Participants
Richard Wayne; President, Chief Executive Officer, Director; Northeast Bank
Richard Cohen; Chief Financial Officer; Northeast Bank
Patrick Dignan; Chief Operating Officer, Executive Vice President; Northeast Bank
Alex Twerdahl; Analyst; Piper Sandler & Co.
Presentation
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 [$191 million, $2 million] 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 — [on] 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.
Question and Answer Session
Operator
(Operator Instructions)
Alex Twerdahl, Piper Sandler.
Alex Twerdahl
Hey. Good morning, all.
Richard Wayne
Morning, Alex.
Alex Twerdahl
First, Pat or Rick, on that last point Pat that you were making on the need for bank leverage, and I think you said something about as it related to pickup and CMBSs. Could you just go into that and explain exactly what you mean by the additional need for bank leverage there?
Patrick Dignan
So it’s just been a lot of capital being raised by nonbank lenders to get into the real estate space coupled with just fewer transactions overall. Those nonbank lenders need to be very, very competitive on rate. And so leverage helps them do that. And so that’s been good for us.
Alex Twerdahl
All right. Thank you for spell that out for us. So I guess just starting on the originated activity this quarter. And I guess as I look at the yields, the yields overall were over 10%. I think Rick you mentioned the weighted average production was 9.3%. So is there something in there, some acceleration of interest that pushed those yields higher this quarter?
Richard Wayne
Will I gave the number for the 9.3% was for what we booked in the quarter. The overall number of that 10% is — that includes our whole portfolio. So we have some loans that are that are higher. And for this quarter’s production, we didn’t have any transaction acceleration of any of that as we have.
So if you look at on the slide in the book number 22, Alex, in the originated column, this is now our whole portfolio. So you can see that the regularly scheduled interest and accretion on the whole book is 9.66%. And so this is really back of the envelope math that we have. This quarter we did $153 million at 9.33% or 9.31%, rather. The other part of the legacy portfolio coming into the quarter was probably more like 9.70% or 9.80% because it was more of the portfolio and the rate was higher.
But what we didn’t have for the number I quoted was any accelerated accretion because we just booked it. And you can see that for the whole portfolio, there was 43 basis points, which took the 9.66% to 10.09%. For all the others that are listening, that’s a lot of numbers I threw out. I think if you look at page 22 of our slide deck, that will be clear for you, hopefully.
Alex Twerdahl
Okay. Appreciate that. And then you talked — you alluded to some opportunities out there for loan purchases in the coming quarters. Could you just remind us sort of what your appetite is in terms of loan sizes, loan pool sizes, both in terms of — and then maybe kind of overall purchase capacity, both in terms of the capital and capital constraints, and then also just in terms of just the sort of the capacity with your current workforce to be able to manage through some of that stuff.
I know that’s a several part question, but I think there’s been a lot more conversation about some big pools being potentially sold in the near term. And so just wanted to be able to make sure we’re lining up what your appetite is with what other people are talking about as well.
Richard Wayne
So my next comments will be — the numbers will be rounded. I don’t have those exactly in front of me, although we have them. But so we have about $550 million or $600 million of loan capacity now, if we were to leverage our capital to a level that we were comfortable with. And that, of course, gets increased as we — if we were to sell the stock under our at-the-market or the ATM offering that we have out there and of course, also increased by earnings every quarter as well.
And so we’re not — so we have a lot of room to — without raising a lot more capital outside of the ATM, for example, just kind of where — to put a lot more purchase loans on our balance sheet. In terms of what we’d like, we’re not sort of we’re not limited particularly by pool sizes, subject to what I just described is our overall current limits, our overall loan capacity. But when we look at loan pools, it’s more we look at them loan by loan. And we have both a legal lending limit in terms of the size of the loan under Maine law of 20% of total capital, but we never get that close.
But with that, our house limit, it is more like 10% of that number, but our sweet spot on purchase loans are anywhere — it’s a big, sweet spot, call it $1 million to call it $10 or $12 million; occasionally, we have a larger one and sometimes we have smaller ones. And we have a slide in the book on page 7, that makes the point. Now, this is for all of our lending that shows that only 17% of our loan book are loans that are $15 million or more.
And so I mean 83% of our loan book is less than $15 million and only $8 million — or 8% is between $10 million and $15 million . So I’ll say it another way, 75% of our loan book are loans that are less than $10 billion with a big chunk between $2 million and $6 million and an under $2 million.
In terms of the kind of loans that we look at, we’re looking for at performing loans, we’re looking for loans that are generating sufficient cash flow. We have a preference for loans that are in liquid markets, so that if we ever have to take back the collateral, which is rare that there’s a market for those.
We generally stay away from and way away from construction loans or land loans or development loans or the things where there’s historically been a lot of risk for that. Our portfolio is — while we’re in 44 states and we keep track of that, but don’t ask which states we’re not in place, but we do keep track of it.
Our biggest concentrations in New York followed by California, followed by Florida and New Jersey, but then we’re around in a lot of other states. And we also — on purchase loans, we get whatever the interest rate and the structure of the loan is when we acquire it. That’s a lot of information on your question. I hope it was relevant information that I have given you all that to what your question is.
And you didn’t ask exactly about this, but I wanted to just amplify a little bit Pat’s comment about no volume in Q3, but there were transactions we were knee-deep into that have rolled into Q4. So we’re expecting, of course, with the caveat, it is not done until it’s done, we would expect meaningful volume in our fourth fiscal quarter or the one that we are currently in.
