Northeast Bank

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 Dignan, 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 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. 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 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. At this time, I'd like to turn the call over to Rick Wayne. Please go ahead, sir.

Thank you. Good morning, and thank all of you for joining us today. With me on this call are J.P. LaPointe, our Chief Financial Officer, and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments, JP, Pat, and I will be happy to answer your questions. Last night we uploaded an investor deck, and this morning I'm not going to go through page by page on the assumption that we provided the information, and I'm sure those on the call have read it, but I do want to amplify a few points, more than a few. First, let me just say, we thought it was a great quarter in almost every aspect. And I will, in my following comments, explain why we think that is true. First, just some earnings and key ratio highlights. We had net income of $11.4 million which compared to $9.9 million in the link quarter of 15%. Earnings per share were $1.42 diluted. Return on equity was 18.8%. Return on assets was 2.9%. NIM was 5.24%. And if we exclude triple P from the NIM calculation, the NIM would have been 6.44%. Obviously, those are really outstanding numbers. Let me first start with a discussion of the loan activity. To state the obvious, if you increase your loan balance and maintain high rates, we're going to have an increase in net interest income, which is what occurred. We had a record $261 million of purchases and originations. That's a record by a lot. The originations were $168.4 million and the purchase loans were $92.1 million. Also, our rates in our portfolio remain high at 8.96% on our purchase portfolio and 6.48% on our originated portfolio. I'll remind you that most of our originated portfolio, virtually all of it, is tied to prime and floats and so as rates go up, as they will, we're going to be picking up additional interest income from that portfolio. Just to put this in context, our loan national lending portfolio increased by $112 million or 11% from the link quarter. And if we go back a year, it increased $207 million or 23% over the past year. And then the final point I want to make on this is that because our loan book grew and we've maintained our rates, our base net interest income that is before transactional income, increased by $1.7 million from the link quarter. And so our plan is that as the correspondent fee over time goes down, we will make up for that and hopefully much more by growing our loan book. And so with that, let me turn to the correspondent fee for a second. And for this, I would ask you to go to slide four. With the correspondent fee income, it went down to the link quarter, from the link quarter, from $7.8 million to $6 million in this quarter. And the reason that it went down is the biggest component of the correspondency income is on the line called servicing interest, which is our share of the servicing income that is earned by loan source on the loans that they purchased. And that one line item went down by $1.6 million from the link quarter. And the reason for that is that loans are being forgiven at a very fast clip now. And to describe that a little bit more, in total, LoanSource purchased $11.2 billion of loans. And it was the balance at the end of December 31... was $4.6 billion, which is down $2 billion from September 30. And so when those Triple P loans get forgiven, there's obviously no servicing income on those. And therefore, that number goes down. They're paying down at roughly the pace of $500 million per month. I suspect it will continue at that pace for a while and then there will be some tail to it. But we can expect that over time the corresponding fee income will go down. I say over time. I suspect most of it will be recognized, not all, but most of it through September 30th of this year. I want to make a comment on our provision because we had a credit provision of a million one, and that was due to the performance of the SBA portfolio. At the start of COVID, when we looked at the SBA portfolio, which by its nature has higher credit risk on the unguaranteed piece, when COVID started, we put in an additional $3 million on the unguaranteed portion of that SBA portfolio. And fortunately, that portfolio has performed remarkably well. And this quarter, we reversed out about $1.1 million or so from the reserve against that portfolio. It still has a healthy reserve on it of 5.2%, but it's not the 10% that we that we previously had. Non-interest expense, it decreased $2.1 million from the link quarter to $11.2 million, primarily because the link quarter had $1.6 million of non-recurring correspondent expenses associated with the wrap-up of the Triple P. And so our Non-interest expense for the quarter was $11.2 million. And those that like to do the modeling, you know, I think that's a pretty good number. You know, you may think about $45 million for the year. On asset quality, those slides are 10 through 12. Again, strong delinquencies were $14.6 million. or 1.23% of total loans. As I said before, in the case of our business, particularly around the purchase loans, those delinquencies will look higher than a traditional community bank. And the real question is to look at the charge-offs. On our originated loan book, where we've done, I don't know, $1.8 billion or so in that range, our charge-offs are, ready, zero. And in the case of the purchase portfolio where the returns are on a weighted average about 11.5%, more or less, the weighted average charge-offs are eight or nine basis points. So really terrific asset quality. On the COVID deferrals, They virtually all worked out. The ones that we provided a P&I deferral, 99% are current. And in the case of interest only, they're also performing remarkably well. So now I want to make a comment on deposits, which are slides And over the last year, year and a half, we've made a conscious effort to reduce our reliance on higher cost bulletin board and ABLE CD and money market deposits with a focus of bringing down that cost by growing our deposits to our community banking division, which includes deposits. in our footprint, of course, both consumer and business. Also, a meaningful number of deposits from municipalities, which we're trying to state, and municipalities, which we're continuing to grow, as well as a focus on getting deposits from our national lending customers. And that's really paid off. Our average cost of deposits for the quarter were 36 basis points, which compared to a year ago, it was 103 basis points, and two years was 198 basis points. Now, of course, some of that, you know, a fair amount of that is rate driven, but if you look at the slides, you'll see how we have changed the composition of the deposits. Also on the share repurchase activity, I know this is near and dear to a bunch of our investors. For the quarter, we repurchased 340,000 shares at a weighted average price of just under $34. And finally, I want to make a comment on our 7A program with Nuiti, as you recall, We signed a five-year exclusive marketing agreement with Nuiti, which is formerly ACAP. The people are the same people, I should say more accurately. And starting with trying to market small balance or starting to market SBA 7A loans to most of the 115,000 customers that LoanSource has from purchasing their loans. Our first foray is looking at small balance working capital loans under $25,000. We've spent a lot of time, along with Nuiti, building out the technology which is substantially complete. Nuiti has just started to invite existing loan source customers in a phase rollout to apply for these small balance working capital lines. As I said before, I don't want to over-promise or under-promise. We'll see how this performs. We're certainly optimistic, but we will see. And we will have better numbers to report to you after the quarter we're in now when we meet again in April. And with that, I would like to turn it over to you for questions.

