NBN - NASDAQ

Welcome to the Northeast Bank Second Quarter FY 2023 Earnings Call. My name is Kevin, and I'll be your operator for today's call. This call is being recorded. With us from the bank is Rick Wayne, 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 will be referenced in this morning's call. The presentation can be accessed at the Investor Relations section of northeastbank.com under the 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 rebroadcast 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 Instructions] 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 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. Wayne, you may begin.

Thank you. Good morning, I am Rick Wayne, and with me are JP Lapointe, our Chief Financial Officer; and Pat Dignan, our Executive Vice President and Chief Credit Officer. After our presentation, we would, of course, be happy to entertain any questions that you might have. I want to refer to the slides in my comments, starting on Slide 3. The financial highlights for the quarter were net income of $11.3 million, earnings per share of $1.54, return on equity of 17.5%, return on assets of 2.1%. Of course, the big news, which was included in our earnings release the last quarter was that soon after September 30 in this quarter, we purchased loans with UPB of $1.15 billion at a price of $998.5 million, which was an 86.6% investment on the purchase price. We also -- in the quarter, we originated $174 million of loans. The weighted average yield on the originations was 8.72%, and we earned 8.48% on the entire book. On the purchased loans, we had a return of 8.69% and when you look at all of this compared to the prior quarter, I would note that in the -- a year ago, we had $6 million of correspondent fee income and only $600,000 in the current quarter, which is great because we're looking for ways to grow our loan book and replace the correspondent fee income, which we've done well. And then finally, if that wasn't enough, it was a busy quarter, we had approved an at-the-market offering for up to $50 million. We were quite busy. I want to now turn to Slides 4 and 5 and make a few comments on the loan purchases in the quarter. On Slide 4, we provide detail based on collateral type, the largest collateral types were multi-family, which was $320 million out of the $1.1 billion, retail of $312 million. And then we can see the detail there as other collateral types, really noteworthy that the weighted average loan to value of the $1.1 billion of loans that we purchased was 33.5%. As you repeat that number, pretty low, 33.5% weighted average loan-to-value on our purchases, always focusing on credit quality, we do that. And then on Page 5 shows the geography of it. And we can see that the largest piece of it was in California with $570 million of UPB. And then next, New York $216 million and Washington state of $89 million. And then you can see the rest of the UPB on that slide. If we go to Slide 9, we break our focus for a second on the investment side, thinking about concentration risk by dollars -- our total capital was $270 million. And so you can see that on the very largest size, we only have 12% of our portfolio with the loans that are $15 million or greater, 10% between $10 million and $15 million. And then you can see the rest. So we do not have a concentration limit of the dollars. We're very careful about that. Below that, you can see the collateral types. And then we're -- in our portfolio now the largest state is New York with 33% followed by California with 31% of our portfolio is our national lending portfolio, of course, and then the rest in another 42 states. If we move now to Slide 19, we'll talk about the cost of our deposits for -- in a couple of minutes. The average cost of deposits, which is what the green line depicts increased by 141 basis points from 0.87% in Q1 to 2.28% at the end of December 31. And I want to point out that, that was primarily the result of funding for our loan purchases, where we funded that with broker deposits and some borrowings from the Federal Home Loan Bank. And so we had a lot of new dollars in terms of the rate on our existing deposits that went up by 30 basis points. And so you can see most of it as a result of adding new deposits and expensive deposits -- more expensive. And you can see our spot rate, which was 303 on the last day of December was up from the spot rate of September 30, which is 146 basis points. And that, again, primarily was due to the funding of the loans that we purchased and really primarily with brokered CDs. The brokered CD cost for all that was 4.43%, and those CDs will mature between June and December of this year, and we expect to replace that with funding at about 4%. So that should come down. Next, I want to move to Slide 23, which takes a look at our non-interest expense. You may recall from prior calls, we said that we expected, we would be about $52 million for the year. And you can see that we're higher in this quarter, but we were lower in the last quarter. In the six months, we're pretty close to that -- we're pretty close to $26 million, which would be what you would expect for half a year. I will say though, as we added $1 billion of -- in our loan book, we will see an increase in expenses in the third fiscal quarter and fourth fiscal quarter as we're going to be adding more people to service the loan book. It will still be highly profitable with that purchase, but we're going to have some increase in non-interest expense. On Slide 25, you can see that our loan discount combined is now $189.6 million, which is an increase of $150 million from where we were at the end of September as a result of buying the loans at a good discount this quarter. And finally, before we take questions, I want to ask you to look at Slide 31, which is the last slide, I just want to make a few points on that. As I mentioned in the very beginning, as one of our goals was to replace correspondent fee income with more net interest income. And if we look at the net interest income for the December 31 quarter was $28.7 million, which is the highest, and that's up to $20 million one year ago. And also, it's important to note that a big chunk of the purchases, what we're reporting here is the multiple pools, but the largest one we did not close until about December 23...

21st.

21st, thank you, JP. So we only had 10 days of interest income from that. And then, of course, going forward, we will have that included, although we included. I went to that reasonably quickly, but we provided all its information assuming that you have read it. And of course, if there's anything we can clarify, we'll do. And with that, we'll be happy to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Twerdahl with Piper Sandler. Your line is open.

Hey. Good morning, guys.

Good morning, Alex.

