Northeast Bank (NASDAQ:NBN) Q3 2024 Earnings Call Transcript May 1, 2024
Northeast Bank isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Northeast Bank third quarter fiscal year 2024 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; 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 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 rebroadcast on the website for future use.
[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 the current expectations of North East 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.
Richard Wayne: 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. I’d like to first now 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 $13.9 million or $1.83 of earnings per share. Our ROE was 16.45%, our ROA was 1.87%, and our NIM. was 5.01%.
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 million of loans and there were no purchased loans in the quarter. But with respect to the purchased 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. The purchase volume I would point out is typically lower in the first quarter of each calendar year. For FY23, it was $21.5 million and for — I’m comparing the same quarter, I should be clear on that because we’re a June 30, year end. And for the same quarter, the first calendar quarter ’22 was $23.9 million.
So both of those are relatively small numbers. In part, there’s not the same urgency for sellers in the first calendar quarter when there has been a lot of activity in the fourth calendar quarter, which was the case for us. I also want to talk about the originated loan book in a little bit more detail. Out of the $153 million of originations in the quarter, $143 million or 93% were in our lender finance program that is to leverage nonbank lenders in their lending, which we really like that part of our originated portfolio. They’re all floating either tied to SOFR 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 $532 million of our originated loans representing a 63% advance rate against our borrower’s loan balance and a weighted average loan to value of 44% against the underlying collateral.
Obviously, quite strong with low LTV and low advance rate, we have the underlying borrower, we have our borrower, all on the collateral — on 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 purchased 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. At March 31, we have $174 million of accretable discount on our purchased loan book. Just to remind you, accretable discount, we bring into income over the life of the loan. And we have sent almost $18 million 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’s — the combined about that is about 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 of book loan book and our activity is primarily bridge loans. They have a weighted average life at least historically of 1.6 years. So it’s short. 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. Second 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’d some data on that for the fiscal year to date.
So for nine months, we originated a total of $285 million of loans, and we had $297 million of paydowns. 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. 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 million of originations versus $297 million of paydowns. 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 nonperforming 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%.
The charge-offs in the quarter were a total of 20 basis points, but 15 basis points of that was just CECL related. When CECL was adopted, under the CECL rules, we needed to gross up some of our — our purchased loans and then have an allowance for the amount that we gross set up. So for example, if we bought a loan that was, say, $50,000 loan, but we didn’t pay anything for it in the pool bid pre-CECL, we would have carried at a zero. Post-CECL, we show the loan at $50,000 with a $50,000 allowance. So with respect to 15 basis points of charge-offs, they are, in my example, attributable to the gross-up of the loans and the allowance was set up. So the charge-offs, as you would normally think of it against our principle was 5 basis points. And I think with that, Richard?
Richard Cohen: Great, thank you very much, Rick. We’re 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 third quarter $36.5 million of NNI. That $36.5 million included $1.2 million of transactional income. In other words, if you exclude that transactional income, the base NII was $35.3 million, and that is higher than we’ve seen in historic quarters. The key reason for the NNI was the larger balances that generated that yield. The yield on the purchased book was 8.7%; on the originated book, it 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 second quarter. And you can refer to slide 15, if you want to get a sense of that. We had a change in the mix of deposits in the Bank in the third quarter. We had an increase in our term funding and a corresponding decrease in FHLB borrowings. Let me break that down quickly. Our brokered certificates of deposits, the BCDs were up $132 million, whereas the FHLB borrowing was down by $96 million. That was a deliberate efforts by us to increase our off-balance sheet capacity. Turning now to non-interest expense. The non-interest expense for the quarter was $16.4 million.
There are two key components to that. The key change that was — that you’ll notice is there was a $1.05 million accrual for the incentive compensation. That was a true-up because of our expectation on the annual total and we accrued three quarters of the total annual expense. Ordinarily, we take that true-up in the fourth quarter. If you strip out that $1.05 million, you’re left with noninterest expense of $15.4 million, which is the comparable noninterest expense in comparison with prior years. Turning now to the ATM offering, you will 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 third quarter was $9.4 million.
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. Both 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 Dignan.
Patrick Dignan: Thanks, Richard. Despite no loan purchases last quarter, there’s really nothing unusual about the quarter as Rick pointed out, the first calendar quarter is generally slow on the purchase side as those sellers are really not focused on balance sheet repositioning that earlier 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 fourth quarter. And we’re confident that if you look at the entire fiscal year, that we’ll have a very strong year for purchased 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 and CMBS, most likely due to growing confidence in the market. 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.
Rick?
Richard Wayne: Thank you, Pat. Thank you, Richard. And now we will turn it over to you for any questions that you might have.
Operator: [Operator Instructions]. Our first question comes from the line of Alex Twerdahl from Piper Sandler.
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