If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speakerphone to ask a question, please make sure your mute button 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 our first question online comes from Mr. Jeffrey Kitsis from Piper Sandler.

Good morning.

Good morning, Jeff.

Thanks for taking my questions. First, I wanted to start on the national origination business. You guys had a really nice quarter there. Can you talk about what factors drove the big growth and how sustainable that is over the next handful of quarters?

Of course. Well, we've hired, as I mentioned before, some outside business development offers, some additional ones, officers we have. And now two in New York, one in Miami, one in California. We have a lot of organic growth too, you know, customers that, you know, just are existing customers and have additional financing needs. We've done a lot to market our origination business. And we have, you know, a very good niche, which is focusing on, you know, particularly in the portfolio finance business, that the borrowing needs are too small for the big banks and not what a traditional community bank would do. And I think we have momentum with this. I don't know if every quarter will be $168 million, but we do expect we're going to have very good volume each quarter for this. Pat, do you want to add anything to that?

That was a good summary. I would just add that we're able to float in a niche right below non-bank lenders with respect to pricing, and there seems to be growing demand for quick execution, and our pricing advantage is paying off.

Thanks. Appreciate the caller. Next up, I wanted to talk about the purchase market. Has something in the market for loan purchases changed, which could suggest that volume would pick up going forward, or was this quarter's strong volume more function of seasonality?

I think it was, you know, this quarter, you know, we had a big purchase of $68 or $70 million included in that number, you know, We often bid on pools that large. They're very competitive. And so, you know, I think that was a big, not I think, that was a big contributor to the large portfolio purchase for the quarter. You know, I expect we'll, I wouldn't predict that every quarter is going to be as large as this one on the purchase side. You know, I would expect that, you know, We will get our fair share as we have in the past, but I don't think anything has particularly changed in that market from the previous quarters. Got it.

Thanks. I wanted to ask a little more about the annuity deal. What is it about the small balanced working capital loans under $25,000 that you guys really like as a lending product and What is it about that product that you think will particularly appeal to the customers that ACAP run on?

So first of all, you can get very good pricing on the product. It's prime plus $475. Typically with SBA loans, the maximum you can get is $275 over prime. There's a big underserved market. that would benefit from this working capital loan. It's also, you know, if you want to do it in a lot of volume, not that it's simple, simple, but it's easier, you know, less I's and T's to cross than the larger SBA products, so it can be highly automated. And we think, you know, when you compare this product with some of the other loans that come to, small balance loans for businesses, this has a lot of benefit over those. It's got a seven or ten year amortization as opposed to be doing six months or a year or two or three years. That's a big advantage. And the rate is much better than typically what you see for some of the non-bank lenders doing these loans that they approve in a day. And it's also a product that most banks are not doing and don't want to do because unless you do it in volume, which is our expectation, it is pretty expensive to offer one of these $25,000 loans to a borrower. So to kind of wrap that up, we don't think there's a lot of competition for this. We think there's a lot of need for it. The pricing is good for it. Our expectation is we will sell these off and hold. And the guarantee is large on these. It's currently 90%. And so it's got a big guarantee on it. And we think there will be a lot of demand. But as I said, I don't want to overstate that until we can report what the actual numbers are. And I would add after we do this, then we'll take a look at other 7A products as well. But we're starting with this. And One of the things is not only, you know, marketing to the existing loan source customers. We're going to, you know, different states to talk to the economic and development offices of those states to see where we can provide this because, as I said, there's a big underserved population for this kind of loan product. And then also going to other banks and try and white label the product for them. For example, on our website, there's a link where customers can come, they click on it, and then they wind up on the annuity website to do it. And our hope is that we can do that with other banks as well.

