Northeast Bank

Welcome to the Northeast Bank first quarter fiscal year 2023 earnings call. My name is Shannon, and I will be your operator for today's call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer, JP LaPointe, Chief Financial Officer, and Pat Dignan, Executive Vice President and Chief Operating Officer. Yesterday, 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 the question and answer session. During the question and answer session, if you have a question, please press star 11 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 risk 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. I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Good morning. And thank you all for joining us today. With me are JP LaPointe, our Chief Financial Officer, and Pat Dignan, our Chief Operating Officer and Chief Credit Officer. After my comments, JP, Pat, and I will be happy to answer your questions. During my comments, I'm going to refer to the, in some cases, to the slide deck. that is on our website. And I'm only going to focus on some meaningful highlights to try and provide some more detail into what has already been filed. First, I want to just mention some financial highlights for the quarter, which are, and I'll refer to slide number three. For the quarter, net income was $8.3 million. EPS was $1.12 diluted. ROE was 13.07%. ROA was 2.03%. Tangible book value was $33.57. And during the quarter, we repurchased 108,000 shares at an average price of $37.88. Let me just, at a higher level, compare the quarter that just ended with the linked quarter to make the point that the current quarter was actually quite strong, even though the income was lower than the linked quarter. So the linked quarter was, the current quarter was $8.3 million, which is down $2 million from the link quarter, meaning June 30th, which had net income of $10.3 million. This difference is really attributable to two factors. One, the corresponding income was down $2.3 million compared to the link quarter. And the provision was $1.7 million difference from the link quarter. In the current quarter, we had a provision for 850,000. And in the lean quarter, we had a credit to our provision to our allowance for $880,000. So if you take a look at these two items, 1.7 million and 2.3, that's $4 million, which on an after-tax basis is $2.8 million. And as I mentioned, we were down 2 million. So, you know, but for those two, our income would have been higher in this quarter. And I will, as we go through this presentation, I will talk about those two, why they were down. I'd like to also talk about the quarterly loan activity. And this information is on slide seven, eight, and 26. First, we had record originations of $181.7 million. with a yield of 7.85% on our originated loan portfolio, originated national loan portfolio, which benefited from both increases in the prime rate and increased interest in fees collected upon payoff of some loans. So that was 7.85% on the originated yield. We had purchases of $77.5 million, and the yield on that, or the return on that, was 7.1%, which was meaningfully lower than in the link quarter. The link quarter, that number was over 9%. I don't have it exactly here, but over 9% in the June 30 quarter. And the difference of that, which is substantial, 210 basis points, is due to a lower level of income from accelerated accretion and fees. In the current quarter, that accelerated accretion and fees were 86 basis points, and it was just a little bit less than 3% in the linked quarter. And so why is that? The why is it part is because we had less payoffs in the current quarter, which in a lot of respects is a good thing, because it's kind of good and bad. So if you get an early payoff, you generate more accelerated income, and so your return is higher. But on the other hand, the loan pays off, and then you don't have that loan to generate interest income in the following quarters. And so that's the good and the bad news. But it did have the impact of the effect of having the transactional or the accelerated accretion fees lowered by 210 basis points. On the point on loan payoffs, this was our lowest level of payoffs in 14 quarters. If you measure the amount of payoffs compared to the total purchase, I'm now talking about the purchase loan book. For this quarter, that ratio was 5% doing some rounding. And if we go back and look at the average for the prior 14 quarters, it was about 8%. So we had substantially less payoffs, which generated, as I've explained, less transactional income. But our loan book is growing because those loans weren't paid off. In terms of the loan portfolio, national lending portfolio growth, if we look at the link quarter in our national loan portfolio, it increased $167 million, or 13.5% increase from June 30th, 2022. If we go back and look a year ago, loans increased in our national loan portfolio by $412 million, or a 41.6% increase in our loan book over the last year. That's quite substantial, a loan increase. And so now I'm going to segue into the corresponding fee income and how we're replacing that reduction in income with net interest income. And I'm going to refer to slide 29 in these comments. First, Our base net interest income, and by that I mean our interest income before any what we call transactional income or accelerated accretion or those things, was for the quarter $22.6 million compared with $20.1 million for the linked quarter. So our base net interest income quarter to quarter increased by $2.5 million or 12%. because our loan portfolio is growing and we're benefiting from a higher rate interest environment. You know, then if we look at the corresponding fee, that's been declining, you know, every quarter. In the current quarter, it was 1.4 million compared with 3.7 million for the linked quarter. So it decreased by $2.3 million. So just to compare those two numbers, Our net interest income increased by $2.5 million, and our correspondent fee income decreased by $2.3 million. And so this answers the question that investors raised when we generated so much capital from the Triple P activity. And knowing that the Triple P income had a shelf life, When that goes away, can you replace that by growing your balance sheet? And we are doing that as evidenced by the numbers that I just described. On asset quality, slide 10 remains strong. Delinquencies were $14 million or a little bit less than 1% of total loans and non-accrual loans. were $13.7 million, and that was 93 basis points, or 0.93%, I should say, of total loans. So those are, given our line of business, very strong numbers. And then finally, I think the biggest news to come out of all of this, which occurred in September, where we disclosed that in the month of October, we purchased in multiple transactions a total of $303.6 million of UPB of loans, which will increase, obviously increase our loan book from October going to the end of October. We just recently closed on it going forward, which will be a benefit in subsequent quarters. And with that, that ends the formal part of our presentation, and we are here to answer any questions that you might have.

