Northeast Bank Q4 2023 Earnings Call Transcript

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July 25, 2023

There are 5 speakers on the call.

Operator

Welcome to the Northeast Bank 4th Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. Would now like to hand the conference over to your speaker today, Rick Wayne, CEO. Please go ahead.

Speaker 1

Good morning, and thank you all for joining us today. I am Rick Wayne, the Chief Executive Officer of Northeast Bank. And with me on the call are JP Lapointe, our Chief Financial Officer and Pat Digman, Our Chief Credit Officer and Executive Vice President, after my comments, JP, Pat and I will be happy I'm going to reference in my comments the investor deck that was uploaded last night. Starting with Slide 3, under the heading Financial Highlights. For the quarter, we purchased $48,800,000 of loans With a UPB of $54,300,000 make a few comments on that Volume, it's a typically the June 30 Quarter is not the busiest in the year.

Speaker 1

And if we go back and look at all of the quarters From over the last 5 years, it's pretty close to the highest amount for that Quarter, it was a $19,000,000 increase over the March 31 quarter. And when we take a look at the activity, and so always back up. So that's that I think is a pretty good number. Absent the large transactions We had in the 4th calendar quarter of 2022, it's more or less the run rate we've been for many years. We did see during the quarter some big transactions that had come to market, but And that is generally true that the bid ask is pretty wide between sellers and buyers.

Speaker 1

And so, it didn't meet our pricing expectations. And so, therefore, we didn't bid on those. We would Based on what we see in the market, the gap between the bid and the ask We'll narrow and there'll be more opportunities to take a look at those. We originated $84,200,000 in The quarter as well, our originated loan book, This is and was therefore our balances were fairly flat with the linked quarter. But over the year, Our originated loan book increased $229,000,000 or 30% from the balance on June 30, 2022.

Speaker 1

What we're seeing is, I would say, a general comment on the market. While $84,000,000 is a good number, it's less than we have done in the earlier part of the fiscal year. I just think there's less transactions in the marketplace right now, again, a bid ask gap In a different context, and we're also we're always careful as evidenced by the 0 charge offs to date in our originated loan book. We're being even more selective now as we're looking at Potential transactions, just some base numbers. The ROE was 16.7% for the quarter 16.5% for the year.

Speaker 1

ROA was 1.7% for the quarter and 1.9% for the year. Our NIM was up 16 basis points from the linked quarter to 4.91, and we ended the year with tangible book value of $38.69 So all in all, we think it was an excellent quarter and year. Let me just drill down a little bit on asset quality, which is on Slide 8. Delinquencies were only 13 $100,000 or 52 basis points on total loans And non accrual loans were $15,700,000 or 55% Excuse me, nonaccrual assets for $15,700,000 or 55% of total assets, Also very good. And you can see on Slide 9, there was movement in the non performing asset category.

Speaker 1

We had $4,300,000 of resolutions and then we put on an additional $5,500,000 So So the linked quarter was up about $1,000,000 but not meaningful in terms of the size of our balance sheet and the numbers and are solid with a low level of non performing assets. On the funding side, The average cost of our deposits was up 36 basis points from the previous I should also point out on deposits, ours are 95% Sure. Between a combination of having Deposits under the $250,000 amount and also using IntraFi and Reach and Tang with two way sweeps to ensure any of those that are over. So 95% insured, obviously, a very good number. And we have seen almost no one off other than normal course activity in our deposit accounts.

Speaker 1

On Slide 21, the non interest expense It was $16,400,000 in the quarter, which is $2,600,000 over the linked quarter, The $2,000,000 of that was incentive comp booked in the 4th quarter, which is what we typically do when We see how the year was. We have, I think, a really Instructive set of new slides in the book, when we meet with investors and others, it's almost the first question It comes up is around our portfolio of office loans. And so we have in the slides, which Pat is going to walk through, a lot more color Those slides, they will help you get a sense as to the quality of those loans. And our plan is to do that over the next quarter or 2 for all of the major Food groups of commercial real estate, including retail and hospitality, multifamily, industrial, etcetera. So, you won't be just looking at one number, but you'll be understanding much better the nature of our portfolio.

