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.

Hey, good morning, guys. Good morning. First off, Rick, I missed what you said earlier. When I got on the call, you were talking about seeing a lot of volume in the quarter so far in the quarter that we just started. I think you were talking about the purchase loans. Can you just confirm that comment and maybe talk a little bit more about the market for purchase loans as it stands right now with rates kind of poised to go much higher over the next couple quarters? Of course.

Before I do that, Alex, I just want to clarify. I think I misspoke in my presentation, I said that nonperforming assets increased by 3.3 million. That was wrong. I meant to say they decreased by 3.3 million. So, I wanted just to clarify that. As to your question, the context was I said that in the quarter that ended March 31, typically a light quarter, the first calendar quarter of the year, and it was even lighter than we would have expected. And then I went on to say that with respect to the quarter we're in, without predicting at all what we're going to do because, you know, the results are binary. You win or you don't win. We're seeing, you know, a fair amount of volume now, and so we'll – we'll be able to report how we do, but it's different in terms of what we're seeing now than it was in the quarter that ended March 31. With respect to your question about increasing rates on the purchase, I asked Pat to comment on that.

There's some activity we're seeing right now that's concentrated in fixed rate assets, and there's certainly a lot of feedback from the large loan sale advisors that banks who are sitting on a lot of fixed rate assets and who have funded short for many years are considering selling before rates continue to increase. So we expect there to be quite a bit of volume coming up. At least that's the feeling among the loan sale advisors and on the street. We haven't seen a ton of volume yet, but again, we're expecting it. June is typically a, the quarter ending in June is typically a busy month for loan sales. So we're expecting some volume in the next month.

That's great, Tyler. And then, you know, one thing that really jumped out at me, I know you didn't do a huge amount of purchases in this, the quarter that just ended, but it looked like the discount that you got on those loans was a lot larger than what we've been seeing over the last, I don't know, almost decade. So is that just indicative of kind of the fixed rate nature of what you purchased and maybe it needs a bigger discount relative to where rates are going or is there something else there? Has the market and the pricing gotten better all around?

Now, it's – I mentioned this as well, but I'll clarify it. The large discount was really attributable to one sort of unique transaction. And so, you know, the pricing other than that one, you know, was typically where we are. So I wouldn't – overly generalized about the pricing in the market. It was just that we got a really good buy on one transaction. And that's what drove it.

Okay. And then, you know, the originated business has obviously been on fire the last couple of quarters, as you alluded to, and you're showing in the numbers. I know you made some adjustments and added some people and other geographies. are you continuing to add more people, you know, can you maybe talk a little bit about the pipes there and, um, you know, is that something that also should accelerate into a rising rate environment or into the spring months? Um, and maybe just give us a little bit more color on what you're seeing in the originated business.

Well, first on, on the, on the people, you know, as you mentioned, you know, and I've mentioned, you know, over the past calls, we have hired, um, more business development folks, not since our last call to be clear, but you know, we now have, um, four outside senior lenders, um, two in New York, one in Miami, one in Southern California. We are looking to hire more. Um, we'd like to be able to hire, um, a person in a person or persons in Texas. Um, um, in, um, another one in California and another one in Florida. Um, and we're having conversations. Um, and I'll just point out that, you know, that, that all of the credit around that, you know, occurs in Boston. So we get senior lenders that can source business for us. And then all the underwriting, um, occurs in Boston. Um, and you're right that, um, That the volume is on the originated side closed loans has been great You know, we're over 150 million last quarter. I want to say 160 and change And this quarter, you know over 150 You know, we have reasonable expectation that that's pretty good number for us where we are now where the pipeline is very, very strong. And virtually all of the loans that we're doing now are like the ones we did before, which are floating and, you know, in the range of, you know, prime plus 2 to prime plus 275, something, you know, in that range. And the net interest income that I mentioned The improvement, you know, over a year ago really doesn't reflect, you know, much of an increase in prime. The 25 basis points that occurred so far, you know, happened, you know, kind of mid-March or so, and that had a very small impact. We're going to start to see a full impact of that for the whole quarter now, plus, you know, any of the increases which the talk is there will be a bunch. we'll get the benefit of that as well.

Great. And then as you're looking to hire more people, can you give us just a little bit of guidance on what we should expect for expenses, which have ticked up a little bit over the last couple quarters but really have remained quite stable given all the growth that you've seen?

Yeah. You know, when you want to be careful, I don't want to announce specific salaries for people we hire, but, you know, kind of that, you know, people get a very good base, but the real upside for somebody is, you know, a bonus. You know, the lenders are really bonus-driven. But to be clear, there's no commission. No one gets a formulaic payment based on volume. Instead, it's the basic philosophy of the bank is, you know, first the bank has to do well, then we have a bonus pool, and then we allocate that bonus pool based on people's contribution. But lenders, you know, it's not a formula. They don't get a commission. It's not a formula. But, you know, they could come in and, you know, they could make a fair amount of money if they do a lot of volume. You know, we shoot for lenders to do, over time, Once they get used to the place, $100 million or more of volume for the bank, and if they do that with the kind of rates that we're getting, that's profitable for the bank, and they deserve to get paid appropriately for doing that.

Okay.

At one point, I want to make on the non-interest expense, and I don't have a number in this, but as we go into the fourth quarter, typically we have more incentive comp, you know, at the back end, you know, as the compensation committee makes that determination, because bank-wide I'm talking about now, you know, based on how we do for the year. So I would expect that the salary, the compensation number in our non-interest expense would go up in the quarter that ends June 30, as it typically does.

Great. Thank you for taking my questions.

Thank you, Alex.

Thank you. Once again, for any questions on the line, that's zero, then one on your touch-tone phone. Standing by.

at this time i see we have no further questions and now i'll turn the call over to mr wayne for closing remarks thank you richard and thank all of you for participating in our call and supporting our bank you know we try and make our material that we provide as helpful and as transparent as possible if you There are additional things that you would like to see in our material that would be helpful. Let us know, and if we're able to include that, we will. And with that, I wish you a very good day. Thank you.

And thank you, ladies and gentlemen. This concludes today's conference.