Northeast Bank

Welcome to the Northeast Bank Third Quarter Fusca Year 2023 Earnings Conference Call. My name is Livia 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 Dickman, Executive Vice President and Chief Operating Officer. Yesterday, an investment 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 reply calls 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 the current expectations of Northeast Bank 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 send the call over to Rick Wayne. Mr. Wayne, you may begin.

Thank you, Lydia. 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 pandemic. of failures of silicon valley bank and signature bank and kind of the main points that are are out there um you know one i want to talk about our deposits first we have 2.13 billion dollars of deposits at march 31 and this is important of which 92 percent are insured and three percent 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 them, but we are just uninsured and not in restricted accounts. As soon as the news broke around those two banks, we contacted all of our deposit customers in descending order based on balance to offer full insurance on their deposits through IntraFi, which is formally promontory. And some of our, most of the customers, you know, 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. Really, no. None of our customers are thinking about taking their deposits out now, something we are obviously pleased with and proud of. A second issue that I want to compare our bank with what happened to some of the other two. Those banks wound up having a mismatch between their deposits and their investment portfolio and invested in longer duration treasuries. 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 one- or two-year agencies. Our investment portfolio has a weighted duration of 13 months, and currently the unrealized loss is only $860,000 pre-tax 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 three. And we have a very wholesome slide deck that we I'm only 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 Triple P loans and had gains from those that is our 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 a comparable ROA of 1.8%. Our tangible book value at the end of the quarter was $37.02, growing a little bit less than $2 from the December 31 quarter. We also sold 160,000 shares of stock under our ATM at the market offering at an average price of $42.78. And finally, our loan volume was purchased and originated $144.5 million. Turning to slide six, 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 the very large purchases of around $1 billion. But the first calendar quarter, March 31, our third fiscal quarter, is commonly a low-volume quarter. If you look at going back a year, we had that. It was 23.9 million a year ago. Now, occasionally it's higher. But, you know, 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 requests 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. It's not as strong as it's been in the preceding quarters. If we go to slide seven, you can see the distribution of our portfolio And I 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 less than $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 three states, and then you can see on the chart the rest of them were in 44 states. Sometimes, this is just a fun fact, people ask which 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 eight, these are asset quality metrics, and quite strong. You can see that at the end of the quarter, The ratio of non-perform loans to total loans is only 58 basis points, which if we go back to June 30, 21, it was 180 basis points. So two 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. We move to slide 15. We have a few comments about our deposit costs and our deposits on slides 15 and 16. I think I want to highlight, one, the average cost of deposits for the quarter was 323, and the spot rate, that is to say the rate on March 31 was 335, and it's not on this slide, The spot rate at December 31 was 303, so it's kind of 32 basis points in the quarter. On slide 16, we break out the source of the deposits by channel and the rates. You know, first I want to highlight that if we were to aggregate those in the banking center, which is $615 million. I'm doing some rounding. To our national lending customers, which is $61 million. Able Banking, which is $35 million. And the holdback, which are primarily reserve accounts. That is a total of $776 million out of $2.13 billion, or 36%. I highlight these because these have lower rates, a weighted average rate of 138, 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 451. You know, I would point out that as those roll over, you know, the increase will be nearly as much as it had been in the past as we have added those in our funding. If we go to slide 19 and we take a look at our revenue compared to our expenses, the revenue was $33.4 million for the quarter, which increased $3.3 million from December 31. 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 discount on our purchase loans of a shade under $190 million, of which $166.5 million is accretable, which we bring in steadily over time. In the non-accretable portion of $23 million, we recognize when a loan pays off. That's a lot of discount on our books, a lot of income that we'll be bringing in over time. 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 that was the highest amount of net income if we exclude those three quarters where we had gains from the sale of Triple P. And I believe if we go to slide 25, and we look at first the blue bar 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 four preceding 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 impact that's having on our income statement. Those are the comments that I have. I should mention that JP LaPointe, our Chief Financial Officer, is here with me as Pat Dignan, our Chief Operating Officer and Chief Credit Officer. He's a double chief. So we're all here to answer any questions that you might have.

Ladies and gentlemen, We will now begin the question and answer session.

If you have a question, press star 11 on your touch-tone phone. If you wish to be removed from the queue, press star 11 again. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, press star 11 on your touch-tone phone.

One moment, please. And I'm showing Alex Wordall from Piper Sandler's online with a question. Alex Wordall, your line is open.

