Q3 2023 Northeast Bank Earnings Call
[music].
Welcome to the northeast Bank third quarter fiscal year 'twenty 'twenty earnings Conference call. My name is to have your eye and I'll be your operator for today's call.
This call is being recorded what else today from the bank is Mclean, President and Chief Executive Officer.
JP 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 we will reference in this morning's call.
The presentation can be accessed at the Investor Relations section of the North East Bank Dot com.
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 these vessels 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 one one on your touch down town.
I remind you this conference is being recorded.
Note that this presentation contains forward looking statements about northeast bank 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.
No. One is bank does not undertake any obligation to update any forward looking statements.
Now I'll turn the call over to Rick Wayne Mr. Wang you may begin.
Thank you and good morning, everyone on the call.
Well, we talk about.
Oh the specifics.
Sure.
Those four.
Quarter that just ended I wanted to just make a few comments in light of.
The reason.
Oh failures of Silicon Valley Bank that signature Burger is kind of the.
10 points better or out there.
One I wanted to talk about our deposits first.
Yep.
One $3 billion of the pod.
As of March 31.
And this is important of which 92% of our insured.
And three.
3% of our deposits relating to a holdback accounts.
We're in a restricted account so we only have 5%.
Of our deposits are.
That are uninsured risks Atlanta.
Not related to what's going on with that.
Uninsured.
Not in restricted accounts.
As soon as the news broke around those two banks.
We contacted.
All of our deposit customers and he said the water based on balance.
All Kurt.
Ooh insurance only the causes.
Intra phy, which is formerly promontory.
And some of our most of the customers.
<unk> 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.
Of that 100 million.
Our broker deposits, which we paid off so really no no change there's no.
Really no none of our customers are thinking about taking their deposits out now.
Something we are obviously pleased with the grille.
Second issue that I want to compare that with what happened to somebody the other two.
Yes.
Thanks.
Wound up having a mismatch between there.
Their deposits.
And our investment portfolio and invested in longer duration treasury. So they didn't have credit risk, but they had interest rate risk.
In our case, we've got a different approach, which is to only invest in one or two year.
<unk> our investment portfolio has.
Our weighted.
The ratio of 13 months.
Currently the unrealized loss is only <unk>.
$860000 pre tax were 620000 after tax so there's some of those points.
Projects.
Remain sticky.
And we do not have any meaningful losses or.
Any at all in our investment portfolio.
Good morning.
Tariffs.
As I have.
Second I wanted to go through some of the financial highlights.
Page three and we have a very fulsome slide deck.
And we also there are more than a highlight certainly.
And then of course to answer any questions yet.
You might have.
First just some.
Basic to assess it wasn't really a great quarter net income was $12 million.
Which excluding <unk>.
Those quarters in which we had sold triple P loans and had gains from those that is a record quarter of net income for us.
$1 69 fully diluted earnings per share.
Our return on equity of 18, 5%, so a very big number 18, 5%.
The comparable <unk> of 1.8.
8%.
Our tangible book value at the end of the quarter.
Was.
$37.02.
Going a little bit less than $2 from the <unk>.
Timber 31 quarter.
We also sold 160000 shares of stock under our ATM.
At the market offering at a average.
Yes.
$42.78.
Finally, our.
While volume was.
Purchased and originated 144 point.
5 million.
Turning to slide six.
I don't want to talk about what we saw core activity and volume.
In the.
Quarter that just ended first with respect to <unk>.
Purchase loans.
We purchased 21 $5 million of walls.
Rich.
Is certainly much lower than that.
Serial quarter, where we had been very large.
Purchases of around $1 billion.
First calendar quarter March 31, our third fiscal quarter is not as commonly a low volume quarter. If you look at going back a year, we have that and it was $23 9 million a year ago the occasional tire.
But we did see less volume in that quarter.
Our originated loan book.
We originated $117 million, which was also lower combination see less.
All request and also being more selective.
I'd say more selective because we're all selected but even more so now so you can see that.
Of course, a hungrier than.
Woody.
4 million.
So a very good number is not as strong as in the preceding.
