Northeast Bank Q3 2024 Earnings Call Transcript

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May 1, 2024

There are 5 speakers on the call.

Operator

Welcome to the Northeast Bank Third Quarter Fiscal Year 20 24 Earnings Call. My name is Gigi, 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 Richard Cohen, Chief Financial Officer and Pat Dignan, Executive Vice President and Chief Operating Officer. Yesterday, an investor presentation was uploaded to the bank's website, which we will reference in this morning's call.

Operator

The presentation can be accessed at the Investor Relations section of 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 Later, we will conduct a question and answer session. As a reminder, this conference is being recorded. Please note that this presentation contains forward looking statements about Northeast Bank.

Operator

Forward looking statements are based upon the current expectations of Northeast Bank's Management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward looking statements. Northeast Bank does not undertake any obligation to update any forward looking statements. I will now turn the call over to Rick Wayne. Mr.

Operator

Wayne, you may begin.

Speaker 1

Thank you. Good morning, and thank you for joining our investor call. With me are Pat Dignan, our Chief Operating Officer and Richard Cohen, our Chief Financial Officer. This morning, after I have my comments, Richard will discuss income and expense items as well as our at the market offering and Pat will discuss in more detail our purchased and originated loan activity. After we have all presented, we would be happy to answer any questions.

Speaker 1

I'd like to first turn to Page 3 in the investor deck and highlight a few items. First of all, big picture, we thought was a very strong quarter. We had net income of $13,900,000 or 1 point $8.3 of earnings per share. Our ROE was 16.45%. Our ROA was 1.87 percent and our NIM was 5 point 1%.

Speaker 1

Finally, the tangible book value was at the end of the quarter $44.11 First, I want to talk about loans. And as I said, when I'm finished, Pat will fill in a lot more details, but I want to provide an overview. For the quarter, we originated $153,000,000 of loans and there were no purchase loans in the quarter. But with respect to the purchase loans, of course, there is a story behind this, which Pat will explain. It's not bad news, it's good news, but Pat will talk about that.

Speaker 1

The purchase volume, I would point out, is typically lower in the Q1 of each calendar year. For FY2023, it was $21,500,000 and for I'm comparing the same quarter, I should be clear on that because we're at June 30 at year end. And for the same quarter, the 1st calendar quarter of 2022 was $23,900,000 So both of those are relatively small numbers. In part, there's not the same urgency for sellers in the 1st calendar quarter when there has been a lot of activity in the 4th calendar quarter, which was the case for us. I also want to talk about the originated loan book in a little bit more detail.

Speaker 1

Out of the $153,000,000 of originations in the quarter, dollars 143,000,000 or 93% were in our lender finance program that is to leverage non bank lenders in their lending, which we really like that part of our originated portfolio. They're all floating either tied to sulfur or prime. Most of them have floors. And the weighted average of that new production where rates are now is 9.3%, which is quite strong. The lender finance portfolio, and now I want to talk about our whole portfolio, at March 31 was 5.30 $2,000,000 of our originated loans, representing a 63% advance rate against our borrowers' loan balance and a weighted average loan to value of 44% against the underlying collateral.

Speaker 1

Obviously, quite strong with low LTV and low advance rate. We have the underlying borrower, we have our borrower, all in the capital stack providing protection to our loans. I also want to point out something that we don't talk about that often, but it's worth noting is that in our purchase loan business, because we're buying at a discount, generally because of interest rate adjustments and occasionally because of credit adjustments, we have a lot of discount on our books. We have 100 and at March 31, we have 174 $1,000,000 of accretable discount on our purchase loan book. Just to remind you, accretable discount we bring into income over the life of the loan.

Speaker 1

And we have almost $18,000,000 of allowance on the purchase loans, which to the extent, we collect that, which typically we collect a fair amount of that, will come into income through the allowance. And so that the combined about that is about $191,000,000 $2,000,000 of accretable discount and allowance we have on our balance sheet, which bodes well for us. The other point is this is kind of good and bad. The very nature of our originated loan booking loan book and our activity is primarily our bridge loans. They have a weighted average life at least historically of 1.6 years, so it's short.