Thank you. We will now begin the question and answer session. If you have a question, please press star 11 on your touchtone phone. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 11 on your touch tone phone.

Alex from Piper Sandler is on the line with a question.

Thank you. Good morning, guys. Good morning. Good morning. First off, Rick or Pat, I was hoping you could comment on this volume in October. And I guess to a lesser extent during the quarter in the purchase market is obviously a big kickoff relative to what we've seen recently. And I know you've talked a lot about some of the dynamics that are driving that. I'm just wondering if in some of these pools, if the available loans are being driven by the rate environment being driven by the credit, you know, potential credit changes, or if it's really, or something else that we should be thinking of. I'm just kind of curious what's driving the higher volumes.

Pat, do you want to respond?

Sure. Certainly, you know, rate driven. Anytime there's movement in the market like this, there's balance sheet repositioning on the part of sellers. And we've been talking for months about expecting to see an increase in the top of the funnel with respect to loan sales. And we're starting to see that. A good portion of it is driven by interest rates and liquidity on the part of the sellers.

I would answer that. Alex, I would add to that, and we've talked in prior calls, you know, we are so well situated to take advantage of these opportunities in the marketplace. I know you know this, but if there's anyone on the call that doesn't, you know, a lot of the folks that worked here, you know, came out of Capital Crossing Bank, which all we did was purchase loans. So we have opportunities to look at pools coming in. We have, you know, first the expertise to be able to underwrite all of these loans and service them and we have the capital to be able to buy them, and it's really a great way to grow our loan book. And sellers like to deal with us because we have a reputation for being able to execute, to be a very good counterparty for them. And you did hear a forward-looking statement, which I won't bore you with again. But we're seeing a lot in the pipeline now. There's a lot of loans coming to market. I should point out that doesn't mean we're going to buy a lot more because you bid on them one at a time. But we're seeing more volume now than I think we've ever seen. Would you agree, Patrick?

Definitely. And there is some portion of the availability that's credit-driven, more than in the past few years. But, again, the stuff that we're focused on is primarily – not a lot of big credit issues in the launch that we've been successful purchasing.

Do you have any thoughts that you can share with us on sort of how you balance the volume versus the pricing on there? Certainly with the volume increasing, you'd expect the pricing to improve or pricing for you to improve, just given... you know, obviously the dynamics of supply and demand. I'm just curious, you know, without necessarily giving away all the, you know, all the secret sauce, you know, how you think about bringing on additional volume in any given quarter versus making sure you get the best pricing possible.

Well, you know, one we have with the capital, we have a lot of capacity to grow our loan book. Secondly, So I'm going to just go through three or four things that we think about when we buy without the secret sauce. You know, when we look at loans, we're obviously mindful of credit quality, you know, first point, making sure that we're bidding at a level that we're comfortable that, you know, we are with the LTV to what we're buying. When we think about pricing, you know, we bid generally to a certain yield, mindful that, you know, You need to be competitive, of course. We're not the only ones bidding on loans. So you're partly driven by what the marketplace requires for a bid. But the thing we have, we know, and even more so in recent times, is that when we buy loans, we do much better than just what we think is the yield to maturity based on the price that we bid. Because one, of course, you get early payoffs, which enhance the yield. And secondly, We find in a bunch of these loans that sometimes there's what we call shadow interest where there may have been a default at one time and the customer balance is more than the original UPB for it or what we pay. I don't want to put numbers out there because that would be related to the secret sauce, but we know we're going to do better than just what the math tells us on the yield to maturity. for those reasons.