Quarters.
If we go to slide seven.
See the distribution of our portfolio.
And I want to point out that only 13% of the portfolio.
Those that are more than 15.
Million.
And 9% are loans between 10.
And then a half million, which means that 78% of our portfolio.
And more or less.
And again, we have.
Concentration.
In New York at 35%.
30%.
Yeah.
And 5% in Florida.
So that 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 contract.
Can I ask what states are we're not in at all because we haven't had an opportunity.
In case, you were wondering it's Hawaii.
North and South Dakota.
Z and Vermont.
Other than that we are in all of the other states excluding bills, if we move to slide eight.
Is your asset quality metrics.
Okay.
And.
Yeah.
Boise quite strong you can see that.
At the end of the quarter.
The ratio of one to four loans with total.
<unk> is only 58 basis points.
If we go back to June 30, 'twenty, one it was 180 basis points. So two things are occurring the numbers are.
Only up a little bit, but on a much bigger balance sheets.
We're seeing the benefit of that.
Hmm.
Move to slide 15.
Yes.
Few comments about our.
The positive for us.
Deposits on slides 15, and 16, I think what I want to highlight one the average cost of deposits for the quarter was $3 23.
And the.
Spot rate that is to say the read on March 31 was three <unk>.
Right and.
And it's not on this slide but.
The spot rate at December 31 was 303, so it's kind of a 30.
Two basis points.
Quarter.
Alright.
Schools.
We breakdown.
The source of the deposits by channel and the race.
First I want to highlight that if we were to aggregate those and the banking center.
Which is $615 million and there is some rounding.
Two our national lending customers, which is $61 million.
April banking, which is $35 million.
And the hold back which are primarily reserve.
Accounts.
Uh huh.
That is a total of $776 million out of $2 3 billion or 36% I highlight these because these have.
ZIP lower rates, a weighted average rate of 138.
But the balance of the deposits you have a 64% or higher.
You're right products.
And what we are focusing.
And I should say have a weighted average rate of two.
51.
I would point out that as those roll over.
The increase will be nearly as much as they had been in the past as we have added those in.
Sure.
Good day.
If we go to slide 19.
And we take a look at our revenue.
Compared to our expenses.
Revenue was 33.1.
For the.
Quarter.
Which increased $3 $3 million from the linked quarter from December 31.
But expenses remain reasonably flat.
100000 hours quarter to quarter. So that's obviously a good thing if we can grow revenue at Maxim.
Manage our expenses.
If we go to slide 21.
You can see that.
We have this.
His tail on that curve.
<unk> woes.
Of a shade under $190 million of which 166 and a half as accretable.
Which we bring in.
We are currently.
And my one Accretable portion of 23 million, we recognize when a loan pays off.
That's a lot of discounting on our books a lot of income there overdoing it.
Part time.
If we go to slide 24.
Sure.
And look at our net income for the quarter.
Order, 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 a.
Uh huh.
Oh Boy, if we go to slide 25.
And we look at.
First our blue bar.
On the first.
Left side of the page.
See there.
ACI in interest income was $29 million.
So that doesn't include transactional income and that number at all.
Higher than total net interest income.
Each of the four proceeding.
Quarters.
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 income that the impact that's happening.
Okay.
Those are the comments that I have.
I should mention that.
Peter point, our Chief Financial Officer.
Here with me.
Hum.
Our chief operating officer, and Chief credit officers couple cheap.
Yes.
So we're all here to answer any questions that you have.
Right.
Ladies and gentlemen.
We'll now begin the question and answer session.
Press Star one on your Touchtone phone if you Mr. BMO from Mcmoran Crestar. One again, we 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 one on you touched on the phone.
One moment please.
And I'm, showing Alex Jordahl from Piper Sandler online with a question.
Alex <unk> your line is open.
Good morning, guys.
Alright.
Yes.
I wasn't sure if I press star one one once or twice there.
A couple of questions here for you guys.
First off just on that almost $190 million.
Discount can.
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 pay downs.
And maybe talk about whether or not it was expected or unexpected we're having 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 any thoughts around whether or not this quarter was typical.
