Northeast Bank

Welcome to the Northeast Bank second quarter FY 2023 earnings call. My name is Kevin, and I'll be your operator for today's call. This call is being recorded. With us from the bank is Rick Wayne, President and Chief Executive Officer, J.P. 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 will be referenced in this morning's call. The presentation can be accessed at the investor relations section of northeastbank.com under the events and presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. At this time, all participants are in 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 11 on your touchtone 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 current expectations of Northeast Bank's management and are subject to risk 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. Good morning.

I'm Rick Wayne, and with me are J.P. LaPoi, our Chief Financial Officer, and Pat Dignan, our Executive Vice President and Chief Credit Officer. After our presentation, we would, of course, be happy to entertain any questions that you might have. I want to refer to the slides in my comments, starting on slide three. The financial highlights for the quarter were net income of $11.3 million, earnings per share of $1.54, return on equity of 17.5%, return on assets of 2.1%. Of course, the big news which was included in our earnings release last quarter was that after September 30th, meaning in this quarter, we purchased loans with UPB of $1.15 billion at a price of $998.5 million, which was an 86.6% investment on the purchase price. We also, in the quarter, we originated $174 million of loans. The weighted average yield on the originations was $8.7 and we earned 8.48% on the entire book. On the purchase loans, we had a return of 8.69%. And, you know, when you look at all this compared to the prior quarter, you know, I would note that a year ago, we had $6 million of correspondent fee income and only $600,000 in the current quarter, which is, great because we were looking for ways to grow our loan book and replace the corresponding fee income, which we've done well. And then finally, if that wasn't enough, and it was a busy quarter, we had approved an at-the-market offering for up to $50 million. We were quite busy. I want to now turn to slides four and five and make a few comments on the loan purchases in the quarter. On slide four, we provide detail based on collateral type. The largest collateral types were multifamily, which was 320 million out of the 1.1 billion, retail of 312 million, And then we can see the detail there as other collateral types. Really noteworthy that the weighted average loan-to-value of the $1.1 billion of loans that we purchased was 33.5%. I should repeat that number, pretty low. 33.5% weighted average loan-to-value on our purchases, always focusing on credit quality. We do that. And then on page five shows the geography of it. And you can see that the largest piece of it was in California with $570 million of UPB. And then next, New York, $216 million. And Washington State of $89 million. And then you can see the rest of the UPP on that slide. If we go to slide nine, I'm going to focus for a second on the investment side, thinking about concentration risk by dollars. Our total capital was $270 million. And so you can see that on the very largest size, we only have 12% of our portfolio with loans that are $15 million or greater, 10% between 10 and 15 million. And then you can see the rest. So we do not have a concentration limit on dollars. We're very careful about that. Below that, you can see the collateral types. And then our portfolio now is, The largest state is New York with 33% filed by California with 31% of our portfolio. This is our national lending portfolio, of course. And then the rest in another 42 states. If we move now to slide 19, we're going to talk about the cost of our deposits for a couple minutes. The average cost of deposits, which is what the green line depicts, increased by 141 basis points from 87.87 in Q1 to 2.28% at the end of December 31. And I want to point out that that was primarily the result of funding for our loan purchases where we funded that with broker deposits and some bonds from the federal home loan bank. And so we had a lot of new dollars. In terms of the rate on our existing deposits, that went up by 30 basis points. So you can see most of it was a result of adding new deposits and expensive deposits, more expensive. And you can see our spot rate, which was 303 on the last day of December, was up from the spot rate at September 30, which was 146 basis points. And that, again, primarily was due to the funding of the loans that we purchased, and really primarily with brokered CDs. The brokered CD cost for all that was 443. And those CVs will mature between June and December of this year. And we expect to replace that with funding at about 4%. So that should come down. Next, I want to move to slide 23, which takes a look at our non-interest expense. You may recall from prior calls, we said that we expected we would be about $52 million for the year. And you can see that we're higher in this quarter, but we were lower in the last quarter. For the six months, we're pretty close to that, pretty close to $26 million, which would be what you would expect for half a year. I will say, though, as we added a billion dollars of In our loan book, we will see an increase in expenses in the third fiscal quarter and fourth fiscal quarter as we're going to be adding more people to service the loan book. It'll still be highly profitable, that purchase, but we're going to have some increase in non-interest expense. On slide 25, you can see that our loan discount combined is now $189.6 million, which is an increase of $150 million from where we were at the end of September as a result of buying the loans at a good discount this quarter. And finally, before we take questions, I want to ask you to look at slide 31, which is the last slide. I just want to make a few points on that. As I mentioned in the very beginning of this, one of our goals was to replace correspondence fee income with more net interest income. And if we look at the net interest income for the December 31 quarter, it was at $28.7 million, which is the highest. And that's up from $20 million one year ago. And also, it's important to note that A big chunk of the purchases, what we're reporting here is multiple pools. But the largest one, we did not close until about December 23rd. Am I right? 21st. 21st. Thank you, JP. So, we only had 10 days of interest income from that. And then, of course, going forward, we will have, that will be included, all that will be included. I went through that reasonably quickly, but, you know, we've provided all this information, assuming that you have read it. And, of course, if there's anything we can clarify, we will. And with that, I'd be happy to take questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star 11 on your touchtone phone. If you wish to be removed from the queue, please press star 11 again. If you're using a speakerphone, you may need to pick up the handset first before pressing any numbers. Once again, if you have a question, please press star one one on your touch tone phone. We'll pause for a moment while we compile our Q&A roster.