I don't know if it's exactly responsive, but... The other thing is that the... Going back to the pricing question, it's what doesn't show up on our disclosures is the much larger numbers of loans that we look at and either lose or pass on.

But we can't get there on those. I mean, yeah, in preview, this is really directional. I don't have the numbers exactly in front of me. But at one point, we went through kind of the funnel in a particular quarter, not this quarter, but we may wind up buying something like 15% or 20% of the stuff we look at or less because there's a lot of loans that come over the transom, so to speak, that we don't bid on. And then previously, there was a lot that we bid on and we didn't win.

There's definitely some deals out there now where the sellers are shocked at the pricing or about taking a hit.

I think, Alex, kind of the punchline to this is we had predicted this after COVID, but we were wrong. But right now, there's a lot of opportunity to buy loans. We're buying them at better pricing, as you mentioned in your question. And so we're trying to grow our balance sheet. In addition to the originated activity, which was record-breaking last quarter, with the purchase bonds.

Got it. Thanks for all that color. On to the transactional income and appreciate your comments on sort of where that shook out this quarter relative to the previous 14 quarters. You know, how should we think about that? Because it strikes me that when rates moved up back in 2017, 18, 19 time period, we didn't see necessarily that transactional income fall off a cliff. But then again, that was a much different increasing cycle. You know, as you look forward, and I know obviously there's a forward-looking statement, but do you think we're going to see lower levels of that, of early payoffs relative to history? I mean, maybe give us a little bit of thought around, you know, how you think maybe somebody would think about that over, maybe not necessarily over a quarter, but over a year.

Well, two comments there. One is, Part of the retention is we have a deliberate effort by our asset managers to retain loans because it was previously, you know, we would have a customer, it would be a good loan, the customer would be paying all the time, the LTV would be lower, and we would try and encourage the customer to stay, pointing out to that customer that, you know, it's really easy. They don't need a new appraisal. They don't need new legal documentation. You know, they mostly have to sign, you know, a two-page extension agreement And so very low friction costs. And then we would offer them what we would think would be a good rate. And this is when right before rates went up, say we would offer them five and a half because rates were so low, but we had the loan and we had the capacity. And they would still leave us because they would get an offer at four. But that's not anymore. So borrowers that are with us, their opportunities to refinance those out are less and they're more expensive. And so it's easier for us to keep that loan than we are trying to. You know, when you think about, you know, the purchase, the return on our purchase loans, it really depends going forward on the level of the prepayments. You know, if I were to estimate, I think this quarter, was unusually low. I would not expect us... I mean, it could happen if we don't get the payoffs, but again, we're building a loan book. But I think that what we had this quarter was unusually low. I would expect it to be at least over eight going forward. Again, subject to any given quarter, it depends on the payoffs. But directionally, I would think it would be higher. And, you know, also, you know, the purchase loans generally are not variable. I mean, there are some that are and some that reprice, you know, different intervals. But it's not like our originated book. It's tied to the prime, mostly all of it, or so far now. Right.

Okay, that's helpful. And then just on the other side of the balance sheet on funding costs, I know you did some things to – to improve the funding profile going into this, but given all the growth that we're seeing, you know, maybe talk about any strategies or updated strategies on funding and the incremental growth that we should be thinking about. JP?

Yeah, thanks, Alex. We have some strategies, you know, primarily in the community bank and our national lending and corporate and institutional deposits, you know, included in this poll in the community bank. To continue to grow the balance sheet to fund the growth Obviously with the lower level of pay downs, you know, we required more funding to bring on the balance sheet to fund the growth Because you know usually we see more funds coming in from the loans paying off early and we we didn't have that this quarter So, you know fired us to go out and bring in more incremental deposits, you know, which you know can sometimes be a little more expensive than your existing deposits already and So, you know, we do have some strategies that we're, you know, still looking to roll out and bring in funding as needed. And then, obviously, we can supplement with other funding sources as needed if we have an opportunity, you know, for a big portfolio to purchase. Okay. Thanks.

