NORTHPOINTE BANCSHARES INC Q3 FY2025 earnings call

• MPP Business Success: Exceptional performance with $3.4 billion in balances at quarter end, $473 million growth from prior quarter, and $1.7 billion growth from third quarter of last year. Funded $9.8 billion in loans through the channel in the third quarter, highest quarterly level ever.
• Residential Lending Activity: Increased mortgage block and application activity, 23% annualized growth in all-in-one loan portfolio, and pickup in refinance activity in September. Added new mortgage originating professionals.
• Deposit Growth: Benefited from new core custodial deposit relationship, driving $300 million increase in interest-bearing demand deposits from prior quarter. Continue to explore new non-brokered deposit sources.
• Asset Quality: Virtually all lending programs backed by 1 to 4 family residential real estate, geographically dispersed. Credit quality and risk management practices strong, net charge-offs $977,000 in third quarter but still well below historical averages.
• Tangible Book Value: Increased by $0.56 per share over prior quarter, and by 15.8% annualized when adding back dividend impact.

MPP Business

• Third quarter ending balances increased by $473.2 million or 65% annualized, with average balances increasing by over $400 million from the prior quarter. Growth came from increasing facility size for 6 existing clients ($225 million additional capacity), bringing in 9 new clients ($345 million additional capacity), and strong utilization of existing clients. Average MPP participations were $8.7 million during the quarter, with average yields of 7.10% during the quarter (7.30% including fees).

Residential Lending

• Closed $636.6 million in mortgages during the third quarter, down slightly from prior quarter. Mortgage rate lock commitments and applications increased, with refinance volume picking up in September. Sold $547.9 million of loans in the quarter, with 82% in traditional retail channel and 18% in consumer direct. Hired new mortgage originating professionals.

Digital Deposit Banking

• Ended third quarter with $4.8 billion in total deposits, up from $4.5 billion in the second quarter. Majority of deposit growth from new custodial deposit relationship, driving a $306.9 million increase in interest-bearing demand deposits. Also saw a $34.3 million increase in noninterest-bearing demand deposits.

Specialty Mortgage Servicing

• Earned $2.0 million in loan servicing fees for Q3 (excluding $910,000 negative adjustment on change in fair value of the MSR). Serviced 14,200 loans for others with a total UPB of $4.5 billion as of end of third quarter. Continued to private label outsource nonspecialized mortgage servicing while expanding loan servicing.

• Net Interest Income: Increased by $3.8 million over prior quarter, net interest margin 2.47% in third quarter. Full year 2025 net interest margin expected to be in 2.45%-2.55% range, lower end; 2026 expected in 2.45%-2.55% range, higher end.
• MPP Loans: Ended third quarter at $3.36 billion, forecasting period ending balances to increase another $50 million to $100 million by year-end 2025, and $4.1 billion to $4.3 billion by year-end 2026. Expect $300 million to $500 million on average participated out in 2026.
• AIO Loans: Period ending loan balances expected to be between $740 million and $760 million by year-end 2025, increasing to between $900 million and $1.0 billion by year-end 2026.
• Noninterest Income: Increased by $1.6 million from prior quarter, driven primarily by higher gain on sale of loans. 2025 total saleable mortgage originations forecast $2.1 billion to $2.3 billion with all-in margins 2.75%-3.25%; 2026 total saleable mortgage originations forecast $2.2 billion to $2.4 billion with same margin range.
• Noninterest Expense: 2026 total noninterest expense expected to be in range of $140 million to $144 million. Fourth quarter 2025 noninterest expense expected similar to third quarter 2025 level.

• Asset Quality Risk: Asset quality is a significant risk for banks. However, virtually all lending programs of Northpointe are backed by 1 to 4 family residential real estate geographically dispersed in the US. Credit quality and risk management practices remain strong, with net charge-offs still well below historical long-term averages.

Q: Just drilling a little bit deeper on the NIM trajectory. I heard you on the guide for '25 and '26, the 2.45% to 2.55% level, low end and then high end. But when you look near term and into the beginning of 2026, can you talk a little bit about how you would expect the NIM to trend off of the 2.47% level in 3Q, just as you think about it big picture, given the repricing dynamics and then expected Fed rate cuts?

A: Sure. So based on what we've seen, I kind of outlined the September rate cut, we're still looking at the impact of that, which we'll see in the fourth quarter. I'll reiterate, we are mostly asset neutral as most of our assets and liabilities reprice within 30 days. There is a little bit of a negative effect in the short term from I would say, a 25-basis point rate cut, but it's nothing significant. So my guidance as we look from the margin from today out into 2026, I think we'll see continued improvement in the mix based on the fact that loans in our legacy portfolio or our first mortgages have lower average yields between 4% or 5%. As those roll off, we replace them with loans that are yielding today 7% or so of MPP or AIO. So we have a continued improvement in the mix that will trend out throughout the course of 2026. So we see kind of small improvements to get us to the average of 245 to 255 but sort of at the top end of the range. When we see the rate cuts, there's always a lag on MPP loans as those don't reprice predominantly until the 15th. So we were able to pick up a little bit of benefit from margin on that. I think those are kind of the puts and takes into the guidance in 2026.

Q: So just first question on the servicing portfolio. It looks like the UPB on loans serviced for others was up around $500 million this quarter. Any color on kind of what drove the increase?

A: So yes, we continue to ramp up our subservicing of the AIO-like products for various end investors. So we actually have added some additional new end investors with similar products over the last quarter. So we continue to ramp up that product specifically. And then we continue to retain some of our MSRs as we sell our own production into the market. So we'll slowly continue to build that, as Brad mentioned in his forecast.

Q: And then with regards to the outlook for -- on deposit growth and adding more custodial accounts, obviously, a very sizable one came on in the third quarter. Do you think future relationships that you add would be of similar size? Or is this kind of a larger one that was out there and they'll be on a much smaller scale going forward?

A: Yes, Damon. So that was probably an outsized one to start with, but we definitely continue to look for additional sources of non-brokered funding, both with custodial and noncustodial sources of non-brokered funds.

Q: And then just lastly, on the expense guide, Brad, can you just go over your commentary on that? I didn't quite get all that.

A: Sure. So for the last quarter, for the fourth quarter this year, I'd expect our expense guidance to be similar to the third quarter level for total noninterest expense. For 2026, my guidance is $140 million to $144 million for the full year. The key drivers are going to be, I'd say, higher mortgage volume, you're going to have higher variable comp on that business with the increase that we projected in saleable mortgage originations and AIO growth. We have improvement in business activity, which drives higher bonus and incentive comp. We always have a cost of living adjustment, which occurs March, April from annual merits. And then we have just continued to build out and strengthen our team and continue to develop our status as a public company and making sure our risk management practices are solid.