Good morning, guys. Good morning. I wasn't sure if I pressed star 1 once or twice there. A couple questions here for you guys. First off, just on that almost $190 million of discount, can you talk a little bit about sort of the life of the portfolio there and what you saw this quarter in terms of early paydowns, you know, and maybe talk about, you know, whether or not it was expected or unexpected what happened 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 you know, any thoughts around whether or not this quarter was typical or if it was maybe light or heavy?

Well, in this quarter, I'm just going to go on the slide too. I want you to in a second, but first on the purchase portfolio, Paydowns were generally slower. You know, the rates are, a lot of the loans that we have purchased, particularly in one of the pools last quarter was $700 million in WPD and $600 million to pay for it. So there was a lot of discount there. You know, I would have described those loans, they were, When originated, we're typically five-year loans that had a low, by today's standard, fixed rate for the first five years and then going to floating after that, of which some of them already are floating and others are going in. But the paydowns were not as great, you know, as they had been, I would say, historically on those for the, you know, understandable reason if you have a low rate and you have creditors No still term left in which that would be fixed. I know unless it was a life event of some sort, selling the real estate or if it was owner-occupied, selling the business and the real estate or someone died or otherwise had a need, you know, to deal with that, you know, you wanted to take out more money because they have very low LTVs on that in the low 30s. He wouldn't be as inclined to pay it off. So I think that it was lower in that. And also lower in our, and I can put a number on that on slide five now that I'm looking at it. The purchase runoff was $44 million on a billion and a half dollar loan book. And now I'll come back to the origination for a second. So the answer, A little bit more of your question. 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 due to credit, but due to interest rate. And if they do pay off, you pick up a fair amount of income. You know, it started off at a slow start. That really wasn't surprising to us in the environment we're in now, but our expectation is that, you know, that will pick up. You know, in one of the previous calls, Alex, you had asked about, you know, what our yield on the return on the purchase book was under eight. You know, we think it was going to wind up at that time. And I said I thought it would be, you know, at least eight for the year. And I suspect we'll be pretty close to that. We'll see what happens in the in the fourth quarter. And with respect to the Originated book, that also, the paydowns, JP, do you have the numbers on the Originated, Rebecca? The Originated 117, oh, thank you. JP pointed, it was right in front of me. So we originated at 117, we had $86 million of one-off. So while our origination amount of 117 was lower than in previous quarters, it still grew that loan, both the originated loan book group as the pay downs were less. I touched on a lot. Is there more on that, Alex?

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 purchased, you know, I guess available for sale portfolio market.

Pat, you want to comment on that?

You know, the first calendar quarter is typically a low-wage quarter in the purchase market, and there's been, There's been a fair amount of activity. Obviously, there was a lot involved with both signature and AVB. Otherwise, we haven't seen too much yet from on the distressed side. Not that that's really our wheelhouse anyway, but there continues to be. Most of the stuff we've seen has been mergers or mostly mergers. 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's hoping for.

I have some numbers that I think might be helpful to answer your question. We put together a funnel report on purchase markets to see what we looked at and what we wound up buying. And so we saw last week, 20 pools of loans for 970 million UPP. And out of those, there were almost $300 million of loans that we, pools that we just didn't do any further work on that we tossed out because of either performance, undesirable collateral, where there were underwriting issues for us. We couldn't get what we needed. And so there were 674 million after that 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, the seller withdrew the assets for sale. So then that left us with $29 million or four pools, 50 relationships that we bid on. And out of that, we won, or out of that, I should say, $5.4 million we lost on our bid because of our, you know, we couldn't get to the yield that we needed. And we wound up winning 20 upb of 24 million for 44 loans so we started out at 970 million and wound up closing 200 and i mean 24 million of those and then you know the biggest chunks were that well i have to repeat what i just said to that That's what happened with the purchase market.

That's not an atypical volume for the market. You know, it's a big market, and our piece of it is a great touchdown 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 pulled 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's a lot of situations where the FDIC has partnered with various banks and funds in sort of a structured transaction model. I'm curious if that's something that would be of any appeal to you or if it's really just bringing it on balance sheet that makes the most sense.

