Northeast Bancorp Q3 2023 Earnings Call Transcript

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Provided by Quartr
April 25, 2023

Key Takeaways

  • Stable deposits: $2.13 billion quarter-end balance with 92% insured and 3% restricted, leaving just 5% uninsured, and management proactively offered full IntraFi coverage to all depositors.
  • Minimal bond losses: Investment portfolio weighted duration is only 13 months, resulting in just $0.86 million pre-tax ($0.62 million after-tax) unrealized losses.
  • Record quarterly profits: Q3 net income reached $12.5 million ($1.69 EPS), translating to an 18.5% return on equity and 1.8% ROA—highest ex-PPP gain quarter ever.
  • Strong asset quality: Non-performing loans to total loans ratio improved to 0.58%, down from 1.80% in mid-2021, even as the loan book expanded.
  • Rising deposit costs: Average cost of deposits increased to 3.23% (3.35% spot rate), up 32 basis points from December, potentially squeezing net interest margins as deposits reprice.
AI Generated. May Contain Errors.
Earnings Conference Call
Northeast Bancorp Q3 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Welcome to the Northeast Bank Third Quarter Fiscal Year 2023 Earnings Conference Call. My name is Olivia, 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 Dichnan, 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 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 replay 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.

Operator

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'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.

Operator

I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Speaker 1

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 Failures of Silicon Valley Bank and Signature Bank and kind of the main points that are out there. One, I want to talk about our deposits first. We have 2.13 $1,000,000,000 of deposits at March 31, and this is important, of which 92% are insured And 3% of our deposits relating to holdback accounts Or 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're just uninsured and not in restricted accounts.

Speaker 1

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 the deposits through IntraFi, which is formally promontory And some of our most of the customers either had it or took us up on that. And then If we look at the deposits quarter to quarter, our deposits decreased by 106,000,000 From twelvethirty one to March 31, but of that $100,000,000 were broker deposits, which we paid off. So really 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 and proud of. 2nd issue that I want to compare our bank with what happened to some of the other 2.

Speaker 1

Those Thanks. We wound up having a mismatch between their deposits And their 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 had a different approach, which is to only invest in 1 or 2 year Agencies, our investment portfolio has a weighted duration of 13 months. And currently, the unrealized loss is only $860,000 pretax We're $620,000 after tax.

Speaker 1

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 do want to compare us as I have. Secondly, I now want to go through some of the financial highlights on Page 3, and we have a very fulsome slide deck that we post that I'm all going to highlight certain 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 $12,500,000 which excluding Those quarters in which we had sold PPP 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 the comparable ROA of 1.8%, our tangible book value at the end of the quarter It 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 $42.78 And finally, our loan volume was Purchased and originated $144,500,000 Turning to Slide 6.

Speaker 1

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 $21,500,000 of loans, Which is certainly much lower than the preceding quarter where we had the very large Purchases of around $1,000,000,000 But the 1st calendar quarter, March 31 or 3rd fiscal quarter, It's not it's commonly a low volume quarter. If you look at going back a year, we have that It was $23,900,000 a year ago. Now occasionally, it's higher. But we did see those volume in that quarter.

Speaker 1

And our originated loan book was we originated $117,000,000 which was also lower, Combination of seeing less loan request 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, 144,000,000 It's still a very good number, just not as strong as it's been in the preceding quarters. If we go to Slide 7, you can see the distribution of our portfolio.

Speaker 1

And I want to just Point out that only 13% of the portfolio are loans that are more than 15 $1,000,000 and 9 percent are loans between $10,500,000 which means that 78% of our portfolio Our loans were $10,000,000 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 3 states. And then you can see on the chart, the rest of them were in 44 States. Sometimes this is just a fun fact.

Speaker 1

People ask which states are we not in, and it's all 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 8, these are asset quality metrics. And this portfolio is quite strong. You can see that At the end of the quarter, the ratio of non performing loans to total Loans is only 58 basis points, which if we go back to June 30, 2021, It was 180 basis points.

