Northeast Bank

welcome to the northeast bank fourth quarter fiscal year 2024 earnings call my name is stephen and i will be your operator for today's call this call is being recorded with us today from the bank is rick wayne president and chief exec executive officer richard cohen chief financial officer and pat dignan exit executive vice president and chief operating officer Prior to the call, 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 11 on your touchtone phone. As a reminder, the 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'll now turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Thank you. Good morning, everyone. Thank you for joining us on the call. During the call, I'm going to first give some, go over some highlights for the quarter and the year. our view of what the year has looked like. After I finish my comments, Richard Cohen is going to talk about funding and our ATM. And then Pat is going to talk about loan activity and share some thoughts on what we see in the market. And then, as you've just heard, we'd be happy to answer any questions. First, just some thoughts on the quarter and the year. We think it was a really strong year and a strong quarter. Almost in all the metrics one would look at, our loan volume was very strong. Our margins, our NIM was very strong. Asset quality held up really well. And of course, Our return on equity at 17.46% for the year is impressive, as is the ROA at just a little bit under 2%, 199 for the quarter and 198 for the year. Let me just highlight a few things that I'm now referring to on page three. With respect to our national lending, the purchase loans were 160.6 million of UPB at a purchase price of 89.4% for an investment of 143.6 million. And for the year, 382 million invested with upb of 432.4 million at an 88.4 percent purchase price on the origination side we originated in the quarter 114 million and for the quarter and the shade under 400 million for the year at 399.1 million the um I want to just talk for a second about rates and move to page 22 in the slide deck, which takes a look at what we earned in the rates in the quarter. And this is a slide that shows what is both regularly scheduled interest and then plus normal accretion plus accelerated accretion and fees. First, starting with the purchase loans, The regularly scheduled interest and accretion was 843, and we picked up another 104 basis points from accelerated accretion for a total of 9.47% on the purchase loans. And on the originated loans, the regularly scheduled interest, not accretion on that was 9.65% and three basis points for fees. So overall, we earned on our loan book for the quarter 9.55%, which is, we think, an excellent number, generating a NIM for the quarter of 5.13%, which is consistent with what we did during the year, which was 5.16%. Richard will talk about the ATM, as I mentioned. We earned in the quarter $15.1 million and $58.2 million for the year, which is pretty even income each quarter. One of the prior quarters was a little bit lower as a result of some incentive comp that we accrued earlier than we normally do, and we discussed at the last call. on a per share basis, fully diluted $1.91 for the quarter and $7.58 for the year. I did mention the ROA. The ROA was $16.56 for the quarter and $17.46 for the year. You know, interestingly, if we take a look at the first And that's a result, that difference is, I should add, is a difference because we have a lot more capital now. For the quarter, we earned $15.2 million in the first quarter. In this quarter, we earned $15.1 million, so virtually the same amount of money. But our capital was $312 million in the first quarter, and now it's $377 million. And so with same dollars on more capital, I would just remind those that have been investing with us for a while, this excess capital sounds reminiscent of all the capital that we had after the triple P. And of course, we got questions about how we were going to deploy it. And we wound up buying a billion dollars a quarter, a million dollars of loans in the fourth calendar quarter of um 2022. um i'm not predicting that we're going to do that um but i um and pat will touch on this a little bit more we are of the view there are a lot of opportunities to purchase loans um and without over promising of course they're binary transactions you win or you don't win and so we'll see what happens but we are optimistic about what we see in the marketplace. And and also in the highlight section, you can see that our tangible book is $46.34. I do want to comment on asset quality as well. Our asset quality remains strong, which I think is particularly impressive in light of that, you know, virtually all of our loans are commercial real estate loans, which have been under some level of concern, you know, kind of across the board. You read about it in the paper almost every day. You know, in our case, we have relatively low loan to values, you know, in the very low 50 percent range. And that has It's been very good for us. I just want to find a page on the essay quality at the back. Becca, you have the other one. This is real live. We're doing this, so I can try for the page flipping as I'm getting there. But I will. Thanks. Well, rather than taking a lot of your I'm here while I now have it. Thanks, Rebecca. You can see that on page nine, the nonperforming assets, we still get a fair number of resolutions. We started the quarter with 28 million and $3 million of nonperforming assets were resolved. And then we added 4.6 million so they come and they go and that's what you would expect you know from our purchase loan book and so um you know those numbers uh remain to be strong for us um with that i would ask richard to um follow great thanks very much rick um pat's going to pick up the section on the loan so i'm going to focus primarily on the deposit side in terms of the 2024 financial year our deposits increased 402 million dollars