First off, obviously, a lot of -- a lot going on here. Can you give us a little bit more in terms of the characteristics or duration, I guess, that we should be expecting for some of these purchased loans. Just trying to get a sense for what kind of amortization we might see on an annual basis as well as trying to get a sense for how to think about the, I guess, the regularly scheduled or regularly accretable yields that we should be using or potentially could be using for -- to think about modeling for 2023.

I think we can give you some direction. We now -- for competitive and other reasons, we don't publicly disclose on a particular pool or pools in the quarter, what the WACC is, what the WAM is, what we expect we do report it, of course, as when we look back at what happened in the quarter and the year. We report what happened for the overall portfolio. But I think that can give you out some helpful information on these assets that we bought. One is that these are longer-term assets, the WAM on it could be more than 10 years and it had a lower coupon rates. That's why we got the big discount that we did. It wasn't obviously a credit issue given how low the LTVs are. We would -- there's some things we know about this and others we don't. We would expect a general returns on this to look like other loans that we purchased a little bit higher. But the really big variable is when the loans pay off as to how much discount we're going to recognize. And I'd say comfortably, we will earn more than 8 on this, perhaps meaningfully more than that. It depends on the prepayment speed on it.

Okay. So -- and 8 is over the lifetime of these loans, right? That's not something that we would expect to necessarily seen immediately.

No, exactly right. Because I mean it may happen. I don't think it's crazy, I think we're going to do more than -- report more than eight currently and more I don't mean to have more. I mean, but over time, with prepayments and with what we call shadow interest when we -- some loans, you get quite controlled interest and like -- and things like that. But I think this will look generally like what we've bought in the past.

Okay. And then can you talk a little bit about what drove the volume? Is this coming from several banks? Or is it a handful -- is it an indication of the overall broad market, maybe just a little bit more of sort of the characteristics of what drove this opportunity?

These were -- I think we have seven transactions in the quarter purchases. The ones that we're referring to here are -- good chuck of them were or four of them or three of them maybe, and the biggest one came out of an M&A transaction that the seller needed to and wanted to sell loans.

Okay. And is this -- I mean, does this kind of keep your sort of hands full for the time being? Or I know you've talked about the market being pretty solid. Is there a possibility to continue seeing purchases over the next couple of quarters?

Well, I think we will -- sort of generally been -- normally, we buy 100 -- excluding these big transactions, and not only we buy $150 million to $200 million quarter. No, I certainly at that level, we would expect that, and it's entirely possible that we could see some larger ones -- positive quarter past a year. This is why I have been here, Alex, to help you with these about year. And we don't know whether we're going to see another big transactions, certainly within the realm of possibility. But I'm not predicting that I'm not predicting that to be clear to set expectations.

Right. And then I know you have the ATM going on, but what sort of constraints would there be on the balance sheet with respect to funding or capital that would be considerations for thinking about future purchases?

Well, I just want to find this -- so at 12/31, after we took our loan book worth of $2.5 billion at the end of December, which is obviously up a lot. At the end of December, our loan capacity, if you look at our capital ratios, it was $150 million. So that came back down from like a year ago, it was $1 billion of capacity. There's $150 million. As you know, Alex, our loan capacity will increase as we earn money. And we have the ATM, which is if we need to sell more shares to raise capital, we can do that as well. That's all in place. And in fact, I didn't note that in here, but it's in our earnings release. How much did we sell in...?

34,000 shares.

So we haven't done much of it yet. It was approved kind of late in December, but we are not very late, maybe mid-December, but we sold those 33,000 shares. So we can sell more shares to raise more capital. I don't see us as capital constraint if we have opportunity, which we were going to keep on the balance sheet.

Great. And then can you just walk through the -- you talked about the -- some brokered CDs going from -- I thought you said 4.43% and then maturing between June and December of this year and that funding going out before. Can you just walk through the amount of that again in the actual numbers?

Sure, Alex. During the quarter, broker deposits went up about a little over $500 million with a weighted average rate on that being about 4.43%. That was more for immediate funding, not our long-term funding strategy of this. So our plan is to pledge the loans that we purchased from the FHLB and take out some longer-term advances to better match the structure of the loans. And right now, where rates are from the FHLB advances, we think we can borrow money around 4% to match some of the maturity of the loan pool. So we do expect the funding cost to come down once we can deploy that strategy as these brokered deposits mature.

Okay. And then you talked about the increase in expenses. And can you give us maybe just a sense for what -- how many people you might have to hire or an efficiency ratio or some sort of guideposts to sort of give us some sort of sense for how much expenses might go up as a result of meaningfully increase in the size of the balance sheet?

I think we could give you a better answer when we reconvene at the next call, I'm not trying to avoid your question, but I don't want to put out a bad number. And we'll have a much better idea than as I -- but I did want to make it clear that we have a lot of operating leverage in the bank, and it's going to be a relatively small number relative to our expenses and our -- the size of our loan book. I'd rather -- to give you the idea, I'd rather put that out when we talk next time, we can give you a much tighter number.

Okay. No problem. I think that's all my questions for now. Thank you for providing some clarification here.

Thank you, Alex.

[Operator Instructions] We have no further questions at this time. I would like to turn the call back over to Rick Wayne for any closing remarks.

Thank you and those on the call. Thank you very much for your participation. Alex, thank you for your questions. Good ones, actual ones. And we look forward to talking to you again at the end of the current quarter, where we can provide some -- tighter answers to the question that Alex asked. And with all of that, I say thank you.