Speaker 1

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. If we move to Slide 15, we have a few comments about our deposit There are deposits on Slides 15 and 16. I think I want to highlight, 1, the Average cost of deposits for the quarter was 3.23 and the spot Great. That is to say the rate on March 31 was 3.35 and it's not on this slide, but The spot rate at December 31 was 303, so it's gone up 32 basis points in the On Slide 16, we break out The source of the deposits by channel and the rates, first, I want to highlight that If we were to aggregate those in the banking center, which is $615,000,000 I'm doing some rounding, To our national lending customers, which is $61,000,000 Able Banking, which is $35,000,000 And the holdback, which are primarily reserve accounts, that is a total Of $776,000,000 out of $2,130,000,000 or 36 percent.

Speaker 1

I highlight these because These have lower rates, a weighted average rate of 1.38%. But the balance Of the deposits, the other 64% are in higher rate products. And what we are focusing and I should say, I have a weighted average rate of 4.51. I would point out that as those rollover, 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.

Speaker 1

The revenue was $33,400,000 for the quarter, Which increased $3,300,000 from the late from December 31, but expenses remain reasonably But they only went up $100,000 quarter to quarter. So that's obviously a good thing if we can grow revenue without much and We manage our expenses. If we go to Slide 21, You can see that we have discount on the purchase loans Of a shade under $190,000,000 of which $166,500,000 is accretable, Which we bring in steadily all the time, and then an accretable portion of $23,000,000 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, It was $12,517,000 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 H and Unbeliev, If we go to Slide 25 and we look at first the blue bar In the first on the left side of the page, you can see that our base net interest income It was $29,000,000 so that doesn't include transactional income.

Speaker 1

And that number alone is higher than total net interest income for each of the 4 preceding quarters. And so we're really seeing the benefit of our larger loan book as a result mostly from The purchases that we made in the Q4 that the income 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, Here with me is Pat Diggin, our Chief Operating Officer and Chief Credit Officer. He's a double chief.

Operator

Ladies and gentlemen, We will now begin the question and answer session. One moment please. And I'm showing Alex Twerdahl from Piper Sandler online with a question. Alex Wardell, your line is open.

Speaker 2

Good morning, guys.

Speaker 3

Good morning, Alex.

Speaker 2

I wasn't sure if I press star 1 once or twice there. A couple of questions here for you guys. First off, just on that almost $190,000,000 of discount. Can you talk a little bit about the 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 what happened this quarter.

Speaker 2

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 or if it was maybe light or heavy?

Speaker 1

This 1st on the purchase portfolio, Pay downs were generally slower. The rates are a lot of the loans that we have purchased, Particularly, in one of the pools last quarter was $700,000,000 UPB and $600,000,000 we paid for it. So there was a lot of discount there. I would describe those loans, they were when originated were typically 5 year loans that had a low By today's standard, fixed rate for the 1st 5 years and then going to floating After that, of which some of them already are floating and others are going in. But the pay downs were not as great As they have been, I would say historically, those for the understandable reason, if you have a low rate And you have still term left, 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, having to deal with that, you already wanted to take out more money Because they have very low LTVs on that in the low 30s, we wouldn't be as inclined to Pay it off.

Speaker 1

So I think that it was lower than that and also While we're in our and I can put a number on that on Slide 5 now that I'm looking at it, the purchase runoff was 44,000,000 And I'll come back to the origination for a second. But your So the answer to a little bit more of your question, those loans, a lot of them have a long duration of those going out 15 years I'm in a lot of cases. And so we like to buy loans like that because you get a lot of discount not through the credit, Due to interest rate and if they do pay off, you pick up a fair amount of income. It started off at a slow start. That really won't be surprising to us in the environment we're in now, but our expectation is that, that will pick up.

Speaker 1

Yes. One of the previous calls, Alex, you had asked about what our yield on the return on the purchase book was under We think it was going to wind up at that time. I said I thought it would be at least 8 For the year, and I suspect we'll be pretty close to that. We'll see what happens in the Q4. And with respect to the originated Look, that also, the paydowns, JP, do you have the numbers on the originated, Rebecca, on the that one with the originated.