If it was may be light or heavy.
This quarter I'm still on slide two.
200, and secondly.
Okay.
First on the <unk>.
The purchase.
Portfolio.
Yes.
Hey, Bill.
Sure.
Generally slower.
The rates are a lot of the loans that we.
Purchase, particularly in one of the pools.
Quarter was 790 <unk>.
$600 million.
So those are the discount there.
I would describe those walls.
Sure.
Well, our originated where typically five year old study.
So by today's standard fixed rate.
For the first five years, and then going to Florida.
After that of which some of them already are clothing at others ago.
Pay downs were not as great.
As they had been I would say historically.
Okay.
Understandable reason, if you have a long way and yet.
Still term left towards that would be.
<unk>.
Unless there was a LIFO credit of some sort of selling the railroad stay or owner occupied accelerated the business in the real estate.
Or someone died or otherwise had.
Hello.
The deal with that.
Or do you wanted to take out more money because they have very low ltvs on that in a low earnings.
It wouldn't be as inclined to.
Pay it pay it off so.
I think there was lower than that and also.
Lower in our.
Okay.
And I can put a number on that on slide five looking at the purchase runoff was $44 million.
On a brilliant.
Our loan book.
Yeah.
Now I'll come back to the origination.
A second but so to answer your question.
It was a lot of leather long duration.
15 years.
A lot of cases, and so that we'd like to buy loans.
Like that because we get a lot of discount relative to credit.
In the interest rate and if they do pay off it pick up.
Crap out of income.
After a slow start on that.
It's surprising to us.
Environmental elaborate our expectation is that that will that will pick up one of the previous calls Alex you had asked about.
LNR.
Yield.
The return on the purchase purpose under eight.
Right.
We think it was NOI end up at that time.
I thought it would be.
At least eight.
For the.
For the year and I subscribed will be pretty close to that we will see what happens in the in.
In the fourth quarter.
With respect to the originated book.
Book.
That also.
The pay downs JP do you have the numbers out of the year originated Rebecca.
The originated originated 117, thank you.
No.
J P pointed it was right in front of me.
But so we originated 117, we had $86 million.
Wow.
Sure.
While our origination amount of 117 was lower than that.
Previous quarters, it still grew that loan growth.
The loan book group as the Paydowns were less.
Touched on a lot more than that Alex separate.
I think for you I think I think that's good for that that part of the question.
I wanted 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 Im curious if youre still seeing is largely driven by rates or if there's something that's starting to be driven by credit quality, that's coming into the purchased.
I guess available for sale portfolio.
Market.
Pat will comment on that.
Hey, Doug.
First calendar quarter is typically a.
Hello, H quarter already.
Purchase market.
There has been it has been.
A fair amount of activity, obviously, there was a lot involved.
Mature and.
And ABB.
Otherwise, we havent seen too much yet.
From on the distress side.
Thats really our wheelhouse anyway.
But there is there continues to be.
Most of the stuff we've seen has been mergers.
Sure.
And most of the mergers.
We will see there is talk of.
They come in.
We're seeing we're seeing we're certainly seeing.
Seeing some activity, but it's not.
A big shoe to drop and everybody is hoping for.
So I have some numbers that I think might be helpful to answer your question, we put together.
Our final report.
<unk> markets and see what we looked at it what we wound up buying.
So we saw.
First quarter 2000 pools of all four of $970 million.
<unk>.
And then how the roads.
We.
There was almost $300 million awards that we caused the weakness.
Do any further work on that.
Yes.
Cost out because of either performance.
The undesirable collateral.
There were underwriting issues for us.
NGL related and so there were $674 million after that that we took a closer look at.
And out of those.
$645 million, we did that to further work on one because either undesirable collateral to the yield did not meet our pricing expectations or three a seller with true.
The assets for sale. So then that left US was 29 million or 40 or 50 relationships that we.
Benign.
And out of that.
Okay.
That is to say $5 4 million.
We grew all of that on our.
Cause therefore, we couldnt get to the yield that we needed and we wound up.