That is an increase up to $2.34 billion from its previous level of $1.94 billion. The most significant trend on the deposit side is our deliberate substitution between borrowings and increasing our brokered CDs. I referred to this on our previous call, and we continue to do so. So for the financial year, our brokered CDs are up by $241 million to a level of $871 million. whereas our borrowings are down $217 million to a level of $345 million. The reason that we're doing that, to reiterate, is we want to increase our capacity for off-balance sheet funding. Our community bank, to close off the picture on the deposit side, the community bank is up $219 million to a level of $1.4 billion. Taking a look at the cost of our funding, you can refer to slide 15, which refers to the quarterly costs. It shows you the rates for each of the quarters historically, as well as the current spot rates. I think what's worth pointing out over there is that the cost of deposits you will have seen rising steadily from the 2023 financial year right through to the end of 2024. What's noteworthy, though, is that the spot interest rate at the end of our financial year decreased to 4.26%, from its average for the fourth quarter of 4.36. That's an indication, of course, that rates are coming down, and I'll speak about that next. We're very careful to focus on our interest rate risk in the banking book. We continually monitor and manage that to make sure that we're not excessively exposed to rates going up or down. We get a lot of questions about what will happen in a rates down environment, and the answer that we give is that we are likely to benefit from a decrease in interest rates, There are a few reasons for that. The first one is that we have certain flaws on our originated loans. Secondly, of course, our deposits will reprice and therefore reduce the cost of funding. In other words, you'll see us move in the opposite direction to that indicated in slide 15. And then finally, there's a prepaid benefit. As rates go up, prepayments may increase. If that does happen, that will accrue to income. And Rick has referred to some of the uplift we get in terms of our revenue from that perspective. Having said all of that, we do not deliberately position ourselves to take excessive exposure in either direction because we're conscious that rates cannot perfectly be predicted. I refer you also to slide 19, which you may find interesting. That speaks about revenue and non-interest expense. I think what's most noteworthy about that, if you look at the chart, is it's a very useful visual way to see that our revenue is growing faster than our operating expenses. expressing that differently you will have seen that we regularly report our efficiency ratio and you will have noticed a trend on that which is for that to improve over time i'm going to turn quickly to the atm you'll recall and as i mentioned in the previous quarter the atm is where we sell shares in the open market and we do so in order to raise additional capital so as to increase our common equity tier one the reason we do that is as pat will refer to we see opportunities in the market And we see the ATM as one of the tools that we can use to raise capital to allow us to take advantage of those opportunities without putting undue stress on our capital adequacy. Speaking quickly of the ATM, the ATM, when we initially commenced it, we had a $50 million capacity. $27 million of that has been utilized to date in both the current and prior financial years. We therefore have $23 million left in the ATM. To speak about the activity in the fourth quarter, we sold 150,000 shares at an average of $55.13 on a net basis per share. That added $8.3 million to our capital for the quarter. Speaking quickly about the year, the ATM for the year added 29 cents per share to our tangible book value. Let me hand over to Pat Dignan. Thanks, Richard.

There's not really a lot new this quarter over last quarter, except that there's a continued increase in real estate transactions, which provides more confidence in the investor side. And also on the purchase side, banks have had the opportunity to write down some of their loans. And what we've seen is a real uptick in purchase loan opportunities. We think that the next quarter will be be strong on the purchase side. Just in the general market, office and multifamily continue to be a concern. Beyond that, we keep an eye on expenses and again, more of the same. We think there's a lot of opportunity and we expect to be positioned well for it.