Speaker 1

The benefits of that kind of lending are we get very premium pricing for it, because there's not that much competition for banks doing the kind of bridge lending that we're doing. That's very good. 2nd benefit is because it pays off so early, we have a freshness to our existing loan book because it's turning. And at the I have some data on that, for fiscal year to date, so for 9 months, we originated a total of $285,000,000 of loans and we had $297,000,000 of pay downs. So that means a lot of that portfolio is paying off and we're replacing it with loans that have just been underwritten more recently.

Speaker 1

I would point out that normally our originated loan book grows in this case since beginning of the year it has decreased as I as you can see from the $285,000,000 of originations versus $297,000,000 of pay downs, That is not what we expect to happen longer term. And Pat will talk about the originated loan activity to amplify that point. Finally, before I turn it over to Richard, I want to talk about asset quality. Our non performing loans in the quarter decreased from 118 basis points to 105 basis points. And the allowance to gross loans has decreased from 1.06% to 0.98%.

Speaker 1

The charge offs in the quarter were a total of 25 basis 20 basis points, excuse me, but 15 basis points of that was just CECL related. When CECL was adopted, we under the CECL rules, we needed to gross up some of our purchase loans and then have an allowance for the amount that we gross that up. So for example, if we bought a loan that was say a $50,000 loan, but we didn't pay anything for it in the pool bid pre CECL, we would have carried that at 0. Post CECL, we show the loan at $50,000 with a $50,000 allowance. So with respect to 15 basis points of the charge offs, they are in my example attributable to the gross up of the loan and the allowance was set up.

Speaker 1

So the charge offs as you would normally think of it against our principal was 5 basis points. And I think with that, Richard?

Speaker 2

Great. Thank you very much, Rick. We are going to run through a few items as Rick mentioned, the net interest income, the cost of funds, the non interest expense and a discussion about the ATM offering. From a net interest income perspective, the bank generated in the Q3 $36,500,000 of NII. That $36,500,000 included $1,200,000 of transactional income.

Speaker 2

In other words, if you exclude that transactional income, the base NII was $35,300,000 and that is higher than we've seen in historic quarters. The key reason for the NII was the larger balances that generated that yield. The yield on the purchased book was 8.7%, on the originated book was 10.1%, giving us a weighted average yield on national lending of 9.22%. If we then take a look at the cost of funds, which then generated the net interest margin that you heard Rick speak about being 5.01%, the cost of funds was 4.23% on a weighted average basis. That is up 15 basis points compared to the 2nd quarter and you can refer to Slide 15 if you want to get a sense of that.

Speaker 2

We had a change in the mix of deposits in the bank in the Q3. We had an increase in our term funding and a corresponding decrease in FHLB borrowing. Let me break that down quickly. Our brokered certificates of deposit, the BCDs, were up $132,000,000 whereas the FHLB borrowing was down by $96,000,000 That was a deliberate effort by us to increase our off balance sheet capacity. Turning now to non interest expense.

Speaker 2

The non interest expense for the quarter was $16,400,000 There were 2 key components to that. The key change that was that you will notice is there was a $1,050,000 accrual for the incentive compensation. That was a true up because of our expectation on the annual total and we accrued 3 quarters of the total annual expense. Ordinarily, we take that true up in the 4th quarter. If you strip out that $1,050,000 you're left with non interest expense of $15,400,000 which is the comparable non interest expense in comparison with prior years.

Speaker 2

Turning now to the ATM offering. You'll recall that that is the bank selling shares in order to raise capital in the market. For the quarter, the bank sold 180,000 shares. That generated proceeds per share of $52.34 and the total dollar proceeds from the ATM in the 3rd quarter was $9,400,000 The impact of that on our tangible book value was $0.31 per share. The reason for the ATM is that we believe there are significant opportunities to both originate and acquire loans given the current level of activity in the markets.

Speaker 2

Those sort of transactions are typically lumpy as has been mentioned before and we see the ATM as one of the tools we have available to us to enable us to achieve our business objectives. I'll now turn over to Pat Stignan.

