Northeast Bank

Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2022 First Quarter Earnings Results Conference Call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer, J.P. LaPointe, Chief Financial Officer, and Pat Digman, Executive Vice President and Chief Credit Officer. Last night, 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 northeast.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. The question and answer session for this call will be conducted electronically following the presentation. 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 risk and uncertainty. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bay does not undertake any obligation to update any forward-looking statements. At this time, I would like to turn the call over to Rick Wayne. Please go ahead, sir.

Thank you. And good morning and thank you to all of you for joining us today. As noted, I am Rick Wayne. the Chief Executive Officer of Northeast Bank. And with me on the call are J.P. LaPointe, our Chief Financial Officer, and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments, J.P., Pat, and I would be happy to answer your questions. And I'd like to start with some comments on our financial highlights, which is on page three of the slide deck. First, I'll point out that we earned $9.9 million for the quarter, which was $1.20 per earnings per share. Our return on equity was 16.7%. And return on assets was 2.41%. Results we were very pleased with. If we take a look at our national, still on page three, at our national lending activity, for the quarter, we purchased 35.4% We invested $35.4 million on a $37 million of UPV. And we originated $94.5 million of loans with a weighted average rate of 5.87%. Now, as I've mentioned in previous calls, our originated loans are... very predominantly a floating rate tied to prime with floors baked into them and today's rate environment 587 on new originations was very strong and those factors contributed to we put a few different numbers around that interest margin one is kind of the typical one counting everything all in, which was 474. But if we take the triple P impact out of that and subject to the language input node 4, it's a 6% NIM, which kind of would be what would be standard if we didn't have the impact of the triple P activity in that account. Our purchase loan return was 9.19%, very, very strong, with a fair amount of discount that was accelerated because of prepayment. During the quarter, we repurchased 102,311 shares at $29.91. Finally, before I get into a little bit more detail, I want to comment on our joint marketing agreement with Nuiti. That's a name to you, Nuiti. It's substantively the successor to ACAP, who we originally entered into the agreement with them. The principles are the same. They started a new entity and changed the name. I don't really want to over-promise on this. It's got a lot of potential. On the other hand, it could turn out not to generate that much, so I don't want to provide any numbers until we have them. I can say that the platform is substantially... complete. They're going out to, as you may recall, annuity has subject to getting some approvals from some of the sellers of the loans to loan source about over 100,000 customers potentially that they can market to who already have PPP loans generating this kind of loan activity. The customer acquisition cost can be high and The case of what they have, it's going to be very, very small because they have access to all the customers already. The portal is going to open up over the next couple months of this calendar year with a soft opening to make sure it all works. The initial product is a $25,000 loan under the SBA 7A program. It's a product that doing all of the paperwork that you need to do under the SBA program is less. It carries within an 85% guarantee and you can get very good pricing on those loans and our expectation if we get some volume would be to you know, sell those loans, the 85% guarantee piece in the secondary market. So there's not a lot to report as to what has happened. I would expect that when we speak again in January, we'll be able to provide some more news on that. If we now turn to page four, which is provide some detail on our correspondent fee income, which of course has been a substantial portion of our income while this has been around, and it hasn't been around that long. If you look at the bottom of page four, you can see since the fourth quarter of 2020, through the first quarter of 2022. That's our fiscal quarter. Loan Source has purchased $11.2 billion of Triple P loans. And as of September 30th, this is in the last footnote, there's been $6.6 billion, there is $6.6 billion remaining at September 30th. And I will talk a little bit more on the next slide about what's happened in round one, what's happened in round two. Again, on the bottom you can see in the total line that the total income that was to be amortized was $19.46 million. And as of the end of September, $9.7 million remains. And if you look up at the top three numbers, the one I want to point out for a second is the amortization of purchased accrued interest. You know, our initial... The loans have paid off sooner than we had thought, so we... needed to accelerate $720,000 in this quarter so we had the right relationship between that purchase accrued interest and the outstanding balances. If we turn to the next page, you can see we've broken up on round one and round two. Round one which was $5 billion of purchases, is now $549 is only 11% remaining. In round two, there's 99% remaining of the $6.15 billion at the end of September, but they just recently opened up their portal. I won't bore you by reading the whole forward-looking statement again, but roughly speaking, we think most of this income from this arc Correspondent activity will be recognized by the end of this fiscal year for us, maybe a little bit into the following year, the following quarter of the next year. But that will give you some idea as to our view. Page six is a slide of our portfolio. You can see we have almost 2,100 loans for $1.74 billion. And what I do want to highlight on that, should I get to the page, is that our national lending division has almost a billion dollars in its portfolio, $990 million. And let me just see. I think we'll move to page nine, which provides some statistics on our national lending portfolio. The top one is size. You can see that only 11% of our portfolio has our loans greater than $9 million. We provide all of the breakdown of the collateral types and we are now in 45 states. It really is a national lending business. Going to the next slide on asset quality. You can see that the percentage of non-performing assets to total assets is 160, which is high compared to the link quarter. But the link quarter, as we talked about, the balance sheet was inflated because of all of the cash in the collection account. To highlight two other things, on the right side, the classified loans are $12.7 million, up a little bit from June 30th, but down from the preceding quarters, and charge-offs are three basis points. There were four basis points last quarter, and that's, you know, really, we think, a really good statistic when you think about the rates that we're earning. on our purchase unoriginated loan book. On slide 11, you can see that the deferral program is virtually done. We had 118.1 million of loans in our deferred where we gave P&I deferrals too. There are no parties under deferral anymore, and the delinquencies are pretty low on that. And on interest only out of the $40 million, only $4.5 million remain. And the performance of those loans is also excellent. On the next slide, we show kind of a rollover of our bridge, rather, I should say, on our non-performing assets. I'll just highlight in the case of loans, we added $5 million and $2.5 million came off. So there was a slight increase in there and in our REO The balances came down by about 880 grand compared to June 30th. There's a lot of information in the deck having to do with allowance and how much we have in each group. We provide that so you can look at that. We've done that in other quarters. I'm not going to do it now. And then also the loan-to-value in our national lending portfolio on page 4. I will not go through all of this by collateral types, but in summary, I would point out that the $990 million has a weighted average loan-to-value of 48%, which is really what we do is we try and loan where we have really high confidence in the collateral value. I'm going to, again, slip through the remaining slides, and I'm going to now ask JP to start in on page 20. JP.

