Northeast Bank

Welcome to the Northeast Bank third quarter fiscal year 2022 earnings call. My name is Richard and I'll be your operator for today's call. This call is being recorded. With us today from the bank is Mr. 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. 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 zero, then one 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. Action 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 Mr. Rick Wayne. Mr. Wayne, you may begin.

Thank you. Good morning, and thank all of you for joining the call today. 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 will be happy to answer any of your questions. I'd like to start out with a few highlights on page three of the slide deck. For the quarter that ended, we had net income of $10.6 million, earnings per share of $1.36 diluted, return on equity of 17.6%, a return on assets of 2.8%, Our cost of funds for the quarter were 30 basis points. I also want to comment on our share repurchase program. For the quarter, we repurchased 79,588 shares at $34.71. And in April through today, we repurchased an additional 82,000 shares at $34.43. Combined from January through April to date, we have repurchased 162,000 shares at $34.57. We recently filed an 8K and put out a press release where the board approved and the regulators approved the repurchase of an additional 1 million shares or $40 million of capital. I also now want to focus a little bit on the originated loan volume. For the quarter, we originated $150 million. $2 million of loans, which reflected an increase on our originated portfolio of $61.3 million, or 9.9%, compared to the link quarter on December 31, 2021. And if we go back to the beginning of our fiscal year, our originated loan book has increased 157 million dollars or 30 percent compared with june 30 2021. i want to comment also on our purchase loan activity for the quarter we invested 24 million dollars on upb of 32 million dollars which is a bigger discount than we previously had. Half of the deals that we did were direct as opposed to through loan sale advisors. On the question of the discount, that was primarily directed from one transaction and then the others were more typically priced or priced more typically where we are. With respect to the activity in the March 31 quarter, typically that quarter, from a purchase perspective, is light. And the activity we saw was even lighter than for a light quarter. With the gigantic forward-looking statement that you just heard, we're seeing a lot of volume in the quarter that we are in. And when we reconvene in July, we'll have a chance to report on the success in the quarter. And so that's where we are. I want to focus, if you go on slides four and five, I want to make a comment on our correspondent fee income. One, as we have discussed, mentioned from the very beginning the income from our triple P activity and in particular as a correspondent for the loan source was that revenue was going to go down over time and at some point go away. We're starting to we've been seeing in over the quarters that number reduced for the quarter that was March 31, the income was a little bit less than $5 million, which was down from $6 million in the previous quarter. And the reason for that is that the Triple P balances held by loan source on the loans that they have purchased have been coming down as loans have been forgiven. They originally purchased $11.2 billion of loans. And at the end of March 31, it was down to $2.8 billion. So the loans that they have, the triple P loans they have, have come down by 75%. And, you know, we share in the servicing income. So is that portfolio comes down, our share of the servicing income also goes down, and that's why we're seeing a decline of that. We also expect to see a decline in this quarter and in quarters that follow. And, you know, we were always asked the question, you know, that we have, you know, we increased our capital by, a significant amount because of our triple P activity, both our originations and our correspondent income, as I mentioned. And then, you know, it was observed when that income goes down, we need to replace that by growing our loan book. And so I want to comment on that now as to how that is going. I mentioned already that on our loan book, originated loan book, that's gone up 30% from the beginning of the year. You know, if we take a look at, and this is, I'm going to be referencing slide 31 for this point. If we take a look at our net interest income, which of course includes interest income minus our interest expense, And we take a look at March 31. Now, I'm on slide 31. Our base net interest income, which excludes transactional income, for the quarter was 18. I'll do a little bit of rounding here, 18.4 million. And that compares from a year ago to base net interest income for the quarter of $14.3 million. So, we compare the quarters, our base net interest income went up by $4 million, or 28%. And of course, that happened as a result of two factors. Our national lending book over that period, now again, I'm comparing March 31-22 with March 31-21, and with a little bit of rounding, went from $980 million a year ago to $1.2 billion at the end of March. That's an increase of $220 million or an increase of 22%. And so with that increase in our loan balance, generated a lot more interest income. And then, of course, we had savings in our interest expense. I mentioned earlier that our deposits cost was 30 basis points for the quarter. And that, of course, is our goal, is to keep increasing our commercial real estate book. And if we're able to do that, then we will be able to keep increasing our income. Of course, a quick comment on asset quality. Our non-performing assets increased by $3.3 million or 16% since December 31. I'm very happy about that. I also want to make a comment about our exclusive marketing agreement with annuity around trying to originate 7 loans. When we spoke last time in January, I had said that I would expect that I would have more concrete results to report in our April call, and I don't have concrete results to report on the amount of 7 volume because annuity is continuing to build out the platform, which is not nearly as easy as one would think with all of the I's to dot and T's to cross to ensure that we're doing the underwriting in a way that the SBA will honor its guarantee. That is much more complicated than one would think, but there is some action going on. They have redone the portal for their borrowers in a much more user-friendly way, getting really close to solving the issues around the SBA process that I just described. Initially, their marketing approach was to send out emails to the hundred thousand plus triple P customers that the loan source had. I think it's fair to say that that was not a particularly successful approach. They have now engaged a firm to start a calling campaign, which started this week. The firm's making, you know, many, many calls to approach all of those customers on multiple times. They've also signed up more referral partners. I have a much higher confidence level now that when we reconvene in July, we'll have some tangible results to report. From the very beginning of this, I said I don't want to set expectations too high on this or too low. You know, our investment in dollars in this been relatively small, $500,000 or $600,000 so far. It's got the possibility to generate a lot of business and a lot of income. And on the other hand, we have to see whether customers are interested in a low-balance 7A loan. But we will have more to report on this. And I think with that, I will turn it over to you, our listeners, so that we can respond to any questions that you might have. Thank you.

Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchtone phone. If you wish to be removed from the queue, please press 02. If you're using a speakerphone, you may need to pick up your hands at first before pressing the first. Once again, if you have a question, please press 01 on your touch-tone phone, and we're standing by for questions. Our first question online comes from Mr. Alex Tordal from Piper Sandler. Please go ahead.