Speaker 1

So with that, Pat?

Speaker 2

Thanks, Rick. Recently, we've gone through and Harvested a lot of data on our real estate portfolio, particularly in the office space and Broke the portfolio down by a number of different factors. We thought that the best way to illustrate the flavor of office collateral that we have It was to illustrate by the number of floors. What we typically tell investors is that the vast majority of our Our office portfolio is comprised of low rise buildings with local tenants, that is tenants serving A local neighborhood or community as opposed to more traditional office space that is in central business districts or office parks, that sort of thing. And so as you can see from the first table, The vast majority of our office portfolio is in buildings with less than 5 floors.

Speaker 2

189 of the 2 47 loans are below $1,000,000 with the remainder above and just 10 loans that are higher than Four stories actually. The other question that we get frequently from investors is Concerning the maturity of those loans, many articles recently talked about the CMBS debt It's maturing over the next year or so, over $1,000,000,000,000 and the potential inability of those loans to refinance. And as you can see from the table on Slide 12, about 54% of our office On Slide 13, we've illustrated All of the loans secured with office space that are above $3,000,000 or 1% of capital. This comprises most of the dollars. And as you can see from this slide, Most loans are again low rise as geographic diversity, low dollars per square foot

Speaker 1

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

Operator

Our first question will come from the line of Alex Twerdahl from Piper Sandler. Your line is open.

Speaker 3

Hey, good morning guys.

Speaker 1

Good morning.

Speaker 4

Good morning, Alex.

Speaker 3

First off, Rick, you talked about some larger amount of transaction volume that was coming to market in the Q2. I'm just curious, is that comprised of several Larger transactions or is there a number of more granular transactions or maybe just a little bit more on the complexion of actually what's coming to market.

Speaker 1

You know what, we saw and this is by no means everything that comes We saw, let me just get out the right, dollars 2,500,000 Thank you. Of transactions that were in 34 pools, Some small, do you recall what was the largest one? I wouldn't say it was a 900,000,000

Speaker 2

There was a $900,000,000 pool.

Speaker 1

Yes. One of those, Alex, was a $900,000,000 pool. So there were some very large ones and then there were some smaller ones. But there was a big chunk of those that almost 60% of what I'm describing, The yield, we just went there on the seller's expectation on price. And then there was others that were we didn't bid on because it was undesirable collateral or we didn't agree with And so we wound up bidding on 100 and $65,000,000 of UPP, and we wound up winning $54,000,000 So just to summarize your question, there were some large ones, there were smaller ones And we got roughly a third of what we bid on and there was a lot that we did not bid on because of the sellers' Pricing expectations, as we've mentioned in previous calls, it's a lot of cost and time to do the underwriting that we do on these and we're not going to get there on price, We don't do all of that work.

Speaker 1

Not that we're afraid of hard work, we work hard, but using what there's a purpose and It's a goal that's attainable.

Speaker 3

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

Speaker 1

Yes. Some did not trade, as I understand it. And Pat, you want to respond to that?

Speaker 4

There was a couple

Speaker 2

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

Speaker 3

Got it. And then can you just spend a couple of seconds or a couple of minutes talking about your Taking capacity for some of those larger pools, obviously, you did one in the 4th quarter, very large one relative to you. But to the extent There are some larger pools like that $900,000,000 pool or some even in the $1,000,000,000 range. In terms of Your ability to actually do some of those deals or your appetite, I guess, maybe talk around what the constraints would be and How you might go about approaching something that's a little bit larger?

