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.