a lot of purchase opportunity back then. And there's a lot of reasons for it. But one of the principal reasons with banks is they tend to do fixed-rate lending and fund short. And so in a rising rate environment, there's some portfolio management there for liquidity purposes.

Rising rates also increases the cost of funding for more than us for our chief competition, which are non-banks. So I think those are the two basic reasons why a rising rate environment is good for the purchase business.

The other thing a rising rate environment tends to do is slow down the pace of refinancing out of our portfolio.

Gotcha. That's helpful.

Thank you. And then just thinking about the balance sheet capacity here, if we were to hypothetically assume you'd be able to deploy the $1.6 billion, how much an added expense would need to go along with that? And how would you generally frame the operating leverage that could create?

We have tremendous operating leverage. Of course, $1.6 billion depends on the amount of loans that you have there. But relative to the net interest income you would pick up, it would be very small.

But you could do the math. You could take the $1.6 billion, assume a spread.

And then we'll give you your net interest income.

And I would expect the operating additional cost to do that. It won't be zero, but it's going to be very small to put on another billion six of loans.

Thank you, Peter.

Ladies and gentlemen, I'm showing no further questions. Now we'll turn the call back over to Rich Wayne for closing remarks.

Thank you.

Thank you, Damon.

Thank you, Bader, for your insightful questions.

Thank you to those on the call listening and to those who will listen if they go to our website to hear the tape.

Also a transcript published as well.

Look forward to meeting again in January, towards the end of January when we will be reporting our results for our second fiscal quarter or the fourth calendar quarter ending December 31.

And in the meantime. If you have any questions, feel free to call one of us if we're able to answer it.

We will be happy to. And if you have any suggestions on material that you think would be helpful to include both in the investor deck and on the call, let us know that as well.

That's all for today.

Thank you.