Well, as I do to the listeners, I'm sure you'll notice I was there to point out, historically, the structure, not everyone, but the general structure, and we don't know what this will be, and Newmark is acting as a long-term advisor to the FDIC. But if this is a structured transaction, the one historically that they've done is they put them out for bid. And then what they, you know, 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 put some numbers to that. There's an $18 billion portfolio in that pool of multi-family loans. And these are just numbers for explanation. I have no idea what the numbers will be. But let's say it's traded for $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 that would go to it, and the buyer would own the 20% interest in that LLC. And then there's some other structuring points. Typically, if it's been a third-party servicer and compactor, it's been a promote. And we'll 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. Okay. And a lot of those loans I said, a signature was a very big multifamily lender, and a lot of those in New York are loans that have the properties that have rent stabilization or might have a tax abatement under Section 421A. So there's a lot to figure out there.

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

So, Let me just start, Pat. So the purposes of the deck, and we say this in the deck, in the case of purchase loans, we use the calculation of the current balance and we compare that with the valuation at the time that the loan was originated. And because a lot of these loans, if we go to page, When is the seasoning page in here? We go to page 13. You know, you can see that out of our billion 460 total, 440 million, let me say it differently, about a billion dollars was originated before 2019. and the paid ends 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, the value we use is when the appraisal was done. And for the most part, it was, that's done in the last year, 18 months. You know, you raise a fair point about, you know, values going down since, and we're very, just to be clear, You know, we're explicit as to how we do the calculation and the deck. You know, one of the things we will be taking a look at and we will update calls for this in the future, you know, to the extent there's, you know, meaningful change in values, we will highlight that as well. Pat, do you want to answer that?

Well, I think you got it.

Yeah.

Well, maybe it's just that we, you know, we frequently update. We look at valuations orderly. And we do a lot of stress testing around values, you know, where the cap rates are moving up and expenses are moving up and 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'll be some movement on the valuations. But historically, we've taken a relatively conservative approach. So, yeah.

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, you know, whether or not the bulk of the deposit repricing has already happened. And as that portfolio amortizes or pays off, you know, potentially, you know, there's not a lot more in terms of deposit repricing higher that we could see.

Thanks, Alex. The majority of the deposits that we put on last quarter for the purchases, especially the big ones, were laddered 6, 9, and 12 months. So of that purchase, what we funded was broker deposits. About 50% was 6 months, which would mature in June. 25% was 9 months, and 25% was 12 months. So September is the summer maturity on those. We did have some other broker deposits that we took out last quarter with shorter terms, but primarily the bulk of it, the $350 million that we did there was $69 to $12.

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

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

And the weighted average rate of that?

Of the Berkeley money at March 31st is $4.47.

$4.47. Okay. So we have adults on those that are maturing, maybe, and that would be around 50 basis points of increase if we had to replace them today at five.

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

Yeah, well for first there were. They were higher in part one because of the increase in deposit insurance. You know, and then we had we did and what that's about. What is that 363,000 345,345,345,000 for that. And then we had some higher professional fees in there. In the next quarter. You know, I think that we'll be hired most likely because we have incentive comp that we chew up in the fourth quarter. And so, you know, there could be more for that, you know, for all of our employees. But I think kind of on a runway, you know, what you're seeing in the third quarter is, you know, more or less about what we would expect it. That was 13.7, but adding more people and have to add a few more might be, you know, 14 million, maybe a good number now that the balance sheet's a lot bigger. Other than that, as I was saying, in the fourth quarter, you know, it's kind of, you know, it would be that plus what goes in there for additional incentives.

Got it. And then my final question, just noticed some gain on sale of the SBA loans 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 and that program? And are we starting to see a little bit of that come through on the income statement?

Yeah, the group is, annuity where we have a five year exclusive marketing agreement with that they've been going to market. And, you know, initially trying to get the borrowers, triple people, always 115,000 that were on loan source, put the loans on to market to them a small balance SBA laws under 7A, a lot of them under 25,000, and then more up to 250. They're kind of averaging about $75,000 a month, plus some are set to 25 and some are bigger. It looks like they're running now at a run rate three to four million, where we sit today, three to four million dollars a month. So it's improved a lot. It's not where we think it can get to. I should be careful. I'm not going to reread the forward statement, but, you know, so, you know, on the amount, we'll see what happens. We'll slow it down, but that's the momentum now. The technology has improved dramatically. Their 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 would be a small amount higher. We'll see. And in very round numbers, the gain on those sell for, it's about 10% as a little bit more, maybe 11. Oh, 10, I think that's probably a good average to use. You know, if they do, say they think $4 million a month, you know, that's $12 million a quarter. And our share of that is about $600,000. And then we wind up holding on our balance sheet. The unguaranteed part is guaranteed. Part of the loan is not sold. And if there are any losses, we'll pay half of them.

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

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

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

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

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