One moment for our first question. Our first question comes from Alex Turdall with Piper Stanley.

Your line is open. Hey, good morning, guys.

Morning, Alex. I'm Eric.

Morning, Alex.

First off, you know, obviously a lot going on here. Can you give us a little bit more in terms of the characteristics or duration, I guess, that we should be expecting for some of these purchase loans? Just trying to get a sense for you know, what kind of amortization we might see on an annual basis, as well as trying to get a sense for how to think about the, I guess, the regularly scheduled or regularly accretable yields that we should be using or potentially could be using for, you know, to think about modeling for 2023.

I think we can give you some direction. We don't, for competitive and other reasons, we don't publicly disclose on a particular pool or pools in the quarter, you know, what the WAC is, what the LAM is, you know, what we expect. We do report it, of course, as we, when we look back at what happened in the quarter and the year, we report what happened for the overall portfolio. But I think I can give Alex some helpful information on this, on these assets that we bought. One is that these are longer term You know, the way I'm on it could be more than 10 years. And it had lower coupon rates. But that's why we got, you know, the big discount that we did. It wasn't obviously a credit issue given how low the LTVs are. There's some things we know about this and others we don't. You know, we would expect the general returns on this to look like other loans that we purchase, a little bit higher. But, you know, the really big variable is, you know, when the loans pay off as to how much discount we're going to recognize. And I'd say comfortably, you know, we will earn more than eight on this, you know, perhaps meaningfully more than that. You know, it depends on the prepayment speed on it.

Okay. So an eight is, you know, over the lifetime of these loans, right? That's not something that we'd expect to necessarily see immediately.

No, exactly right. Because, you know, I mean, it may happen. I don't think it's, you know, crazy. I think we're going to report more than an eight currently and more. I don't mean more. I mean, but over time, you know, with prepayments and with what we call, you know, shadow interest when we have some loans, you know, you get like default interest and and late fees and things like that. But I think, you know, I think this will look generally like what we've bought in the past.

Okay. And then can you talk a little bit about what drove the volume? Is this coming from several banks or is it a handful? You know, is it an indication of the overall broad market and maybe just a little bit more on sort of the characteristics of what drove this opportunity?

These were I think we had seven transactions in the quarter purchases. You know, the ones that we're referring to here, you know, a good chunk of them were in four of them or three of them maybe. And the biggest one came out of an M&A transaction that the seller needed to and wanted to sell loans.

Okay. And is this, I mean, does this kind of keep your sort of hands full for the time being? Or, you know, I know you've talked about the market being pretty solid. Is there a possibility to continue seeing purchases over the next couple of quarters?

Well, I think we will, you know, sort of generally, you know, normally we buy 100, excluding these big transactions, you know, kind of normally we would buy $150 to $200 million a quarter. No, I certainly at that level would expect that, and it's entirely possible that we could see some larger ones. Oh, I said a quarter, Pat, thank you, a year. This is why I have everyone here, Alex, to help me with these. But, no, a year. And we don't know whether we're going to see, you know, another or big transactions. Certainly within the realm of possibility. But I'm not predicting that. I'm not predicting that, to be clear, because I have expectations.

Right. And then, you know, I know you have the ATM going on, but what sort of constraints would there be on the balance sheet with respect to funding or capital that would be considerations for thinking about future purchases?

Well, the, let me find this.

So at 1231,

After we took our loan book, it's $2.5 billion at the end of December, which is obviously up a lot. At the end of December, our loan capacity, if you look at our capital ratios, it was $150 million. That came back down from a year ago. It was a billion dollars of capacity. It was $150 million. As you know, Al, it's a lot. Our loan capacity will increase as we earn money. And we have the ATM, which if we need to sell more shares to raise capital, we can do that as well. That's all in place. And in fact, I didn't note that in here, but it's in our earnings release. How much do we sell in...