Speaker 3

Thanks, Richard. Despite no loan purchases last quarter, there's really nothing unusual about the quarter. As Rick pointed out, the 1st calendar quarter is generally slow on the purchase side as most sellers are really not focused on balance sheet repositioning that earlier in the year. Having said that, we did review several opportunities that are rolling into this quarter. And we have confidence that there will be meaningful volume in the 4th quarter.

Speaker 3

And we're confident that if you look at the entire fiscal year that we'll have a very strong year for purchase loans overall. Moreover, if interest rates remain at these levels, we expect purchase loan opportunities will increase in the second half of this year. On the originated side, the past two quarters were slower than normal due to less transaction volume generally, mostly due to large disagreements on value and also because of high interest rates. There's also a more conservative posture on our part, especially around cap rates. Transaction volume appears to have picked up as evidenced by increased volume in CMBS, most likely due to growing confidence in the market.

Speaker 3

There's a lot of new capital in the lender finance space creating increased competition. The silver lining through this is that there's an increase in the need for bank leverage. Of our total originated volume this quarter, 90% was in the lender finance space and the vast majority of this volume will continue to grow into the next quarter. Eric?

Speaker 1

Thank you, Pat. Thank you, Richard. Now we will turn it over to you for any questions that you might have.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of Alex Twerdahl from Piper Sandler.

Speaker 4

Hey, good morning all.

Speaker 1

Good morning, Alex.

Speaker 4

First, Pat or Rick, on that last point, Pat, that you were making on the need for bank leverage. And I think you said something about as it related to pickup in CMBSs. Can you just go into that and explain exactly what you mean by the additional need for bank leverage there?

Speaker 3

Well, it's just been a lot of capital being raised by non bank lenders to get into the real estate space, coupled with just fewer transactions overall, those non bank lenders need to be very, very competitive on rate. And so leverage helps them do that. And so that's been good for us.

Speaker 4

All right. Thank you for spelling that out for us. So on the I guess just starting on the originated activity this quarter, and I guess as I look at the yields, the yields overall were over 10%. I think Rick, you mentioned the weighted average production was 9.3%. So is there something in there, some acceleration of interest that pushed those yields higher this quarter?

Speaker 1

Well, I gave the number for the 9.3 was for what we booked in the quarter. The overall number, let me just get of the 10% is that includes our whole portfolio. So we have some loans that are higher. And for this quarter's production, we didn't have any transaction, any acceleration of any of that as we have. So if you look at on the slide in the book number 22, Alex, in the originated column, this is now our whole portfolio.

Speaker 1

So you can see that the regularly scheduled interest and accretion on the whole book is 966. Dollars And so, this is really back of the envelope math. If we have this quarter, we did $153,000,000 at 9.30 3, the ninethirty 1 rather. The other part of the legacy portfolio coming into the quarter was probably more like $9.70 or $9.80 because it was more of the portfolio and the rate was higher. But what we didn't have for the number I quoted was any accelerated accretion because we just booked it.

Speaker 1

And you can see that for the whole portfolio, there was 43 basis points, which took the 9.66 percent to 10.09%. For all the others that are listening, that's a lot of numbers I threw out. I think if you look at Page 22 of our slide deck that will be clear for you, hopefully.

Speaker 4

Okay. Appreciate that. And then you talked you alluded to some opportunities out there for loan purchases in the coming quarters. Could you just remind us sort of what your appetite is in terms of loan sizes, loan pool sizes, both in terms of and then maybe kind of overall purchase capacity both in terms of capital and capital constraints. And then also just in terms of just the sort of the capacity with your current workforce to be able to manage through some of that stuff.

Speaker 4

I know that's a several part question, but I think there's been a lot more conversation about some big pools being potentially sold in the near term. And so we just want to be able to make sure we're lining up what your appetite is with what other people are talking about as well.