With a <unk> of $24 million for 44 walls.
We started out at $970 million at the closing two higher than that.
Only $24 million of valves and Ed.
The biggest chunk score.
I don't have to repeat what I, just said is that yes.
Yes, that's what happened with the purchase market, that's not immediate timber volume market its a big market.
Lisa.
Bret touched on an important point.
Right now there is.
Significant disagreement in the market.
Value means.
And so on.
Fair enough.
From a market.
Got it.
It's obviously the FDIC has been public with their intent to sell a huge portfolio of loans coming out of silica 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.
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 if it's really just bringing it on balance sheet that makes the most sense.
Due to the volatility.
And as I'm sure you pointed.
Pointed out historically the structure what everyone. Both bring a general structure, we know one of our test will be.
Markets.
A volatile adviser.
See if this is a structured transactions have all historically, what they've done is they put them out a bit.
And then we will take.
Hi, Ben.
And then the FDIC tranche.
Transfers.
Loans at that value.
Hello.
Yeah.
Entity and then provides.
Some percentage of financial support Columbus to that.
As an $18 billion.
More than that.
Notwithstanding walls.
This number to your explanation I have no idea what the numbers would be.
Let's say, it's traded for 50 cents. So the FDIC would transfer all of our evolved into an LLC with a $9 billion value.
One <unk>.
Provide financing for a half of that or four 5 billion.
The remaining $4 5 billion in the equity portion and might sell a portion maybe 12% of that to a buyer and so it will be at my model that would be.
$900 million check.
And the buyer.
Sure.
The 20% interest in that LLC.
And then there's some other structuring points has typically been a third party servicer and pull back here.
A promote and it will certainly look at it when it comes out with this and we understand what they've done in the past, but awful lot of unknowns.
So what this will look like.
Okay.
Yes.
Signature with a very big multifamily lender and a lot of those in the New Yorker loans that have the properties that have rent stabilization or might have a tax abatement on sexual towards 'twenty one yes.
There's a lot to figure out there.
Okay.
A couple more questions one.
When you talk about the LTV is theres a lot of questions on what has happened with views on loans and I was wondering Pat if you could give a little bit of color Eric.
And when you talk about Ltvs exactly what that means if thats the V.
Is that your V. Your value that you bring 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 pad.
So for purposes of this debt and we say this in the deck.
In the case of purchase loans.
We've used the calculation after the current balance.
And we compare that with.
The valuation at the time that the room was originated.
And because a lot of these loans if we go to.
Each willis placebo regions.
Okay.
Great.
We go to page 13.
You can see that.
And of our ability towards 60 total.
400.
40 million.
Let me say it differently about $1 billion was originated before.
2019.
And the pay down of <unk>.
Fairly meaningful so we think that thats, a pretty safe number for that and then $440 million versus 2019 or later, but thats. The way, we do that calculation, we don't order.
New appraisal when we.
Purchase alone, but our real estate group makes a determination as to what the value is but we are using.
The appraised value at that time, and the case of our originated loan portfolio, which are the most quarters.
Originated reasonably.
Currently we use the <unk>.
The value we use is when the appraisal was done.
And for the most part it was external.
Eric.
Thanks.
You raise a fair point about values going down syndrome, a very distributed.
Clear.
You were explicit as to how we do the calculation in the deck one of the things we will be taking a look at it annually.
<unk> calls for this in the future the extent, there's no meaningful change in values with alignment.
As well.
Okay.
Thank you got it.
Well maybe just.
We frequently update we look at valuations.
Quarterly.
There were a lot of stress testing around value.
Where the cap rates are moving up.
Fences are moving up and there's a lot of factors that influence value.
And it's kind of a moving target right now.
We're constantly rolling up our own portfolio and so we would expect there'll be some movement.
On the valuations.
Stuart when we've taken a relatively conservative approach.
Paul.
Okay.
Okay and then just.
A few more questions one on the deposits and.
Can you talk a little bit about the latter ring in the deposits the broker deposits they put on along with the purchases last quarter.
