Northeast Bank - Q4 2024

Transcript

Operator (participant)

Welcome to the Northeast Bank fourth quarter fiscal year 2024 earnings call. My name is Steven, 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 Executive Officer, Richard Cohen, Chief Financial Officer, and Pat Dignan, 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 touch-tone 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.

Richard Wayne (CEO)

Thank you. Good morning, everyone. Thank you for joining us on the call. During the call, I'm going to first 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. Now, 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.

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%, 1.99% for the quarter and 1.98% for the year. Let me just highlight a few things that are. I'm now referring to 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% purchase price. On the origination side, we originated in the quarter $114 million for the quarter and a shade under $400 million for the year at $399.1 million. 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.

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 8.43, and we picked up another 104 basis points from accelerated accretion for a total of 9.47% on the purchase loans. On the originated loans, the regularly scheduled interest, not accretion on that, was 9.65% and 3 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. We earned on a per-share basis, fully diluted, $1.91 for the quarter and $7.58 for the year. I did mention the ROA. The ROE was 16.56 for the quarter and 17.46 for the year. Interestingly, if we take a look at the first, and that's a result. That difference is, I should add, a difference because we have a lot more capital now. For the quarter, we earned $15.2 million in the first quarter. And 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.

With the 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. Of course, we got questions about how we were going to deploy it. We wound up buying $1 billion of loans in the fourth calendar quarter of 2022. I'm not predicting that we're going to do that, and Pat will touch on this a little bit more. We are of the view there are a lot of opportunities to purchase loans. Without over-promising, of course, they're binary transactions. You win or you don't win. We'll see what happens, but we are optimistic about what we see in the marketplace.

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 virtually all of our loans are commercial real estate loans, which have been under some level of concern or kind of across the board. You read about it in the paper almost every day. In our case, we have relatively low loan-to-values in the very low 50% range, and that has been very good for us. I just want to find a page on the asset quality at the back. Becca, you have the, no, the other one. This is real live. We're doing this, so I can, sorry for the page flipping as I'm getting there, but I will. Thanks.

Well, rather than taking a lot of your time here, well, I now have it. Thanks to Becca. You can see that on page 9, the non-performing assets. We still get a fair number of resolutions. We started the quarter with $28 million, and $3 million of non-performing assets were resolved. And then we added $4.6 million. So they come and they go, and that's what you would expect from our purchase loan book. And so those numbers remain to be strong for us. With that, I would ask Richard to follow.

Richard Cohen (CFO)

Great. Thanks very much, Rick. Pat's going to pick up the section on the loans, so I'm going to focus primarily on the deposit side. In terms of the 2024 financial year, our deposits increased $402 million. 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 floors 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 prepay benefit. As rates go up, prepayments may increase. If that does happen, that will accrue to income.

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 $0.29 per share to our tangible book value. Let me hand over to Pat Dignan.

Patrick Dignan (EVP and CFO)

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 on the investor side. Also on the purchase side, banks have had the opportunity to write down some of their loans. What we've seen is a real uptick in purchase loan opportunities. We think that the next quarter will 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. Again, more of the same. We think there's a lot of opportunity, and we expect to be positioned well for it.

Pat, 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. 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.

Richard Wayne (CEO)

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, 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 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, and if we wanted to advance on that loan, we might advance 70% or so to the non-bank lender so that our loan, 70 × 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 our borrowers are very comfortable with us as their lender. And so we like that. I just wanted to expand on that in case someone is not as familiar with it.

Patrick Dignan (EVP and CFO)

Another point is on that business is the LTVs are generally lower. In the environment we've been in in the last year 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 the new normal sets in and there's more and more real estate trades, I feel we'll be, in addition to growing this business, also be more competitive on the direct lending space.

Richard Wayne (CEO)

That's right. I just want to amplify another point Pat made on the purchase loan and the pipeline. You've heard the forward-looking statement, so I promise I won't read it to you again. But there seems to be a lot of transactions, 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 flow and collateral generally in liquid markets. And one of the things, of course, when you have a seller, execution risk is an issue that they care about a lot when they want to sell. They want to make sure they have a counterparty that's going to perform. We've been at this at a very long time, 14 years at Northeast Bank and 18 years before that at Capital Crossing Bank.

And we have developed, and I say humbly, earned that reputation in doing that. And we're seeing a lot now. And then I would just point out, as Pat did, or just make sure it's clear, that doesn't mean we're going to win anything. 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.

I would point out that our former analyst, Alex Twerdahl at Piper Sandler, who really understood our bank and was typically the ones asking questions, has 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 and companies that Alex covered. It 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?

Operator (participant)

Yeah, we'll go ahead and begin the question and answer session. If you have a question, please press star 11 on your touch-tone phone. If you wish to be removed from the queue, please press star 11 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 11 on your touch-tone phone.

Richard Wayne (CEO)

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

Operator (participant)

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.

Richard Wayne (CEO)

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.

Operator (participant)

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.

David Minkoff (Principal and Portfolio Manager)

Can you hear me?

Operator (participant)

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

David Minkoff (Principal and Portfolio Manager)

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

Richard Wayne (CEO)

Yes, we can, David. Good morning.

David Minkoff (Principal and Portfolio Manager)

Great.

Richard Wayne (CEO)

Thanks to hear you.

David Minkoff (Principal and Portfolio Manager)

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. I was with this company. I stumbled across it 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 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 6 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 6 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 4 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 7 years ago, 6 years ago, when your base earnings were $2 a share. You would come out with, let's say, $0.50 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 $0.50 quarter. Well, I'm listening to this for 40 quarters, and I haven't seen one disappointment yet with a down quarter or something that caused any aggravation. If there were a Wall Street Hall of Fame, I would nominate you for entrance into that organization, along with Jamie Dimon, who's done a good job, of course, with JPMorgan. But with the proviso, 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?

Operator (participant)

Oh, go on.

David Minkoff (Principal and Portfolio Manager)

What are you going to do for an encore? That's the question.

Richard Wayne (CEO)

Well, the best thing we can do with our capital, of course, is to be able to leverage it with high-quality, higher-yielding assets. 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 roughly $1 billion 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 2013 through 2016, 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 $50. So in terms of 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 Newtek, 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 look 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. I thought.

David Minkoff (Principal and Portfolio Manager)

Right. 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 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. And I don't know why 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 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. 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 an all-time high yesterday. So you're talking to everybody. That's a happy camper on this call. It's just phenomenal. It's really remarkable and deserves to be called. The words that I'm using aren't strong enough.

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 have no aggravation with this company and its actions in 10 years. One other kind of aside here. When I turn on my screen every day, I have my stocks that I own in different columns. The 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. It competes with those groups. I mean, I'm almost thinking you're going to discover the cure for cancer or something. Right.

Or it's just, I don't know what to say. It's just really something to behold, and it's a pleasure to have made your acquaintance for 10 years. I just lucked out, I guess, by getting involved here. So I don't know what else to say. Keep up the good work.

Richard Wayne (CEO)

David, thank you very much, David. Those are really kind comments. And all the people working the bank that listen to this, I'm sure will appreciate you. And you single out me. It's not just me. It's a great team.

Let me just thank you, David. Anyone else have any compliments?

No, I mean, any questions? You're welcome. Before, when David was disconnected, I had to 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.

Operator (participant)

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