34,000 shares.

We haven't done much of it yet. It was approved kind of late in December, or not very late, maybe mid-December. But we sold those 33,000 shares. So we can sell more shares to raise more capital. I don't see us as capital constrained if we have opportunity, which we're going to keep on the balance sheet.

Great. And can you just walk through the, you talked about some brokered CDs going from, I thought you said 443, and then maturing between June and December of this year, and then finally going down to four. Can you just walk through the amount of that again and the actual numbers?

Sure, Alex. During the quarter, broker deposits went up about a little over $500 million, with the weighted average rate on that being about 443. That was more for immediate funding, not our long-term funding strategy of this. So, you know, our plan is to pledge the loans that we purchased from the FHLB and take out some longer-term advances to better match the structure of the loans. And right now, where rates are from the FHLB advances, we think we can you know, borrow money around 4%, you know, to match some of the maturity of the loan pool. So we do expect the funding costs to come down once we can deploy that strategy as these deposits mature.

Okay. And then you talked about the increase in expenses and, you know, can you give us maybe just a sense for what, you know, how many people you might have to hire or, you know, an efficiency ratio or some sort of guideposts to sort of give us a good, some sort of sense for how much expenses might go up as a result of meaningfully increasing the size of the balance sheet?

I think we could give you a better answer when we reconvene at the next call. I'm not trying to dodge your question, although I don't want to put out a bad number. And we'll have a much better idea then. But I did want to make it clear that, you know, we have a lot of operating leverage in the bank, and it's going to be a relatively small number relative to our expenses and the size of our loan book. I'd rather put that out when we talk next time. We can give you a much tighter number.

Okay, no problem. I think that's all my questions for now. for providing some clarification here.

Thank you. Thank you, Alex.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your touchtone phone.

We have no further questions at this time.

I'd like to turn the call back over to Rick Wayne for any closing remarks.

Thank you. And those on the call, thank you very much for your participation. Alex, thank you for your questions. Good ones, excellent ones. And we look forward to talking again at the end of the current quarter where we can provide some tighter answers to the questions that Alex asked. And with all of that, I say thank you.

Thank you, ladies and gentlemen. This concludes today's conference.

Thank you for participating. You may now disconnect. Everyone have a wonderful day.

Thank you. you you Thank you. Bye.

Welcome to the Northeast Bank second quarter FY 2023 earnings call. My name is Kevin, and I'll be your operator for today's call. This call is being recorded. With us from the bank is Rick Wayne, President and Chief Executive Officer, J.P. 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 will be referenced in this morning's call. The presentation can be accessed at the investor relations section of northeastbank.com under the events and presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. At this time, all participants are in 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 11 on your touchtone 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 current expectations of Northeast Bank's management and are subject to risk 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. Good morning.

