Q4 2023 Northeast Bank Earnings Call

Yeah.

Good day, and thank you for standing by and welcome to the Northeast Bank fourth quarter fiscal year 2023 earnings call. At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

The automated message advise your hands raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like 90 conference over to your speaker today, Rick Wayne C. E. O. Please go ahead.

Good morning.

Thank you all for joining us today.

I am Rick Wayne the Chief Executive.

Executive officer of Northeast Bank.

And with me on the call are JP Lapointe.

Our Chief Financial Officer.

And Pat Dignan, our Chief Credit Officer, and Executive Vice President.

After my comments.

J P.

And I will be happy to answer your questions I'm going to reference in my comments. This investor deck. It was uploaded last night.

Starting with slide number three.

Under the heading financial highlights.

For the quarter.

We purchased $48.8 million of loans.

With a U P D of 54.3.

$3 million.

Make a few comments on that.

Volume.

It's a.

Typically the June 30.

Water is not the busiest in the year and if you go back and look at all of the quarters.

Over the last five years.

It's.

Pretty close to the highest amount for that.

Quarter.

It was a.

$19 million increase over the March 31 quarter.

And when we take a look at the activity.

And so always backup so that that I think is a pretty good number of absent the large transactions.

We had in the fourth calendar quarter of 2020.

Two 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.

The bid ask is pretty wide between sellers and buyers in.

And so it didnt meet our pricing expectations and so therefore, we didn't.

In our notes, we would expect based on what we see in the market.

Yeah.

The gap between the bid and the ask will narrow and there'll be more opportunities to.

Take a look at those.

We originated $84.2 million in.

The quarter as well.

Our <unk>.

Our originated loan book.

Which is and was therefore.

Our balances were fairly.

Flat.

Linked quarter, but over the year, our originated loan book increased $229 million or 30%.

From the balance on June 32022.

What we're seeing is I would say, China general comment on the market, while $84 million is a good number.

It's less than we have done.

The earlier part of the fiscal year.

I just think theres less.

Transactions in the marketplace right now again bid ask gap.

In context.

And we're also.

These careful as evidenced by the <unk>.

Zero charge offs to date in our originated loan book.

We even more selective now as we're looking at potential transactions.

Just some base numbers to be.

<unk> was 16, 7% for the quarter and 16 and a 5% for the year.

Our ROA was one 7% for the quarter and one 9%.

For the year, our NIM was up 16 basis points from the linked quarter to $4 91.

We ended the year.

Yes.

With tangible book value of $38.

69 cents.

All in all we think it was an excellent quarter.

And year.

Drill down a little bit on asset quality, which is on slide eight.

Delinquencies were only 13.

So $1 million or <unk> 52.

Basis points on total loans.

And non accrual loans.

$15.7 million or 55% excuse me nonaccrual assets for $15 $7 million or 55% of total.

<unk> still also very good and you can see on slide nine.

There was a movement in the nonperforming asset category.

We had $4 3 million of resolutions and Emily.

An additional $5 5 million so to the linked quarter it was up about $1 million, but.

Not meaningful in terms of the size of our balance sheet.

The numbers.

Our solid.

At the low level of nonperforming assets.

On the funding side.

The average cost of our deposits.

It was up 36 basis points from the previous.

Quarter.

Yeah.

I should also point out around deposits or is it 95% insureds.

Between a combination of having.

Deposit deposit center, the 250000 dollar amount and also using.

Interim fly and reaching <unk> with two.

<unk> suites to ensure any of those that are over so 95% insured obviously, a very good number and we have seen almost no one off.

Normal course activity in our deposit.

Counts.

Yes.

On slide 21.

The non interest expense was $16 $4 million in the quarter, which is two $6 million over the linked quarter, but $2 million of that was incentive comp booked in the fourth quarter, which is probably typically do win.

We see how the year was.

We have I think it really.

Instructive set of new slides.

In the book.

When we meet with investors and others. It's almost the first question that comes up is around.

Our.

Portfolio of office loans.

And so we have in the slides, which.

Is going to walk through.

A lot more color.

Slides.

So it will help you.

Got it.

As to the quality of those loans.

And our plan is to do that.

Over the next quarter or two.

All of the major food groups of commercial real estate, including retail and hospitality multifamily.

Industrial et cetera.