Speaker 1

So my next comments will be and the numbers will be rounded. I don't have those exactly in front of me, although we have them. But we have about $550,000,000 or $600,000,000 of loan capacity now if we were to leverage our capital to a level that we were comfortable with. And that, of course, gets increased as we if we were to sell stock under our at the market or the ATM offering that we have out there. And of course, also increased by earnings every quarter as well.

Speaker 1

And so we're not so we have a lot of room to without raising a lot more capital outside of the ATM, for example, just kind of where we are to put a lot more purchase loans on our balance sheet. In terms of what we'd like, we're not limited particularly by pool size, subject to what I just described as our overall current limit, our overall loan capacity. But when we look at loan pools, it's more we look at them loan by loan. And we have both a legal lending limit in terms of the size of the loan under main law of 20% of total capital, but we never get that close. But with that, our house limit is more like 10% of that number.

Speaker 1

But our sweet spot on purchased loans are anywhere if it's a big sweet spot, call it, dollars 1,000,000 to, call it, dollars 10,000,000 or $12,000,000 Occasionally, we have a larger one and sometimes we have smaller ones. And we have a slide in the book on Page 7 that makes the point. Now this is for all of our lending that shows that only 17% of our loan book are loans that are $15,000,000 or more. And so I mean, 83% of our loan book is less than 15,000,000 dollars and only $8,000,000 or 8% is between $10,000,000 $15,000,000 So I'll say it another way. 75% of our loan book are loans that are less than 10,000,000 dollars with a big chunk between $26,000,000 and under $2,000,000 In terms of the kind of loans that we look at, we're looking for outperforming loans.

Speaker 1

We're looking for loans that are generating sufficient cash flow, we have a preference for loans that are in liquid markets, so that if we ever have to take back the collateral, which is rare, that there's a market for those. We generally stay away from and way away from construction loans or land loans or development loans or the things where there's historically been a lot of risk for that. Our portfolio is while we're in 44 states and we keep track of that, but don't ask which states were not in place, but we do keep track of it. Our biggest concentrations in New York, followed by California, followed by Florida and New Jersey, but then we're around in a lot of other states. And we also on purchase loans, we get whatever the interest rate and the structure of the loan is when we acquire it.

Speaker 1

That's a lot of information on your question. I hope it was relevant information that I've given you all that to what your question is. And you didn't ask exactly about this, but I want to just amplify a little bit Pat's comment about no volume in Q3, but there were transactions we were knee deep into that have rolled into Q4. So we're expecting, of course, with the caveat is not done until it's done. We would expect meaningful volume in the our 4th fiscal quarter or the one that we are currently in.

Speaker 3

Last part of your question was on staffing and I'll just add Rick's comments that we're fully staffed on the lending side and have capacity to absorb more volume if we can find it.

Speaker 1

A lot of operational leverage on that. Thank you, Pat, for pointing that out.

Speaker 4

Yes. That was I mean, that was I guess if there was another $1,000,000,000 plus purchase like we saw a couple of years ago, if that would be, absorbable in the current staff and it sounds like the answer is probably.

Speaker 1

That's not probably. It's, yes. Subject to adding maybe 1 or 2 people, but I don't want to have any first of all, I'm not suggesting at all. I'm just responding to your $1,000,000 question, $1,000,000,000 question that, as Pat said, we have a lot of people here already and maybe some more entry level folks to help with part of it, but there's a lot of operating leverage. And you can here's what I was going to say, you can do the arithmetic.

Speaker 1

I don't want to say anything about that, Alex, but what that would mean to put $1,000,000,000 of loans on the book books with moderate non interest expense increases.

Speaker 4

Yes, understood. Back to the comments on the ATM and the I think the comment of significant opportunities. Is the ATM and the amount that you raised, was that kind of a specific amount in order to kind of be able to just sort of have that capital on hand? Or is that more testing the market to see how quickly you could bring it in, should you need it? Or maybe just a little bit more on the thought process around utilizing that channel and the timing that you used it?

Speaker 2

So I can speak to that. So there was no specific target. What we were trying to do was to utilize the ATM at sensible volumes over a sensible period of time. So we didn't set out to deliver a very specific target or to achieve a very price. It's a long term program.