Speaker 1

We originated 117. Thank you. JP Punit was right in front of me. But, so we originated $117,000,000 We had $86,000,000 of One off. So our origination amount of $1.17 was lower than in Previous quarters, it still grew that loan both originated loan book group as the pay downs were less.

Speaker 1

It's touched on a lot. Is there more than that, Alex, that would be helpful for you?

Speaker 2

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 We're 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, I guess, available for sale portfolio market.

Speaker 1

Pat, can you comment on that?

Speaker 4

The 1st calendar quarter is typically a Lowage quarter in the purchase market and there's been a fair amount of activity. Obviously, there was a lot involved with Both Signature and ABB. Otherwise, we haven't seen too much yet

Speaker 1

From a

Speaker 4

lot of distress 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 most of the mergers. So We'll see. There's talk of pools to come and we're seeing we're certainly Seeing some activity, but it's not the big shoe to drop that everybody is hoping for.

Speaker 1

So I have some numbers that I think might be helpful to answer your question. We put together a funnel report on Purchase market to see what we looked at and what we're going to find. And so we saw last quarter 20 pools of loans for $970,000,000 UPP. And out of those, we There were almost $300,000,000 of loans that we pools that we just didn't do any further work on that We tossed out because of either performance, the undesirable collateral Well, there were underwriting issues for us, but we couldn't get what we needed. And so there were $674,000,000 after that, that we took A closer look at and out of those $645,000,000 we did not To further work on, 1, because either undesirable collateral 2, the yield did not meet our pricing expectations or 3, the seller withdrew the assets for sale.

Speaker 1

So then that left us with $29,000,000 of 4th pools, 50 relationships that we bid on. And out of that, We won or at Advantage, say, dollars 5,400,000 We've lost on our bid because of our we couldn't get to the yield that we needed, and we wound up With a UPB of $24,000,000 for 44 loans. So we started out at $970,000,000 and wound up closing $274,000,000 of those. And the biggest chunks were well, I haven't asked to repeat what I just said to you that. But that's what happened with the purchase market.

Speaker 4

That's not an atypical Volume for the market, it's a big market and our piece of it is Rick touched on an 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.

Speaker 3

Got it.

Speaker 2

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 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 is 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?

Speaker 1

Thank you for the welcome to the Board of Governors. I'm sure you know that, I was going to point out, historically, the structure, Not everyone, but the general structure, we don't know what this will be. Newmark is acting as on sale adviser to the SEC. 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 the highest bid It's the value, and then the FDIC transfers those loans at that value And it's an entity and then provides some percentage of financing. So to put some numbers to that, There's an $18,000,000,000 portfolio in that pool of multifamily loans.

Speaker 1

And I have a number for explanation. I have no idea what the Let's say it's traded for $0.50 so the FDIC would transfer all the balls into an LLC With a $9,000,000,000 value, they would then provide financing for half of that or 4,500,000,000 And out of the remaining $4,500,000,000 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 $900,000,000 check that would go to it, And the buyer would own a 20% interest in that LLC. And then There's some other structuring points as typically there's been a 3rd party servicer and some factors that have been a promote in it. 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.

Speaker 2

Okay.

Speaker 1

And a lot of those loans I had a signature with a very big multifamily lender. And a lot of those In New York, there are loans that have the properties that have rent stabilization or might have a tax abatement under Section 421, Yes, there's a lot to figure out there.

Speaker 2

Okay. A couple of more questions. 1, When you talk about the LTVs, there's a lot of questions on what has happened with Versus on loans. And I was wondering, Pat, if you could give a little bit of color or Rick When you talk about LTVs exactly what that means, if that's the V, is that your V, Your value that you put in the property and kind of the stress tests that go into, just to making sure that the credit is sound.

Speaker 1

So let me just start, Pat, So for purposes of the deck, and we say this in the deck, in the case of purchased 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 If you go to Page 13, you can see that out of our $1,460,000,000 total, dollars 440,000,000 Let me say it differently. About $1,000,000,000 was originated before 2019, and the paydowns have been Fairly meaningful. So we think that that's a pretty safe number for that. And then $440,000,000 was 2019 or later.

Speaker 1

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 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 raised a fair point about values going down.