Speaker 1

Well, the Our capacity loan capacity now based on our existing capital is about $450,000,000 And to point out at the end of December, So as we entered our 3rd fiscal quarter, it was about $100,000,000 and that capacity increased through a combination of Earnings and we raised $8,000,000 to our ATM Offering. So I think that our capacity to do We have great interest in doing a big transaction. For example, the $1,000,000,000 that we bought in the 4th calendar quarter has given us such a base now that just our basic core earnings are up significantly And we'll be going forward because of that and we would like to do more. How much more It would require us to depending on the timing of it, you have your own model, of course, as to what you and we don't But those numbers count as to what we're going to earn, but you could take a look at what you project and figure out how much capacity we would have, which would be augmented by loan payoffs. And I'm not saying we're going to do this so at all, but we could also raise more money through our ATM offering.

Speaker 1

Fortunately, our stock prices Come back very nicely. We're trading at a nice price now. And I would just add on what we're seeing and the stuff we like, which is what we bought in the Q4. We're seeing now is really low LTV. And So we don't want to take any undue credit risk at all.

Speaker 1

So we like to say we're not in the business of Those in principle here, but if we and we're seeing that with low LTV loans that are coming to market. I hope that was helpful enough, but if you have any follow-up on that point, please.

Speaker 3

That's good color. I guess just my final question on the purchase market. For some of the Transactions that are trading during the quarter, is it other banks in as the buyer? Or is it are you competing mostly against private equity And other specialty finance companies.

Speaker 1

Well, we bought as I mentioned, we bid on 165,000,000 and we bought 55,000,000 for $54,300,000 There, Pat, do you want to comment on that? Do you know who the what you're saying?

Speaker 2

It's largely There's also 1 or 2 funds that competed in our space that are have very cheap cost of funding that We often compete with. I know we lost to one of them in one of the bids, but that's largely thanks.

Speaker 3

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

Speaker 4

Yes. The expectation there, Alex, is the allowance is going to go up significantly. As you see in our presentation on slide number here, we have a good amount of Credit related discount, non accretable discount about $23,000,000 of non accretable discount on Slide 23 at June 30. Almost all of that will move into the allowance from the discount, so the loan balance will go up and the allowance will go up accordingly. And then we'll probably be somewhere around where we are and what's in there now for the originated portfolio.

Speaker 4

So If you take what we have now and add in the most of the non accretable discount, that's approximately where we'll be with our CECL calculation Upon adoption? Okay.

Speaker 1

So, JP, just to summarize, you're saying then We don't expect the adoption of CECL to have any there won't be any meaningful income statement effect on the adoption.

Speaker 4

Right, Right. Correct.

Speaker 1

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

Speaker 3

correct.

Speaker 1

Okay. And

Speaker 3

does the $23,000,000 does that get reclassified from capital to the From capital to the ACL?

Speaker 4

No. Just from the discount against the loan. So The loans get grossed up, so purchase loans will increase by $23,000,000 and the allowance will increase by $23,000,000 No capital impact from that upon adoption.

Speaker 3

Okay. And does anything change with CECL with the purchase model? Just Remind us, in terms of the accounting going forward, I guess, would we see higher levels of provisioning Associated with some loan purchases because of that non accretable piece?

Speaker 4

I can answer that currently and prospectively. So currently, yes, Based on how the CECL guidance is written now, when we purchase loans, you would have to provide for an allowance through the provision for loan losses. However, FASB has a standard that they are finalizing at the end of August that will allow purchasers of purchased financial assets to take some of the discount and move that into Discount allocated to credit at purchase.

Speaker 3

Okay. That's really very helpful. And then

Speaker 4

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

Speaker 1

the yield anymore, but will be in

Speaker 4

the income statement still. Okay. Great.

Speaker 3

And then Going back to expenses, I think you said $2,000,000 of expense dollars 2,000,000 higher in expenses. So that kind of puts your run rate on expenses And in the next quarter back closer to where it was in the Q1 or the Q1 calendar quarter, is that correct?

Speaker 4

Yes.

Speaker 2

About that, yes.

Speaker 3

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

Speaker 1

Thank you, Alex.

Operator

Thank you. One moment while we compile the Q and A roster. I'm not showing any further questions in the queue. I'd like to turn the conference back to Rick Wayne for closing remarks.

Speaker 1

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

Speaker 1

So have a nice day. Thank you all.

Operator

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

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