Ted, do you want to comment for a little bit on the increase in the originated loans in this quarter over some of the preceding ones, what you're seeing, aside from more activity, but just looking at the numbers on ours?

We've been very successful on the lender finance side. We've increased the number of groups that we transact with, and there's been a growing for multiple reasons, a lot of migration toward non-bank lenders. And we've benefited from that, increasing the number of transactions and the number of counterparties. We've been able to really boost that business.

I just want to just describe that business for a second. Thank you, Pat. Describe that for a second. In the event there are some callers on that have not been investors for a while and may not know exactly what that business means in our case, because there's lots of ways people talk about portfolio finance or lender finance. We have a significant number of groups that are non-bank lenders that we leverage their lending by providing financing to them. They're typically structured as guidance lines where meaning that every advance that they want to lend money to their borrowers secured by commercial real estate, we underwrite at the same time, just as if we were going to make the loan. It's been a really strong part of our business. So because you have a couple layers of protection in the capital stack, if you have the original property owner that borrows money from the non-bank lender, maybe with 30% equity and borrowing 70% from the non-bank lender, we then would lend, if we wanted to advance on that loan, we might advance 70% or so to the non-bank lender so that our loan, 70 times 70, is 49% against the underlying commercial real estate loan. They're structured typically in bankruptcy remote entities with all of the loans cross-collateralized, all of the advances, to be clear, cross-collateralized, cross-defaulted, with the highest default rate permitted under law. In the case of New York, it's 24%. Our borrowers are experienced and very capable in the area of lending, even if the underlying borrower may be great at making widgets, so to speak, proverbial widgets. but they may not be as sharp in the financial area. But we have that party in between us. To date, we have done a lot of it. We have not lost one penny of principal on it. And it's a business line we like very much. Last quarter, out of the origination volume, 90% of those loans were portfolio finance loans. As Pat mentioned, we're looking to expand that business with more groups.

and um um and um our our borrowers are um you know very comfortable with us as their lender and so we like i just wanted to expand on that in case someone is not as familiar with it another point is on that business is the ltvs are generally lower and in the environment we've been in the last year with with with fewer real estate transactions and a little more subjectivity with respect to real estate valuations we've been not quite as competitive on the direct side but as these as real as the new normal sets in and there's more and more real estate trades i feel will be what will be in addition to growing this business also be more competitive on the direct lending space that's right i just want to amplify another point pat made on the purchase loan and the pipeline uh you've heard the forward-looking statement so i promise i won't read it to you again um but there seems to be a lot um

of transact a lot of dollar transactions in the market now of the kind of assets that we like to buy meaning performing loans secured by cash flowing collateral generally in liquid markets and we have one of the things of course when you have a seller execution risk is an issue for that they care about a lot when they want to sell they want to make sure they have a uh counterparty that's going to perform you know we've been at this at a very long time you know 14 years at northeast bank and um 18 years before that at capital crossing bank and we have developed and i say uh humbly earned that reputation um in doing that and we're seeing a lot now and then i would just point out as pat did or just just make sure it's clear It doesn't mean we're going to win anything. You know, the transactions you win or you lose. But of course, seeing a lot of activity there is much better than not seeing it. And so we will keep you informed around that as we have these calls. I think that's all that we have in our presentation. And I would ask if there are any questions out there um i would point out that um our former analyst alex fordall at piper sandler who was really understood our bank and um you know um and uh was typically the ones um asking questions as um left piper sandler and temporarily they have suspended coverage of us until they can find a replacement for him which is not i think they did that with all of the banks that and companies that Alex covered was not personal to what feels personal, but it wasn't. So we may not have as active questions, but I will see anyone have anything that they would like to ask us?

Yeah, we'll go ahead and begin the question and answer session. If you have a question, please press star one one on your touchtone phone. If you wish to be removed from the queue, please press star one one again. 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.

David Minkoff, this is a perfect time for you to join in.