JP, are you muted? Do you have yourself muted?

You know what, I'm not sure where JP is. Operator, is everyone still on the call? Can you hear me? Because I can continue with this.

Yeah, I can see JP, and that's why I interjected with, are you moderated? Okay. But he doesn't seem to be.

Okay, why don't I – can everyone hear me, though? I'm sorry, everyone listening, with the technical difficulty. We're in different places. Operator, can everyone hear me? I can continue.

You can go ahead.

Okay, thank you. I won't do as good a job as JP would, but I will try going through these slides and doing this. On page 20, this is really a great slide on the quarterly cost of deposits. And the green line shows what our average cost of deposits are by quarter. And if we go back a year, it was 120. And then for the quarter that just finished, our first fiscal quarter, it was 39 basis points. And we have a little dot there showing 45 basis points, which is what it was at the very last day of the quarter. It's slightly elevated, no doubt because the amount of... deposits in the collection account from the loan source was probably lower at that point in time, but that is a very good trajectory that we're working on. If we go to slide 21, and I've talked about this before as JP, one of our objectives is to change the composition of our liabilities and reduce the amount of higher cost deposits, both through ABLE Banking and on the bulletin board, which is a place that banks and others, mostly banks, would buy CDs from us using our products as part of their treasury function, and increasing the amount of deposits in our community banking division. And so if we look at the top of the slide 21, you can see that if we compare the year, September 30, 2020, with just the September 30, 2021, that our deposits in our community banking division have grown $174 million. And the deposits in ABLE banking, which are higher priced, have been reduced by $120 million. And on the rate board or bulletin board, by $63 million. We just think that's really, really great. And it's a lot of work by our folks in our community banking division and Maine to do that. And we have reorganized that group. We have a person in charge of business banking where we're seeking deposits from businesses in Maine, generally without big borrowing needs. We have hired the former deputy treasurer in Maine to go after municipal deposits, which we've had great success in. And we have a whole program to try and bring in retail deposits as well. And then I'll just finally comment, if you look at the bottom of page 21, that our checking deposits accounts are up $148 million year to year. And you can see the higher-priced money market below and the CDs. are down in the aggregate about $205 million. Rick, can you hear me now? I can, but I was on such a roll. But please take over. You can start on slide 22, please.