It won't just be looking at one number by Ub understanding much better the nature of our portfolio so with that.

Thanks, Rick.

Recently, we've gone through and.

Harvested a lot of data on our on our real estate portfolio, particularly in the office space.

<unk>.

Brokerage broke.

The portfolio down by a number.

A number of different.

Factors.

We felt that the best way to illustrate.

Our flavor of office collateral that we have.

Why.

It was to.

Illustrated by the number of floors, while we typically tell investors is that the vast majority of our.

Our office portfolio is comprised of low rise buildings with local tenants that as tenants, serving our local neighborhood or community as opposed to.

More traditional office space that is.

Oh.

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 five floors.

Okay.

189 of the 247 loans are below.

A $1 million went through with the remainder above and just.

Just just 10 loans that are that are higher than for us.

Four stories actual.

The other question that we get frequently from investors is.

Concerning the maturity of those loans many articles recently.

About the <unk> MBS debt that's maturing.

Over the next year or so over a trillion dollars.

And.

<unk>.

The potential and ability of those loans to refinance and as you can see from the.

The table on slide 12.

About 54% of our office portfolio is maturing in the next three years, but the current interest rates on those loans.

Such that they could.

Refinance at today's rates.

Okay.

On slide 13, we've illustrated all of the loans secured with office space that are above $3 million or 1% of capital.

This comprises most of the dollars and as you can see from from the from this slide.

Most loans are.

Again, low rise Theres geographic diversity.

Low dollars per square foot.

And relatively high occupancy.

Thank you Pat.

We are of course be happy to answer any questions on.

These up as fines or otherwise, but I think as I say when we go through the next couple of quarters. We will have this information on all of our different collateral types.

And with that.

We'd be happy to answer any questions that you have.

As a reminder to ask a question. Please press star one one on your telephone and wait for it to be announced to withdraw your question. Please press star one again please.

Please standby, we compile the Q&A roster.

One moment for our first question.

Our first question comes from the line of Alex fertile from Piper Sandler Your line is open.

Hey, good morning, guys.

Good morning, good morning, Alex.

First off Rick you talked about some.

Our larger amount of transaction volume that was coming to market in the second quarter 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.

Actually what's coming to market.

What we saw.

We saw and this is by no means everything that comes to market we saw.

Maybe just get out the rates to.

Two and a half million dollars.

Thank you of transactions.

There were 30 34 pools.

Some small and as you recall it was the largest one I wont say there was a 900.

It was there was a $900 million and.

And one of those Alex global $900 million pool. So there were some very large ones and then there were some small ones.

Right.

There was a big chunk of those that.

Almost 60% of what I'm describing.

Yes.

The year, we'd just wanted thereof, the sellers expectation on price.

And then there were others that were.

We didn't bid on because it was undesirable collateral or we didn't agree with the collateral value.

And so we wound up bidding on $165 million of UTP.

And we wound up winning.

$54 million.

Is that.

Summarize your question there were some large ones there were smaller ones and we got a 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. You guys had mentioned in previous calls.

A lot of cost.

And time.

Two of the underwriting that we do on these and we're not going to get there on price.

We have to do all of that work.

Now that we're kind of hard work, we work hard but.

There is 100%.

Our goal is attainable.

For the ones that look like good collateral that you just werent there on the price.

Those loans do they actually trade during the quarter or what it was.

The market just not there for them some did not trade as I understand it and.

Pat you want to reach a couple of large pools that had a lot of office.

Big Office component I think there are some some some banks trying to unload the office and once they saw the price prices they were receiving it.

No trades.

Got it.

And then can you just spend a couple of seconds or a couple of minutes talking about your appetite and capacity for some of those larger pools. Obviously you did one in the fourth quarter.

Larger and relative to you, but to the extent that there are some larger pools like that $900 million pool or some even in the $1 billion 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 thats a little bit larger.

But.

Higher capacity long capacity now based on our existing capital is about $450 million.

And at the pointed out at the end of <unk>.

December .

So as we entered our third fiscal quarter it was about $100 million.

And as capacity increased through a combination of.

Earnings.

Dan.

<unk>.

And we've raised $8 million through our ATM offering.

So I think that our.

Capacity to do.

We have great interest in doing a big transaction.

For example, the $1 billion that we bought in the fourth calendar quarter has given us such a base now.

Just.

Our basic core earnings are up significantly.