I'm Rick Wayne, and with me are J.P. LaPoi, our Chief Financial Officer, and Pat Dignan, our Executive Vice President and Chief Credit Officer. After our presentation, we would, of course, be happy to entertain any questions that you might have. I want to refer to the slides in my comments, starting on slide three. The financial highlights for the quarter were net income of $11.3 million, earnings per share of $1.54, return on equity of 17.5%, return on assets of 2.1%. Of course, the big news which was included in our earnings release last quarter was that after September 30th, meaning in this quarter, we purchased loans with UPB of $1.15 billion at a price of $998.5 million, which was an 86.6% investment on the purchase price. We also, in the quarter, we originated $174 million of loans. The weighted average yield on the originations was $8.7 and we earned 8.48% on the entire book. On the purchase loans, we had a return of 8.69%. And when you look at all this compared to the prior quarter, I would note that a year ago, we had $6 million of correspondence fee income and only $600,000 in the current quarter, great because we were looking for ways to grow our loan book and replace the corresponding fee income, which we've done well. And then finally, if that wasn't enough, and it was a busy quarter, we had approved an at-the-market offering for up to $50 million. We were quite busy. I want to now turn to slides four and five and make a few comments on the loan purchases in the quarter. On slide four, we provide detail based on collateral type. The largest collateral types were multifamily, which was 320 million out of the 1.1 billion, retail of 312 million, And then we can see the detail there as other collateral types. Really noteworthy that the weighted average loan-to-value of the $1.1 billion of loans that we purchased was 33.5%. I should repeat that number, pretty low. 33.5% weighted average loan-to-value on our purchases, always focusing on credit quality. We do that. And then on page five shows the geography of it. And you can see that the largest piece of it was in California with $570 million of UPB. And then next, New York, $216 million. And Washington State of $89 million. And then you can see the rest of the UPP on that slide. If we go to slide nine, I'm going to focus for a second on the investment side, thinking about concentration risk by dollars. Our total capital was 270 million, and so you can see that On the very largest size, we only have 12% of our portfolio with loans that are $15 million or greater, 10% between $10 and $15 million, and then you can see the rest. So we do not have a concentration limit on dollars. We're very careful about that. Below that, you can see the collateral types, and then our portfolio now is, The largest state is New York with 33% filed by California with 31% of our portfolio. This is our national lending portfolio, of course. And then the rest in another 42 states. If we move now to slide 19, we're going to talk about the cost of our deposits for a couple minutes. The average cost of deposits, which is what the green line depicts, increased by 141 basis points from 87.87 in Q1 to 2.28% at the end of December 31. And I want to point out that that was primarily the result of funding for our loan purchases where we funded that with broker deposits and some bonds from the Federal Home Loan Bank. And so we had a lot of new dollars. In terms of the rate on our existing deposits, that went up by 30 basis points. So you can see most of it was a result of adding new deposits and expensive deposits, more expensive. And you can see our spot rate, which was 303 on the last day of December, was up from the spot rate on September 30, which was 146 basis points. And that, again, primarily was due to the funding of the loans that we purchased and really primarily with brokered CDs. The brokered CD cost for all that was 443. And those CDs will mature between June and December of this year. And we expect to replace that with funding at about 4%. So that should come down. Next, I want to move to slide 23, which takes a look at our non-interest expense. As many recall from prior calls, we said that we expected we would be about $52 million for the year. And you can see that we're higher in this quarter, but we were lower in the last quarter. For the six months, we're pretty close to that. pretty close to $26 million, which would be what you would expect for half a year. I will say, though, as we added a billion dollars in our loan book, we will see an increase in expenses in the third fiscal quarter and fourth fiscal quarter as we're going to be adding more people to service the loan book. It'll still be highly profitable, that purchase, but we're going to have some increase in non-interest expense On slide 25, you can see that our loan discount combined is now $189.6 million, which is an increase of $150 million from where we were at the end of September as a result of buying the loans at a good discount this quarter. And finally, before we take I want to ask you to look at slide 31, which is the last slide. I just want to make a few points on that. You know, as I mentioned in the very beginning of this, one of our goals was to replace correspondence fee income with more net interest income. And if we look at the net interest income for the December 31 quarter, it was at $28.7 million, which is the highest. And that's up from $20 million one year ago. And also, it's important to note that a big chunk of the purchases, what we're reporting here is multiple pools, but the largest one, we did not close until about December 23rd. Am I right? 21st. 21st. Thank you, JP. So, we only had 10 days of interest income from that. And then, of course, going forward, we will have, that will be included, all that will be included. I went through that reasonably quickly, but, you know, we provided all this information, assuming that you have read it. And, of course, if there's anything we can clarify, we will. And with that, I'd be happy to take questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star 11 on your touch-tone phone. If you wish to be removed from the queue, please press star 11 again. If you're using a speakerphone, you may need to pick up the handset first before pressing any numbers. Once again, if you have a question, please press star 11 on your touch-tone phone. We'll pause for a moment while we compile our Q&A roster.

One moment for our first question.

Our first question comes from Alex Turdall with Piper Stanley.

Your line is open. Hey, good morning, guys. Good morning, Alex.

Good morning, Alex.

First off, you know, obviously a lot going on here. Can you give us a little bit more in terms of the characteristics or duration, I guess, that we should be expecting for some of these purchase loans? Just trying to get a sense for you know, what kind of amortization we might see on an annual basis, as well as trying to get a sense for how to think about the, I guess, the regularly scheduled or regularly accretable yield that we should be using or potentially could be using for, you know, to think about modeling for 2023.

I think I think we can give you some direction. We don't, for competitive and other reasons, we don't publicly disclose on a particular pool or pools in the quarter, you know, what the WAC is, what the LAM is, you know, what we extract. We do report it, of course, as we, when we look back at what happened in the quarter and the year, we report what happened for the overall portfolio. But I think I can give Alex some helpful information on this, on these assets that we've bought. One is that these are longer term You know, the way I'm on it could be more than 10 years. And it had lower coupon rates. But that's why we got, you know, the big discount that we did. It wasn't obviously a credit issue given how low the LTVs are. There's some things we know about this and others we don't. You know, we would expect the general returns on this to look like other loans that we purchase, a little bit higher. But, you know, the really big variable is, you know, when the loans pay off as to how much discount we're going to recognize. And I'd say comfortably, you know, we will earn more than eight on this, you know, perhaps meaningfully more than that. You know, it depends on the prepayment speed on it.