Patrick Dignan
The last part of your question was on staffing and I just had to comments, that we’re fully staffed on the lending side. We have capacity to absorb more volume if we can find it.
Richard Wayne
A lot of operational leverage on that. Thank you for pointing that out.
Alex Twerdahl
Yeah, I mean that was — I guess if there was another $1 billion-plus purchase like we saw a couple of years ago, if that would be absorbable in the current staff, and it sounds like the answer is probably.
Richard Wayne
No, it’s not probably. It’s yes. Subject to adding maybe one or two people, but I don’t want to have — first of all, I’m not suggesting at all, I’m just responding to your question million-dollar-question — billion-dollar-question that, as Pat said, we have a lot of people here already and maybe some — and more entry-level folks to help with part of it. But now there’s a lot of operating leverage.
And this is what I was going to say, you can do the arithmetic. I don’t want to say anything about that, Alex, but what that would mean to put $1 billion of loans on the books with moderate noninterest expense increases.
Alex Twerdahl
Yeah, understood. Back to the comments on the ATM and I think the comment of significant opportunities. Is the ATM and the amount that you raised was that kind of a specific amount in order to kind of be able to just sort of have that capital on hand? Or is that more testing the market to see how quickly you could bring it in, should you need it, or maybe just a little bit more of the thought process around utilizing that channel and the timing to use it?
Richard Cohen
Alex, I can speak to that. So there was no specific target. What we were trying to do was to utilize the ATM at sensible volumes over a sensible period of time. So we didn’t set out to deliver a very specific target or to achieve a very specific price. It’s a long-term program, utilize it when the opportunities seem appropriate to us.
Richard Wayne
I was just going back to the kind of a hypothetical you had suggested if there were $1 billion portfolio and our capacity is currently $600 million before we earn money each quarter and we wanted to do that, that would require us to go out after the [AT], building up the capital slowly with the ATM to go out and raise capital for that transaction. Which we would prefer not to do with any urgency around that as opposed to gradually building up our capital.
Our view is that we will utilize that capital. I’m not saying we’re going to utilize it this quarter or next quarter, but we think it’s — when we’re at stock prices today seems like a reasonable idea to do it in moderate amounts. We were approved for 50 million. And last quarter we purchased 9.4 million of it. And I want to say we had about 9 million before that. So we have about 32 million left. So we’re doing it moderately.
I should point out, I’m not saying we’re going to spend it, sell stock this quarter. It really depends on a host of factors, but that was our thinking for — in the last quarter.
Alex Twerdahl
Yeah, understood. And then going onto expenses and Richard, you mentioned about 1.05% I think you said true-up in accruals that normally would happen in the fourth fiscal quarter. So should we expect going forward to see a more, I guess, maybe like a steadier level of expenses? Normally, we see that fourth fiscal quarter like that pretty decent increase in salaries and then it kind of tick back down in the first fiscal quarter. Is that not going to happen this year?
Richard Wayne
Well, I think that we will have — in the fourth quarter, there will be still money that we accrue. We accrue money for our incentive comp all year around. It’s just that we get later into the quarters, we take a look at how well the Bank is doing. And whether we think — when we look at those that are going to get incentive comp, which incidentally, we pay bonuses to everyone in the Bank, some more and maybe much more than others.
But as we get closer to the end of the year — so we were looking at what we thought we needed know in March. So that’s nine months into the quarter. So we added to it for this quarter. I would expect that — no guarantees on this, but it would not be — we’re not going to have the true-up in the fourth quarter, nearly as large as we’ve had in prior quarters.
So let me just trying to put some numbers to make sense of all that for you. So normally, if you take out $1 million, the non-interest expenses is $15.4 million. All right? So that’s the number that we had, I think in the preceding two quarters, more or less, same number. That’s kind of our run rate currently before we put in more money for incentive comp. We don’t know really how much we need until we move further along the year.
(multiple speakers) I’m looking in the [chart now], it’s $15.7 million in the last quarter and $15.4 million this quarter, and it was $15.4 million in our first fiscal quarter. So I would think about that as a number and then we’ll see what the fourth quarter looks like, but we just thought it made sense to true-ups a meaningful portion of it in the third quarter.
Alex Twerdahl
Yeah. Okay. That makes sense. And then just final question for me. The SBA business seems like it’s got the engine starting to rev up again in a nice growth rate in originations and sales volume there. Can you just talk a little bit more about expectations and outlook and thoughts around that segment?
Richard Wayne
But you’re right, that it’s revved up. We did about $30 million of originations in the March 31, quarter. And as you know, of course, this has been a very slow build. We started this about 2.5 years ago. And at that time, I said which I will repeat, I don’t want to set expectations high on this, but it is building and we would expect it will continue to build. But I don’t want to really put — set any –. I’m sorry to do this to you Alex. I know you’d like a better numbers than this. It’s probably reasonable to assume that the path that we’re on now will continue and how much more it will be, we’ll see. Sorry about that unclear answer [precise in].
Alex Twerdahl
No, I appreciate. It been online, it’s been all over the place over the last 5 or 10 years, so I’m not going to hold you to anything, but we will include in our model.
That’s all my questions for now. Appreciate the time, and I’ll get back in the queue.
Richard Wayne
Thank you, Alex.
Operator
Thank you. (Operator Instructions) We have no further questions at this time. Now I will turn the call over to Rick Wayne for closing remarks.
Richard Wayne
Thank you. Thank all of you on the call and thank all of you will listen to the call after this, which you can find this on our website and we will talk again in July. Thank you all.
Operator
Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