Thank you, Rick. Sorry about that. Turning to slide 22, this slide shows the changes in our deposit portfolio in annualized interest expense monthly over the past year. while also displaying the impact of the PPP collection account, which impacts our short-term investments and deposit balances and is subject to significant fluctuation. This slide also excludes the impact of $400 million of short-term brokerage CDs that were taken out in January 2021 to help fund PPP loans and matured during the quarter ended March 31st, 2021. The rate on the brokerage CDs was 15 basis points, and this funding source is not expected to be recurring. which is why it has been excluded from the analysis. Over the past year, we have generated approximately $5.6 million in annualized interest expense savings in our deposit portfolio, decreasing from $10.4 million in October 2020 to just $4.8 million in September 2021. Moving ahead to slide 24, this slide provides detail on our potential additional future interest expense savings on our CD portfolio of which $191 million is scheduled to mature within the next 12 months. Based on the current weighted average interest rate of 1.17%, this cost amounts to $2.2 million in annual interest expense. Slide 25 shows our quarterly revenues over the past five quarters, which when you exclude the PPP gain, have increased by $1.9 million from the linked quarter and increased by $6.8 million from the comparable prior year quarter. Additionally, our non-interest expense has increased $3.9 million from the linked quarter and $3.4 million from the comparable prior year quarter. This increase from the linked quarter is primarily related to an increase of $2.6 million in salary and benefit expense, primarily related to lower deferred salary contract expense during the current quarter due to minimal PPP originations during this quarter, along with increases in salary bonus, and payroll tax expense. Additionally, there was an increase in loan expense of $1.4 million, primarily related to expenses incurred in connection with the wrap-up of the PPP loan origination activity. The increase from the comparable prior year quarter is primarily related to a $1.6 million increase in loan expense related to the previously mentioned expenses from PPP activity, along with a $1.2 million increase in salary and benefit expense, again related to higher salary and bonus numbers, along with lower deferred salary contract expense. On page 26, we show our net interest margin, which was 4.74% for the current quarter, an increase from 3.99% in the linked quarter, and a decrease from 4.95% in the comparable prior year quarter. Given the significant balance of short-term investments that we hold related to the corresponding relationship collection account, our net interest margin gets compressed. Excluding the cash from the corresponding relationship and our PPP loan activity, net interest margin in the current quarter amounted to 6%, an increase from 5.56% in the linked quarter and from 5% in the comparable prior year quarter. Finally, as shown on slide 31, as we have continued to grow our National Lending Division portfolio, and reduce the cost of our deposits, our base net interest income has consistently increased over the last five quarters, increasing $2.9 million, or 23%, over the comparable prior year quarter. That concludes our prepared remarks. At this time, we would like to open up the line to Q&A.

If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone. If you are using a speakerphone to ask a question, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one on your touchtone telephone to ask a question. And we have a first question from Alex Tordahl from Piper-Sanley. Mr. Tordahl, please go ahead.

Hey, good morning, guys.

Good morning, Alex.

Good morning. First off, JP, I was hoping you could just go back to the expense commentary that you had, and I know there's a couple things in there that are kind of, I'm not sure if non-recurring is the right term, but I think you said 1.6 related to the wrap-up of the PPP program. Can you just confirm that that's the end of that expense, or is there anything that's going to linger into subsequent quarters? And then I also wanted to ask about anything else like I know this agreement that you announced, the new SBA program that you announced during the quarter was going to have a shared marketing expenses. Is there anything associated with that program that's already in the expense line or anything that we should be thinking about for future quarters?

On your first question, that is correct. That is the end of expenses related to the PPP activity. There's nothing that will be incurred going forward as part of that. As far as the shared marketing expenses as part of the 7 program, there is some small dollars of some expenses related to getting the system up and running that was incurred in Q1. But small dollars that we've incurred to date as part of that 7 arrangement that we have with annuity.

Okay. And then as I think about just sort of the right run rate for expenses going into the next quarter, I know that salaries and benefits and comp expenses were elevated in the third quarter. Is that going to settle back down?

Some of the stock comp was fully expensed during Q1, so there will be a little bit coming out of there that won't be incurring going forward. As far as the bonus and salary goes, the bonus where we come up with an estimate at the beginning of the year and we typically true it up at the end of the year, but compared to the same quarter last year, our base bonus assumptions are higher than where we were a year ago, so we expect that to stay flat during the year. And salaries, you know, our headcount's just up a little bit from last year, you know, also taking into account raises that we do in Q1 during the current year. But one thing that was incurred during the current quarter that will come out is, you When we pay our bonus in Q1 every year, we do have some elevated payroll taxes that come into that quarter. So that will come out from future quarters.