Okay. So an eight is, you know, over the lifetime of these loans, right? That's not something that we'd expect to necessarily see immediately.

No, exactly right. Because, you know, I mean, it may happen. I don't think it's, you know, crazy. I think we're going to report more than an eight currently and more. I don't mean more. I mean, but over time, you know, with prepayments and with what we call, you know, shadow interest, when we have some loans, you know, you get like default interest and and late fees and things like that. But I think, you know, I think this will look generally like what we've bought in the past.

Okay. And then can you talk a little bit about what drove the volume? Is this coming from several banks or is it a handful, you know, is it an indication of the overall broad market and maybe just a little bit more on sort of the characteristics of what drove this opportunity?

These were I think we had seven transactions in the quarter purchases. You know, the ones that we're referring to here, you know, a good chunk of them were in four of them or three of them maybe. And the biggest one came out of an M&A transaction that the seller needed to and wanted to sell loans.

Okay. And is this, I mean, does this kind of keep your sort of hands full for the time being? Or, you know, I know you've talked about the market being pretty solid. Is there a possibility to continue seeing purchases over the next couple of quarters?

Well, I think we will, you know, sort of generally, you know, normally we buy 100, excluding these big transactions, you know, kind of normally we'd buy $150 to $200 million a quarter. No, I certainly at that level would expect that, and it's entirely possible that we could see some larger ones. Oh, I said a quarter. Thank you, a year. This is why I have everyone here, Alex, to help me with these. But no, a year. And we don't know whether we're going to see, you know, another or big transactions. Certainly within the realm of possibility. But I'm not predicting that. I'm not predicting that, to be clear, because I have expectations.

Right. And then, you know, I know you have the ATM going on, but what sort of constraints would there be on the balance sheet with respect to funding or capital that would be considerations for thinking about future purchases?

Well, the, let me find this. So at 1231, after we you know we took our loan book you know it worked it's two and a half billion at the end of december um which is obviously up a lot at the end of december our loan capacity if you look at our capital ratios you know it was 150 million so that came back down from like a year ago it was a billion dollars of capacity it was 150 million you know and you know as you know out that um Our loan capacity will increase as we earn money. And we have the ATM, which if we need to sell more shares to raise capital, we can do that as well. That's all in place. And in fact, I didn't note that in here, but it's in our earnings release. How much do we sell in...

34,000 shares.

We haven't done much of it yet. It was approved kind of late in December, or not very late, maybe mid-December. But we sold those 33,000 shares. So we can sell more shares to raise more capital. I don't see us as capital constrained if we have opportunity, which we assume we're going to keep on the balance sheet.

Great. And can you just walk through the, you talked about some brokered CDs going from, I thought you said 443, and then maturing between June and December of this year, and then finally going down to four. Can you just walk through the amount of that again and the actual numbers? Sure, Alex.

During the quarter, broker deposits went up about, a little over $500 million, with the weighted average rate on that being about 443. That was more for immediate funding, not our long-term funding strategy of this. So our plan is to pledge the loans that we purchased from the FHLB and take out some longer-term advances to better match the structure of the loans. And right now, where rates are from the FHLB advances, we think we can you know, borrow money around 4%, you know, to match some of the maturity of the loan pool. So, we do expect the funding costs to come down once we can deploy that strategy as these deposits mature.

Okay. And then you talked about the increase in expenses and, you know, can you give us maybe just a sense for what, you know, how many people you might have to hire or, you know, an efficiency ratio or some sort of guideposts to sort of give us a good, some sort of sense for how much expenses might go up as a result of meaningfully increasing the size of the balance sheet?

I think we could give you a better answer when we reconvene at the next call. I'm not trying to dodge your question, although I don't want to put out a bad number. And we'll have a much better idea then. But I did want to make it clear that we have a lot of operating leverage in the bank, and it's going to be a relatively small number relative to our expenses and the size of our loan book. I'd rather put that out when we talk next time. We can give you a much tighter number.

Okay. No problem. I think that's all my questions for now. Thank you for for providing some clarification here.

Thank you. Thank you, Alex.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your touchtone phone.

We have no further questions at this time.

I'd like to turn the call back over to Rick Wayne for any closing remarks.

Thank you. And those on the call, thank you very much for your participation. Alex, thank you for your questions. Good ones, excellent ones. And we look forward to talking again at the end of the current quarter where we can provide some tighter answers to the questions that Alex asked. And with all of that, I say thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Everyone have a wonderful day.