And movie 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 is Hawaii.

Those numbers out 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 will be augmented by loan payoffs and and I.

I'm not saying, we're going to do this so at all but we could also raised more money through our ATM offering.

Fortunately our stock prices come back very nicely.

Trading at a nice price now.

I'll just add on what we're seeing in the stuff, we like which is what we bought in the fourth quarter. We're seeing now is really low LTV.

And.

And.

So we.

We don't want to take.

Hey, Andy.

Undue credit risk at all so we like to say, we're not in the business of losing principal here.

But if we can and we're seeing that with low LTV.

Loans that are coming to market.

So.

I hope that was.

Helpful enough, but if you have any follow up on that point. Please.

That's that's good.

<unk> I guess just my final question on the purchase market for some of the transactions that are trading during the quarter or is it other banks.

As the buyer or is it competing most against private equity.

And other specialty finance companies.

Well, we bought as I mentioned, we've been on 165, when we bought it.

55, or $54 3 million.

There.

Do you want to comment on who we are.

Are you largely banks Theres also one or two funds that competed in our in our space that are.

A very cheap cost of funding.

Often compete with I know, we lost one of them and one of the one of the one of the bids.

Thanks.

Got it Okay and then.

If I'm remembering correctly this quarter I guess.

Your first.

Fiscal quarter of 2020 for you guys adopt Cecil if I'm not mistaken can you maybe give us an update on what the expectations for that could be.

J P.

Spectation there Alex is.

The allowance is going to go up significantly.

As you see in our presentation on slide.

Slide number here.

We have a good amount of.

Credit related discount non accretable discount about $23 million of non accretable discount on slide 23 at June 30th.

Almost all of that will move into the allowance.

From the discounts of the loan balance will go up in the allowance will go up accordingly.

And then.

Probably be somewhere around where we are and what's in there now for the originated portfolio. So if.

If you take what we have now and that in.

The most of the non Accretable discount, that's approximately where we'll be with our CTO calculation.

Upon adoption.

Okay.

I'm sorry, just to summarize are you, saying then we don't expected with the adoption of <unk> to have any.

There won't be any meaningful income statement effect on the adoption.

On the adoption right right correct correct.

For those that are listening that may not be familiar with that Jason was saying that we are at.

The allowance with the credit discount that we have.

I'd say, it's a geography change will become.

And allowance.

And then the discount on our books relating to interest expense. We will just continue to treat as we have been correct.

Okay.

Yes.

And does the $23 million does that get reclassified from capital too.

To the ACL.

No just from the discount against the loan.

The loans get grossed up so purchased loans will increase by $23 million and the allowance will increase by $23 million no capital impact from from that upon adoption.

Okay.

And does anything change with seasonal with the purchase model.

Remind us in terms of the accounting going forward I guess would we see a higher levels of provisioning associated with some loan purchases because of that.

Non accretable piece.

I can answer that currently and prospectively. So currently yes based on how the seats organics is right now.

When we purchase loans you would have to provide for.

And allowance through the provision for loan losses. However, <unk> has a standard that they are finalizing at the end of August .

<unk> allow.

Purchasers of <unk>.

Financial assets to take some of the discount and move that into the allowance. So there is no provision for loan losses and that can be applied retrospectively.

So we figure by the time that is issued it it will have no impact on our financial statements that we won't have to provide to the provision for loan losses for purchase credits.

Unless there is no.

Discount allocated to credit.

At purchase.

Okay.

That's really very helpful.

Then.

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 seasonal.

Again geography on the income statement, but won't be in the yield any more of it will be in the income statement. So.

Okay.

Great.

And then <unk>.

Going back to expenses I think you said $2 million of expense of $2 million higher on expenses, so that kind of puts your run rate on expenses.

And the next quarter back closer to where it was in the first quarter or the first calendar quarter is that correct.

Yes.

Yes.

Great.

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

Thank you Alex.

Thank you.

Once again as a reminder, that star one for a question star one.

One moment, while we compile the Q&A roster.

Im not showing any further questions in the queue I'd like to turn the conference back to Rick Wayne for closing remarks.

Thank you for that and thank you all for this.

Listening.

Please try and make our.

The information in the Investor deck.

Helpful as possible with as much information as we can provide as always if you have any.

It's 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, let's open early for that so we have a nice day. Thank you all.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

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