Speaker 1

Since then, we're very just to be clear, we're explicit as to how we do the calculation in the deck. One of the things we will be taking a look at and we will update calls for this in the future to the extent there's Meaningful change in values, we do highlight that as well. Pat, do you want to answer that?

Speaker 4

I think you got it. Well, maybe just that we frequently update. We look at valuations Quarterly and we do a lot of stress testing around values. We're aware that cap rates are moving up and Expenses are moving up and there's a lot of factors that influence value. And so and it's kind of a moving target right now.

Speaker 4

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.

Speaker 2

Okay. And then just have a few more questions. 1 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 whether or not the bulk of the deposit repricing has already happened and as that Portfolio amortizes or pays off potentially there's not a lot more in terms of deposit repricing higher that we could see.

Speaker 3

Thanks, Alex. The majority of the deposits that we put on last Quarter for the purchases, especially the big ones, were laddered 6, 9 12 months. So that purchase fully funded with broker deposits, about 50% was 6 months, which would mature in June, 25% was 9 months And 25% was 12 months, so September December maturities 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 $350,000,000 that we did there was 6 months to 9 months to 12 months.

Speaker 1

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,

Speaker 3

Right now the broker market is taking us to replace it with brokered deposits. It's around 5 right now. However, when these mature, it could be anywhere the broker market jumped up in March given everything that went on with 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 5 or hopefully lower than that when they go to rollover?

Speaker 1

And the weighted average rate of debt?

Speaker 3

The broken loan we had March 31 is 4.47. 4.77. 4.47.

Speaker 1

Okay. So we have out on those that are maturing maybe And that would be about 50 basis points of increase if we had to replace them today at 5.

Speaker 2

Okay. And then on expenses, expense control I thought was 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?

Speaker 1

Yes. Well, first, they were higher in part, one, because of the increase in deposit insurance. And we had the what that's about, what is that, dollars 3.45,000 dollars 345,000 dollars 345,000 for that. Then we had some higher professional fees in there. In the next quarter, I think that there will be higher most likely because we have incentive comp that we true up in the 4th quarter.

Speaker 1

And so there could be more for that for all of our employees. But I think kind of On a run rate, what you're seeing in the Q3 is more or less about what we would expect. That was $0.13 with an annual report and have to add a few more. It might be $14,000,000 maybe a good number Now that the balance sheet is still operating here. Other than that, as I'm saying, in the Q4, It's kind of it would be that plus what goes in there for additional incentive comp.

Speaker 2

Got it. And then my final question, just I noticed some gain on sale of the SBA loans in this Q1 or Q3 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?

Speaker 1

Yes. The group is annuity where we have a 5 year exclusive marketing agreement with that They've been going to market and initially trying to get the borrowers, triple people borrowers, dollars 115,000 that were On the loan source, but the loans are, the market to them, a small balance SBA loans under 7.8, a lot of them under 25,000 And then more to $250,000 They're kind of averaging about $75,000 a month plus some are at the 25 and some are bigger. It looks like they're running now at a run rate of $3,000,000 to $4,000,000 where we sit today, $3,000,000 to $4,000,000 a month. So it's improved a lot. It's not where we think it can get to.

Speaker 1

I should be No, I'm not going to reread the forward statement, but some of the amount, we'll see what happens. We'll slow start, 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 loan today that was sold in the March 31 I would expect that the June 3rd quarter might be a small amount higher, let's say, And very round numbers, the gain on those sell for it's about 10%, has a little bit more maybe 11.

Speaker 1

Okay. And I think that's probably a good average to use. If they do, say they think $4,000,000 a month, That's $112,000,000 a quarter and our share of that's about $600,000 And then we wind up holding on our balance sheet, the part that is the unguarant part that's guaranteed, Part of the loan, it's not sold. And are there any losses?

Speaker 2

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

Speaker 1

That's a lot. Thank you very much.

Operator

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

Speaker 1

Thank you very much for that, and thank you all for listening and Alex for your excellent questions. I'm looking forward to talking to you again after the end of our 4th Fiscal quarter June 30, and we'll be reporting both on that quarter and on the year. Thank you and wish you all just a great day.

Operator

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

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