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.