All right. Please stand by for the Q&A roster to be compiled.

We'll give it one more moment.

Okay, it appears there are no questions at this time. I would now like to turn the call back over to Rick Wayne for closing remarks.

Well, there's two ways to take the lack of questions. I'm going to go with the most positive outlook that we did such a good job explaining what we're doing that we have answered any questions you might have. There might be another way to think about it, but I'm not going there. But all of you that listened and all of you that will listen to the call, on our website we thank you for your interest continued support and look forward to talking to you again after the end of the following quarter and with that i wish you all a happy weekend soon and a really enjoyable summer thank you

We did actually have, it looks like we did have someone pop into the queue there, so I'll go ahead and promote him, and we will take that question. One moment, please.

Can you hear me?

Yeah, our question comes from David Minkoff, DCM Asset Management. Please go ahead.

Yes, I think we were cut off before. Can you hear me now?

Yes, we can, David. Good morning.

Great. Great. Nice to hear you. Congratulations to you, Richard, and Pat on another great quarter. So I do have one question. But before I ask the question, I've got to say that, Rick, you and your team have done a phenomenal job with this company. You know, I was with this company. I stumbled across it recently. by accident, actually, 10 years ago, about a month after you went public. And so I've listened to 40 conference calls, and I haven't missed a one. And, you know, you deliver these consistent, beautiful results quarter after quarter. And when you think about it, this is basically a seven-branch bank located in Maine that nobody's ever heard of, with the help of some loan acquisition and servicing, and you've delivered phenomenal results time and time again. Now, to put this in perspective, in 2020, when COVID hit, the stock got knocked down from 24 in 2019 down to six in 2020 due to COVID and as well as everything else. that had gotten hit along with it. I mean, it was almost an act of God type of situation. So the results from then, you've engineered the stock going from a low of six in COVID in March 2020 to 72 today. We call that a 12-bagger in Wall Street. The stock is up from the low of COVID 1,200%, 1,200% in four short years. This is totally miraculous. And you come out quarter after quarter, and I've listened to 40 of them. I haven't missed a one. And you come out in a humble manner, giving us the results, no attitude, no arrogance, almost apologetic for these stupendous numbers quarter after quarter. Now, I'll remember three things. seven years ago, six years ago, when your base earnings were $2 a share, you would come out with, let's say, 50 cents for the quarter and caution us to not annualize those numbers because the quarter-to-quarter numbers could be choppy and not to assume that you're going to have another 50-cent quarter. Well, I'm listening to this for 40 quarters, and I haven't seen one disappointment yet with a down quarter or something like that caused any aggravation. I would, if there were a Wall Street Hall of Fame, I would nominate you for that, for entrance into that organization, along with Jamie Dimon, who's done a good job, of course, with J.P. Morgan. But with the proviso that Jamie Dimon takes his marching orders from you. So... That's my comment. You called on me to ask a question and I've given a long dissertation. I hope you don't need two pillows for your head tonight, but if you do, you deserve it. Here's the question.

Can I ask the question now?

What are you going to do for an encore? That's the question. Well, you know, we've