Appreciate the call. Thanks. Did you say the intention is to sell off the guaranteed portion and hold the non-guaranteed portion on balance sheet?

Exactly.

Got it. Okay. Thanks. Next, I wanted to talk about asset sensitivity. I know you mentioned earlier in the call most of the originated book is tied to prime and floats. Can you go through the rest of the portfolio, please, and remind us which buckets of the loan book are variable and what they reprice off of and also if any of the loans are sitting on floors?

JP? Sure. Thanks, Jeff. It's Around 92% of the national lending originated portfolio is variable with just about all of those loans tied to prime. And all of those loans primarily have floors built in, which is typically the rate at origination. So I would say, you know, the majority of the originated book is variable. On the purchase portfolio, you know, that varies based on the loans. Some of those are fixed and some of those are, are variable. I don't have an accurate breakout of what that percentage is, but there is a portion of those that do float. I don't know if Pat has any more color on the purchase portfolio and what percentage of those might be variable.

I don't. I think it's somewhere slightly more variable than fixed.

I would say on the purchase book, of course, a big part of the income comes in from transaction early payoff of those loans. I shouldn't say a big, I don't want to overstate it, but if we go to slide, let me just find this for a second.

It's slide 28, Rick, and that'll show the breakout between the coupon and the regularly scheduled accretion and then the accelerated accretion from payoffs.

Yeah, thank you, JP. So on this slide, The regularly scheduled interest and accretion on the purchase book was 664, but then we picked up another 2.3% from payoff of loans to get us to about nine. And that was an expansion of your question, Jeff, but I think the headline is all the originated portfolio is tied, virtually all of it's tied to prime.

Thank you. Switching to capital, it was a nice quote for buybacks. I was wondering if you could give us an update, please, on what remains on the program and how you're thinking about buybacks as an allocation of capital in 2022 in comparison with all the willing growth initiatives you have in place.

JP, can you just – how many shares are left out of the – We have about 396,000 shares left to buy back as part of our approved plan.

And to answer your question on the way we think about it, for the longest time, we only bought stock under tangible book. And to date, JP, how many shares have we bought back total? And what's the weighted average price?

One second here. To date, we have repurchased almost 3.5 million shares at about $15 per share.

So that's obviously been terrific, but the price was much lower. You know, we think about it, we take a look at, you know, what are our needs for capital. Of course, we do have, as Ed has pointed out to me frequently, you know, we have a lot of capital available. And what we need to do, the most profitable thing we could possibly do is leverage that capital and grow our earnings. And we made good progress this quarter. But we take a look at how much capital we have, what we think we're going to need, what do we think the opportunities are, and where is the stock price relative to the tangible book. This quarter, you know, we, as I mentioned earlier, we bought the shares at a little bit less than $34. And I want to say tangible bulk, JP, we ended up at $30.40. We're all in different places. That's obviously, that's why we're talking, having a conversation around this. Was it $30.40, JP? It was, Rick.

Yes, that's correct. And so, you know, we bought at $34.

You know, and... I think that's about as much as I can add. Obviously, I can't say at what price we would buy back stock. But, you know, those are the factors that we think about when we do it.

Thanks. Last question was on expenses. In your prepared remarks, you mentioned something about $45 million. Was that referring to historical expenses or was that a forward-looking? Forward-looking.

I think we were 11 to this. quarter, and I think that's a reasonably good number for the year.

If we get strong loan growth, does that mean that expenses would come in higher than that $45 million number, or does that $45 million number contemplate the strong loan growth?

If we have very strong loan growth, then that number could get higher. Got it.

Okay. Thanks so much for taking my questions. Congrats on a great quarter.

They were excellent questions, Jeff. I'll have to tell Alex. Thank you.

Thank you. Once again, for any questions, that's Starvin1 on your touchstone phone. And I'm showing we have no further questions at this time. I will turn the call over to Rick Wayne for closing remarks.

Thank you. Thank you all for joining us and supporting us. And we look forward to talking to you in April. Thank you very much.

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