And really what I'm trying to get at is whether or not the bulk of the deposit repricing.
Has already happened and as that portfolio amortize or pays off potentially.
There's not a lot more in terms of deposit repricing higher that we can see.
Thanks, Alex.
The majority of the deposits that we put on last quarter for the purchase of especially the big one.
We're ladder six 912 months, so that purchase where we partnered with broker deposits about 50% was six months liquid mature in June 45% was nine months and 45% was 12 months. So September December maturities allows although they have some other broker deposits that we took out.
Last quarter.
With shorter terms.
Primarily the bulk of that 350 million that we did there was six nine and 12 months. Alex's question is also the weighted average rate.
And those deposits.
Replace them when they mature in this calendar year.
Okay.
Right now the broker market as we get to replace with broker deposits.
Around five right now.
Oliver Wyman is mature.
Would be anywhere the bulk broker market jumped up in March giving everything away.
We're very proud to show.
Depending on what the outlook is in.
Each of these.
Deposits are set to mature could be.
Or hopefully lower than that when they when they go to rollover.
And the weighted average rate of debt of the broker when we add March 31 was 447.
Seven four points of it.
So we have.
Those that are maturing.
It would be about 50 basis points of increase simply add to replace them today at 5%.
Okay.
And then on expenses expense control is ours.
Certainly better than I had modeled given the large increase in the balance sheet can you talk about expectations for the next couple of quarters.
Yes.
First there were.
They were higher.
One because of the increase of the path of insurance.
Yes.
And what that's about.
I heard 60 branches briefly.
Reported 345000 for that.
And then we had some higher professional fees in there.
And the next quarter.
I think it will be higher most likely because we we have incentive comp that we true up in the fourth quarter and so.
There could be more.
Is that.
All of our employees.
I think kind of above that.
On a run rate.
What you're seeing.
Third quarter as well.
More or less that what we would expect that that was 13 settlement, but any more people.
Had a few more might be <unk>.
$14 million.
With the balance sheets of operator.
Other than I've heard him say.
In the fourth quarter.
Thanks.
That plus what percent of their traditional incentive comp.
Got it and then my final question just noticed some gain on sale of SBA loans in the in this first quarter or for the third quarter for you guys.
<unk> been working on rolling out new products with the private equity partners either 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.
Yes.
The group is.
New <unk>, where we have.
Five year exclusive.
Marketing agreement with.
That they've been going to market.
Initially.
Im trying to get the.
Borrowers triple people hours 115000.
Matt.
Sure.
Long source part alongside.
The market for that.
A small balance.
SBA loans either separately.
A lot of them under 25000 and then.
Okay.
Sure.
58 kind of averaging.
About $75000 a long lasting on December 25, and some are bigger.
It looks like.
They're only now at a run rate.
Three to 4 million, where we sit today.
The $4 million a month, so it's improved a lot our.
Think it can get to I should be careful.
No no.
I will read the following statement, but some.
The amount we will see what happens.
So that's a momentum now.
Acknowledging.
Dramatically.
Marketing is important.
A lot as well and so what that represents.
Yes.
The thing that was sold in the March 31 quarter.
But I would expect that June 3rd quarter might be.
Small amount higher than let's say.
And.
In very round numbers again.
So for it's about 10%.
As a little bit more maybe 11.
Okay, and I think thats, probably a good average to use.
Thank you.
So I think $4 million a month.
That's.
112.
$12 million, a quarter and our share of that is about 600 Grand.
And then we wind up holding on our balance sheet.
Alright.
And Gareth.
Guarantee part of the loan it's not sold.
Are there any losses.
Okay.
Okay.
That's all my questions for now thank you for taking them.
That's a lot of thank you very much.
Thank you we have no further questions at this time now I will turn the call back over to Mr. Rick Wayne for any closing remarks.
Thank you very much for that and thank you all for loosening and Alex for your excellent questions.
We look forward to talking with you again.
After the end of our.
Fourth.
Fiscal quarter June 30, well be reporting both on that quarter end.
On the year.
Alright. Thank you unusual just a great day.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
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Okay.
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Yes.
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