You know, the best thing we can do with our capital, of course, is to be able to leverage it with high quality, you know, higher yielding assets. You know, that's what we would hope and expect to do. We have a lot of capital now and a lot of loan capacity left. That's why I made the reference earlier to Triple P when we had, you know, roughly, a billion dollars of loan capacity and patient investors, they were patient, but they wanted to know what we were going to do because we doubled our capital and sort of definitionally your ROE goes down when you have that much capital. And with the excess capital, we're hoping that we can leverage it with the kind of loans that we like. But of course, we're not going to be careless or reckless or put loans on the balance sheet just to have a lower loan book, and we would hope we would be able to do that. I would point out, I know you know this, David, but for others that may not know that, when we have excess capital over some number of years, we return it to shareholders. In the period of around years maybe 13 through 16, roughly, we bought back roughly half of the stock, not a half, a third of the stock in the bank for an average price of somewhere $17 or $18. And on the other hand, we've recently been selling stock at a number that, I'm not talking about this quarter, we don't have anything to say about what we might do in the current quarter. But in the previous quarter, as Richard mentioned, we bought back, sold stock rather at, you know, $50. So, you know, in terms of the, an encore, as you say, That would be one thing. And I would also point out, I think most of you know, we were unsuccessful in this, but we tend to be opportunistic when things present themselves. We made a lot of money with Triple P, which was not, we were not even in a related, we didn't have even a related product, I should say, but we wound up originating $3 billion of that and purchasing another $8 billion and making, 65 basis points along with annuity, which was a partner of ours in that activity. And then we also, when there was an opportunity, we bid on buying Signature Bank and also what was previously Boston Private Bank, part of Silicon Valley Bank. Unfortunately, we didn't win those. But so we looked for, and those are not predictable, those kinds of opportunities, but we like to pay attention and if something makes sense to look at it. Finally, I think I really need to make a point and ask you to confirm this, David. When I called your name, it was not because I had any idea. We haven't spoken for a while that you were going to, and I appreciate your really kind words. I really do. And it's not just me, of course. It's a big team we have here that delivers these consistently good results. But this was not pre-planned. It sounds like I call on David and then he gives me a compliment. I didn't know that was coming.

We haven't spoken in probably a year or so, but I am on the conference calls every quarter. But you're right, I had no questions. Alex asks great questions every quarter, and kudos to him for his good coverage of the company. Not only that, a quarter ago when the stock was in the mid-50s, he had He raised his price target to 72. So he wasn't surprised to see this. That was a great call on his part. So you surround yourself in the company and your analysts with just high-quality people that are just getting the job done. I'm doing this for 40 years, trying to find good companies to invest in, and I can count on one hand the number of companies that have done as good as you have in 40 years that I'm doing this. So, you know, I'm on conference calls all the time. I've never had a discussion like this. I usually ask the question that's pertinent, and that's all. But I've never said this about any company, but it really has to be called out. And I'm thinking this, and I felt the need to verbalize it, and I'm sure I'm speaking for everyone else on this call today. You know, there's nobody that could possibly have a loss in this company, whether you paid $8 a share or $68 a share. The stock hit a new high, an all-time high yesterday, so you're talking to everybody. That's a happy camper on this call. It's just phenomenal. You know, it's really remarkable and deserves to be called. The words that I'm using aren't strong enough. I don't know how to end it. I look for a manager like you. I look for companies that are managed by people like you that are qualified, no attitude, just deliver the good results and just in a transparent way. It's just a pleasure to have dealt with for 10 years. That's all I can tell you. I had no aggravation with this company and its actions in 10 years. You know, and One other kind of aside here, when I turn on my screen every day, I have my stocks that I own in different columns. Banks are in one column, and industrials are another, drugs are another, and high-tech are in another. The high-tech may consist of Amazon, NVIDIA, Microsoft, Meta, Apple. After this conference call, I'm going to remove Northeast Bank, NBN, from the banking column and put it in the high-tech column with the Meta and Nvidia and Amazon where it belongs. So it has some decent competition. So that's all I can tell you. You know, it competes with those groups. I mean, I'm almost thinking you're going to discover the cure for cancer or something, you know. Or it's just, you know, I don't know what to say. You know, it's just really something to behold, and it's a pleasure to have made your acquaintance. uh, for 10 years. I just, uh, lucked out, I guess, uh, by getting involved here. So, uh, I don't know what else to say. Keep up the good work.

Thank you. Thank you very much, David. Those are really kind comments. And I will, you know, all the people who work in the bank and listen to this, I'm sure we'll appreciate you. And it's, yeah, you, you, you, you single out me. It's not just me. It's a great thing. Let me just, um, um, Thank you, David. Anyone else have any compliments? No, I mean, any questions? You know, before, when David was disconnected, I had, you know, thank you all, and I won't repeat that again to you, but have a good weekend, everybody, and thank you very much. I think operator, we're all set.

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