Hey, JP. Alex, we're in different places, so we're going to try and work through this together. JP, we have non-interest expense for the quarter of $13.3 million. Correct. I'm just looking at the press release. And we have $1.6 million. that, as Alex asked about, that is going away, which I think gets us to 11.7. Out of the 11.7, how much of that goes roughly, you know, so we can give some sense of those expenses you're describing, kind of the payroll taxes and things, how much of that is, you know, one time in the quarter?

Probably $400,000 to $500,000.

So it kind of gets us to 11.2. And then we had some ongoing marketing relating to the 7A. How much was that?

That was pretty small dollars that we incurred in the quarter. I don't have the exact number, but fairly small for what we've done so far.

So as we're thinking on the fly, and this I think is safely to say from the numbers that are here, Alex, it looks like 11 million kind of run rate when you knock out those items. I think that was with some more granularity, your question. That's very helpful. Thank you.

And then I wanted to switch gears to the organic part. loan growth. I saw some really nice generation again in that national CRE generation platform. I was hoping maybe you can give us some sort of sense for where the pipeline is and sort of what you're seeing in that portfolio. I know that you did some hiring and some new geographies and kind of where you are in terms of getting some new geographies up and running with the national CRE origination book.

I would love to talk about that, Alex, because there's a lot going on in the As you noted in your report, there's always a lot going on in our company. We really had a big focus on growing our originated book. I'll just remind you in case there's someone on the call that don't recall, we hired a new person. These are all senior business development folks in Miami. and another one in Southern California, you know, both places where we have a meaningful portfolio. And then we have two in New York. You know, these are kind of outside business development offices. Then, of course, we have a lot of organic growth from existing customers and then, you know, other borrowers who, you know, no Northeast bank and they're not coming in through a business development officer. So, you know, $95 million of originations, um, we thought was a, a really, a really great number. Um, um, our pipeline is robust. Um, you know, we love the business. We're in low LTVs with spreads over prime floors structured with, um, special-purpose entities, generally bankruptcy remote, with typically sometimes recourse, but if not recourse, carve out guarantees from, you know, usually substantial individuals or entities. And our borrowers are, you know, I don't want to use the word sophisticated because that's not what I mean, but they're, you know, they know what they're doing. And they... And the way our deals are structured generally, all of the loans to one borrower and the guidance lines in portfolio finance are cross-collateralized and cross-defaulted. So they're highly motivated to pay their loans. We haven't lost one penny of principal in our originated book. And so, you know, that's a great business. You know, your question is, what's the pipeline? The pipeline, as I mentioned, is robust. And I would, you know, expect to continue to see, you know, very solid numbers in there. What we also saw in the quarter, you know, we had, I would describe, as an average quarter on the purchase side, $35 million. And sort of disappointing, you know, because we had a lot of payoffs in there. The net loan growth was only $3 million in that. But I would say that the purchase, as I've said ad nauseum almost, the purchase loan business is lumpy. And really how we're doing it, we need to kind of evaluate kind of on a year-by-year basis, not a quarterly basis. And I have a high level of confidence that we will put some good numbers on the scoreboard in that business. I mentioned before, with all the capital we have, even if we bid loans, which we need to sometimes to win them at, with much less discount than we would previously get, we're looking at if we can buy loans with low LTV, short duration, and just a respectable yield, you know, given all the capital we have, it's just incrementally profitable. And I suspect we're going to start to see some of that being booked as we move through the current quarter and following quarters.

That's really helpful. I mean, just kind of elaborating a little bit on the purchased portfolio, it strikes me that, you know, one, we're now getting to the phase for a lot of these COVID-related deferrals where they're the deferral periods are ending, and I know that a lot of these portfolios have performed very well for banks across the industry, but I'm curious if we're going to start to see some loan sales and reduced concentrations in some lines where banks kind of look back a year later and say, well, you know, maybe we don't want to be as heavy in this type of loan following what happened over the last year. And the other thing in the industry that is all the M&A activity and And can you just sort of remind us, you know, when you're looking at these loans, where they're, you know, and you sort of see where they're coming from, how much of it might be generated by M&A activity and when two banks come together and they look at their combined portfolio, there's a need to reduce concentrations on various asset classes. Is that something that you would expect to drive volume in future quarters?

