Northeast Bank

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, and 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. At this time, All participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star one one on your touchtone phone. 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. I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.

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 turn to page three 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 purchase loans in the But with respect to the purchase 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. um and for um i'm comparing the same quarter i should be clear on that because we're june 30th year end and for the same quarter um the first calendar quarter of uh 22 was 23.9 million dollars so both of those are relatively um small numbers um 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 non-bank 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 a, you know, we have the underlying borrower. We have our borrower. all in the collateral, all in the capital stack providing protection to our loans. The, I also want to point out something that we don't talk about that often, but it's worth noting is that in our purchase 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 purchase loan book. Just to remind you, accretable discount we bring into income over the life of the loan. And we have 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 you know the com the combined about that is about 191 million dollars two million dollars of a uh credible discount and allowance we have on our balance sheet uh which bodes well uh for us The other point is this is kind of good and bad. The very nature of our originated loan book and our activity is primarily our 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. but there's not that much competition, you know, 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 have some data on that. For fiscal year to date, so for nine months, we originated a total of $285 million of loans and we had $297 million of pay downs. 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 millions of pay downs. You know, 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%. 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 purchased loans and then have an allowance for the amount that we grossed it up. So, for example, you know, if we bought a loan that was, say, a $50,000 loan, but we didn't pay anything for it in the pool bid pre-CECL, we would have carried that at zero. Post-CECL, we show the loan at $50,000 with a $50,000 allowance. So, with respect to 15 basis points of the charge-offs, they are, in my example, attributable to the gross up of the loan and the allowance was set up. So the charge-offs, as you would normally think of it against our principal, was five basis points. And I think with that, Richard?

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 NII. 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 NII was the larger balances that generated that yield. The yield on the purchase book was 8.7%. On the originated book 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 FHLV borrowing. Let me break that down quickly. our brokered certificates of deposit the bcds were up 132 million dollars whereas the fhlb borrowing was down by 96 million dollars that was a deliberate effort 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 dollars there are two key components to that the key change that was uh that you'll notice is there was a 1.05 million dollar 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 dollars you're left with non-interest expense of 15.4 million dollars which is the comparable non-interest expense in comparison with prior years. Turning now to the ATM offering, you'll 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 31 cents 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. Those 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. 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 most sellers are really not focused on balance sheet repositioning that earlier in the 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 purchase 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 in 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. Thank you, Pat. Thank you, Richard.

Now we will turn it over to you for any questions that you might have.

Thank you. We will now begin the question and answer session. If you have a question, please press star 1 1 on your touchtone phone. If you wish to be removed from the queue, please press star 1 1. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 1 1 on your touchtone phone. Our first question comes from the line of Alex Twerdahl from Piper Sandler.

Hey, good morning all. Good morning, Alex. First, you know, Pat or Rick, you know, 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. Can you just go into that and explain exactly what you mean by the additional need for bank leverage there?

Well, it's just been a lot of capital being raised by non-bank lenders to get into the real estate space, coupled with just fewer transactions overall. Those non-bank lenders need to be very, very competitive on rate. And so leverage helps them do that. And so that's been good for us.

All right. Thank you for for spelling that out for us. So on the I guess just starting on the 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?

Well, I gave the number for the 9.3 was for what we booked in the quarter. The overall number of the 10% is that includes our whole portfolio. So we have some loans 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 on the slide in the book number um 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 966 and so this is really back of the envelope math if we have This quarter, we did $153 million at 9.31. 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 966 to 1009. 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.

Okay, appreciate that. And then, you know, you alluded to some opportunities out there for loan purchases, you know, in the coming quarters. Could you just remind us sort of what your appetite is in terms of loan sizes, loan pool sizes, you know, both in terms of, and then, you know, 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, you know, I think there's been a lot more conversation about some big pools being potentially sold in the near term. And so we just want to be able to make sure we're lining up what your appetite is with what other people are talking about as well.