Speaker 2

We utilize it when the opportunities seem appropriate to us.

Speaker 1

Alex, just going back to the kind of the hypothetical you had suggested, if there were $1,000,000,000 portfolio and our capacity is currently $600,000,000 before we earn money each quarter and we wanted to do that. That would require us to go out, absent the ATE, building up our capital slowly with the ATM to go out and raise capital for that transaction, which we would prefer not to do with any urgency around it as opposed to gradually building up our capital. Our view is that we will utilize that capital. I'm not saying we're going to utilize it this quarter or next quarter, but we think it's when we're at stock prices today, it seems like a reasonable idea to do it in moderate amounts. We were approved for $50,000,000 and last quarter, we purchased how much Richard?

Speaker 1

$9,400,000 We used $9,400,000 of it and I want to say we had about $9,000,000 before that. So we have about $32,000,000 left. So we're doing it moderately. I should point out, I'm not saying we're going to spend it, sell stock this quarter. Really it depends on a host of factors, but that was our thinking for in the last quarter.

Speaker 4

Yes, understood. And then going on to expenses, and Richard, you mentioned about 1.05, I think you said true up in accrual that normally would happen in the 4th fiscal quarter. So should we expect going forward to see a more, I guess, maybe like a steadier level of expenses? Normally we see that 4th fiscal quarter like a that pretty decent increase in salaries and then it kind of take that down in the 1st fiscal quarter. Is that not going to happen this year?

Speaker 1

Well, I think we will have in the Q4, there will be still money that we accrue. We accrue money for our incentive kind of all year round. It's just as we get later into the quarters, we take a look at how well the bank is doing and whether we think when we look at those that are going to get incentive comp, which incidentally, we pay bonuses to everyone in the bank, some more and maybe much more than others. But as we get closer to the end of the year, so we were looking at what we thought we needed in March. So that's 9 months into the quarter.

Speaker 1

So we added to it for this quarter. I would expect that no guarantees on this, but it would not be we're not going to have the true up in the 4th quarter nearly as large as we've had in prior quarters. So let me just try and put some numbers to make sense of all that for you. So normally, if you take out the $1,000,000 the non interest expense is $15,400,000 right? So that's the number that we had, I think, in the preceding 2 quarters more or less, same number.

Speaker 1

That's kind of our run rate currently before we put in more money for incentive comp. But we don't know really how much we need until we move further along the year. I was wrong, I'm looking to try it now. It's 15.7% in the last quarter and 15.4% this quarter and it was 15.4% in our 1st fiscal quarter. So I would think about that as a number and then we'll see what the Q4 looks like.

Speaker 1

But we just thought it made sense to true up a meaningful portion of it in the Q3.

Speaker 4

Yes. Okay. That makes sense. And then just final question for me. The SBA business, it seems like it's got the engine starting to rev up again, seeing a nice growth rate in originations and sales volume there.

Speaker 4

Can you just talk a little bit more about expectations and outlook and thoughts around that segment?

Speaker 1

Well, you're right that it's revved up. We did about $30,000,000 of originations in the March 31 quarter. And as you know, of course, this has been a very slow build. We started this about 2.5 years ago. And at the time, I said, which I will repeat, I don't want to set expectations high on this.

Speaker 1

But it is building, and we would expect it will continue to build. But I don't want to really put a said any I'm sorry to do this to you, Alex. I know you like a better number than this. It's probably reasonable to assume that the path that we're on now will continue and how much more it will be, we'll see. Sorry about that.

Speaker 1

Unclear answer. No. It's been

Speaker 4

a line that's been all over the place over the last 5 or 10 years. So I'm not going to hold you to anything, but we will include in our model. That's all my questions for now. Appreciate the time and I'll get back in the queue.

Speaker 1

Thank you, Alex.

Operator

Thank We have no further questions at this time. Now I will turn the call over to Rick Wayne for closing remarks.

Speaker 1

Thank you. Thank all of you on the call and thank all of you who will listen to the call after this, which you can find this on our website. And we will talk again in July. Thank you all.

Operator

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

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Northeast Bank Q3 2024
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