You would expect so because that historically is what happens. you know, it's not what happened in the first quarter, you know, to any meaningful degree. You know, you would expect that to happen. You know, you hear that, and you know better than I do that, you know, there's expected there'll be a fair amount of M&A activity, and you would expect that to happen. And so, you know, so we'll see. We're We do see where the potential is for bigger transactions for us. Some of the big banks hold sales every year, a couple sales a year of some meaningful volume. We're starting to see that or continuing to see that, I should say, more accurately.

Those banks that typically sell loans are continuing to. I know loan growth has been challenging across the industry and I'm wondering if a need to retain assets has changed the way other banks think about, um, their, uh, their desire to sort of hold those sales.

I think that that is a true statement that, um, that in some cases, and you just read it in American bankruptcy with what's going on, um, banks, uh, are having trouble generating assets. You know, there's an art, there's always articles about that. And I just want to pause and, um, and make a self-serving statement in that regard. I think one of the things that, you know, we like to highlight, and I think it's important when people think about, you know, our companies, think about us as an asset generator. You know, one of the, I can't recall if we went over the stat in the prepared remarks, but apart from the growth on link quarter, link quarter, if you take a look at, our growth in our national lending business. So that means purchase loans and originated loans, either portfolio finance or directly originated. And you take a look at the average balance for the quarter that just ended with the average balance for the same quarter one year ago, it's up almost 18%. And, you know, I think you... You would know. That's a big deal. I don't think many banks are doing that. You know, when you look at, and we do report this way because, you know, people want to hear it's appropriate. If you just look at a point in time, quarter to quarter, you know, you have one big loan that pays off and doesn't really reflect, you know, what the average is. But, you know, almost, it's like 17.8%. When I say almost 18, I don't mean 14%. I mean like 17.8 or thereabouts. You know, that is really great growth, average balance to average balance. And that's what we're able to do, you know, as a company is generate assets. You know, what we want to do is slow down paydowns, of course. But now to your question, you know, there are a whole bunch of banks that don't want to sell loans because they're having trouble generating assets. And yet there are other, you know, big banks that come out with, you know, for us what would be meaningful transactions, you know, during the year, you know, two times, three times, et cetera. And because we have so much capital and because our funding cost is so incredibly low now, you know, that we can, you know, bid much more, when I say aggressively, not on collateral value, you know, we want that to be, you know, really rock solid, but, you know, giving up some yield because it's incrementally profitable for us. And I expect we'll see more of that.

Right. Final question for me is just on the pace of buybacks we saw during the quarter, slowed down a little bit. I was just wondering, is that a function of an appetite for repurchases, or is it more of a function of what you're able to actually accomplish, you know, given liquidity in the market?

No, it's more a function of, you know, where the price is than anything. You know, we could... You know, you just take a look at, you know, well, let me put that in a full sentence. So it's really that, you know, our appetite at certain price levels. We ended the quarter with Tangible Book at around $29, and the average was just under $30 on the buyback. You know, that's sort of, you know... It's not like we're not a really, you know... not a lot of volume in trading our stock. And so the last time we had the buyback, we wound up buying a lot of shares at, I forget, $13 or something like that. And while our stock price is substantially higher than that now, it's not impossible that our stock price could go down further. Just looking at it now, what I thought was a really great quarter we had but this obviously I'm not objective because we're down today on we're down $1.70 on 59,000 shares so we're kind of looking at where the stock price where our appetite would be okay so the buyback depending on the stock price you intend to remain active with the buyback and at least reduce the shares that you issue during the quarter You know, we had about 700,000 shares remaining in the buyback. I could be off a little bit, but, you know, we have that. And we have a lot of capital. And so, you know, at the right price, we would most likely be a buyer. Thanks for taking my questions. Those were good ones. Thank you, Alex. Thanks.

Okay, once again, if you have a question, please hit star 1 on your touchtone telephone. That would be star 1 to ask a question. Okay. And since there are no other questions coming in, I will now turn the call over to Rick Wayne for closing remarks.

Thank you very much. Thank you. For those of you on the call, I think at the next call we're going to find out what happened to JP, where he went. It's either a technology problem where he has a beautiful little son named Miles who's just turned three, and maybe he got distracted. We don't know. But he did a great job coming back, better than I would have. In any case, look forward to talking again in January after our December 31 quarter. It's a little bit early for this, but I wish all of you happy holidays as we move through Thanksgiving and the holidays in December. And on that note, I would say goodbye to you. Thank you.

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