So my next comments will be, and the numbers will be rounded. I don't have those exactly in front of me, although we have them, but we have about 550 or 600 million dollars of. The loan capacity now, if we were to leverage our capital, you know, 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, you know, to without raising a lot more capital outside of the ATM, for example, just kind of where we are. to put a lot more purchase loans on our balance sheet. In terms of what we like, we're not limited particularly by pool size, subject to what I just described as our overall current limit, 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 our house limit is more like 10% of that number. But our sweet spot on purchase loans are anywhere, if 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 seven that makes the point. Now this is for all of our lending. It 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 and 15. So I'll say it another way. 75% of our loan book are loans that are less than $10 million with a big chunk between two and six and under two. In terms of the kind of loans that we look at, we're looking at performing loans. We're looking for loans that are generating sufficient cash flow you know we are we have a you know a preference for loans that are in liquid markets um so that if we ever have to take back the collateral which is rare that um you know 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. You know, our portfolio is while we're in 44 states and we keep track of that, but don't ask what states we're not in place, but we do keep track of it. You know, our biggest concentrations in New York, followed by Calif. California, followed by Florida and New Jersey. But then we're around in a lot of other states. And we also, you know, on purchase loans, we, you know, 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've given you all that to what your question is. And you didn't ask exactly about this, but I want 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, but the caveat is not done till it's done. We would expect meaningful volume in our fourth fiscal quarter or the one that we are currently in.

The last part of your question was on staffing. And I just had written comments that that we're fully staffed on the on the lending side. We have capacity to absorb absorb more volume if we can find it.

A lot of operational leverage on that.

Thank you for pointing that out. Yeah, that was I mean, that was I guess if there was another billion plus purchase like we saw a couple of years ago, you know, if that would be absorbable in the current staff. And it sounds like the answer is is probably that's not probably.

it's um yes um you know subject to adding maybe one or two people but you know um i don't want to have any first of all i'm not suggesting at all i'm just responding to your million dollar question billion dollar question that um you know as pat said we have a lot we have a lot we have a lot 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 you can 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 a billion dollars of loans on the books with moderate non-interest expense increases.

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 know 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 on the thought process around utilizing that channel and the timing that you used it as i can speak to that so um there was no specific target um what we were trying to do was to utilize the atm um

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. We utilize it when the opportunities seem appropriate to us.

Alex, just going back to the, you know, kind of the hypothetical you had suggested, if there were a billion-dollar portfolio in our capacity, is currently 600 million before we you know we earn money each quarter you know and we wanted to do that that would require us to go out absent the at building up the our capital slowly with the atm to go out and raise capital for that transaction um which we would prefer not to do you know in a you know with with any urgency around it as opposed to you know gradually building up our 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, you know, when we're our stock prices today, it seems like a reasonable idea to do it in moderate amounts. You know, we were approved for 50 million and, you know, last quarter we purchased, How much, Richard?

9.4 million.

We used 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, you know, doing it moderately. I should point out, I'm not saying we're going to spend it, you know, sell stock this quarter. It really depends on a host of factors. But that was our thinking for in the last quarter.

Yeah, understood. And then going on to expenses, and Richard, you mentioned, you know, about 1.05, I think you said true up in accruals that normally would happen in the fourth fiscal quarter. So should we expect, you know, 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 takes it back down in the first fiscal quarter. Is that not going to happen this year?

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 round. It's just as 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. You know 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, you know you know in March so that's nine months into the quarter, so we added to it for this quarter, you know I would expect that. No guarantees on this, but it would not be we're not going to have the true open the fourth quarter. nearly as large as we've had in prior quarters. So let me just try and put some numbers to make sense of all that for you. Normally, if you take out the $1 million, the non-interest expense is $15.4 million, 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. But we don't know really how much we need until we move further along the year. I was wrong. I'm looking at the chart. It's 15.7 in the last quarter and 15.4 this quarter. And it was 15.4 in our first fiscal quarter. So I would think about that as a number. And then, you know, we'll see what the fourth quarter looks like. But we just thought it made sense, you know, to true up, you know, a meaningful portion of it. in the third quarter.

Yeah, okay, that makes sense. And then just final question for me, the SBA business, it seems like it's got the engines starting to rev up again, seeing a nice growth rate and originations and sales volume there. Can you just talk a little bit more about expectations and outlook and thoughts around that segment?

Well, you're right that it's revved up. We did about 30 million of originations um in the march 31 quarter and as you know of course this has been a very slow build you know we started this about two and a half years ago um and at the time i said which i will repeat i don't want to set expectations high on this you know um but it is it's building um and we would expect it will continue to build um but i don't want to really I'm sorry to do this to you, Alex. I know you'd like a better number 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.

No, it's been a line that's been all over the place over the last you know, five or ten years. So I'm not going to hold you to anything, but we will include it in our model. That's all my questions for now. Appreciate the time, and I'll get back in the queue. Thank you, Alex.

Thank you. If you have a question, please press star 1-1 on your touchtone phone. If you wish to be removed from the queue, please press star 1-1. We have no further questions at this time. Now I will turn the call over to Rick Wayne for closing remarks. Thank you.

Thank all of you on the call. And thank all of you who 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.

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