And then, can you talk a little bit, Rick, about the pipeline on the originated national loans? I mean, obviously, that growth has been huge for now over a year.

THE ORIGINATED, YOU KNOW, ON THE ORIGINATED SIDE. I MENTIONED EARLIER WE HAD RECORDS, AMOUNT OF VOLUME IN THE QUARTER THAT PROCEEDED THE PIPELINE, BOTH IN, YOU KNOW, JUDGED BY WHAT'S IN CLOSING, WHERE WE HAVE TERM SHEETS OUT THAT HAVE BEEN SIGNED IN RETURN WITH THE DEPOSIT, WHERE WE HAVE TERM SHEETS THAT ARE OUT THAT WE'RE WAITING TO GET BACK, THE PIPELINE IS VERY LARGE. BUT THAT'S A VERY GENERAL STATEMENT TO THAT QUESTION. PAD, DO YOU WANT TO ARROW THAT AT ALL?

SURE. AS DISCUSSED IN PREVIOUS QUARTERS, THE LACK OF FIXED RATE ALTERNATIVES OR AT LEAST WITHOUT LONG LOCKOUTS AND THE increasing funding costs for non-bank lenders has really benefited us with our cost of funds and with our rate structures and lockouts. We're pretty attractive alternative relative to previous years. And so we're able to be not only more volume, but pickier with respect to the assets that we pursue.

You had mentioned in your preliminary write-up, Alex, about Our business development officers now, they've been with us for a while, but now they're really in stride in terms of value. And plus, there's a lot of organic growth, too. Existing customers are just calling in for refinancing needs. And in the case of portfolio finance, a number of those borrowers that leveraging non-bank lenders, those numbers are increasing. We're doing a fair amount to improve our brand in the marketplace through digital advertising and events with borrowers and coming up in the year conferences and those kind of things. So we're very optimistic about the volume we can do on the originated side.

With higher volumes on the loan portfolio and the loan growth, should we expect a little bit of a kick-up in expenses in coming quarters?

I think the number I had out earlier, I mentioned $52 million for the year. I think that's a pretty good number. I mean, if it went up, I think it would go up a little bit, not crazy. I think that's a reasonable number for the year. To the extent we see any meaningful changes in that, we can update that. in one of our next calls, but I think that's a reasonable assumption for the bank.

That's for the fiscal year, correct?

Yes.

Okay. Just two more questions for me. One is just, you know, given the growth and managing excess capital, I'm just curious, you know, how if buybacks still make as much sense today as they did a couple quarters ago.

Well, there are two, you know, when we think about, you know, buybacks, you know, we think obviously about use of capital and, you know, and what price you'd have to buy back. So I mentioned in the prior quarter, we back, you know, I mean, the current quarter, September, 108,000 shares we've bought back. Currently, you know, one of the things that's happening now is because we've increased our loan book so much that when we factor in the purchase loans that we described in the earnings release, It used to be our loan capacity based on our capital was something like $100 million. A billion dollars, JP is pointing out. So JP usually corrects me with, you know, but I make a small error he doesn't mention, but a billion, that's a big thank you. And now it's more like $500 million of capacity. So we think about capital differently now. based on the amount of opportunity in front of us and the stock price, you know, where it is. And so I think, well, that's all I would say on that point.

Okay. And then just a final question. I saw during the quarter that the annuity relationship looks like it went live sometime in September. I'm wondering if you can give us any sort of update on anything there.

We can. You know, I would say they, you know, they're starting to book 7A loans. JP, do you have a number of what they have done kind of through September?

It's not a lot.

So they've booked around 2 million. They're actively doing it. There seem to be some changes with the SBA around the processing of these 7A loans, which might improve. But they're at it. We'll see what happens. But it's not a lot yet. And I will remind everybody, when we started all of this, set the expectation that we didn't know then what they were going to do, whether it was going to be a little or it was going to be a lot. It's currently a small amount, but it could be much more. I wouldn't really factor a big number in your analysis, because so far it has not been the case.

Great, thanks for taking all my questions.

Those are very good ones, and a lot of them. Thank you, Alex.

Thank you. As a reminder, if you have a question, please press star 1-1 on your touch-tone phone.

One moment, please.

We have no further questions at this time. Now we'll turn the call over to Rick Wayne for closing remarks.

Thank you very much. Thank you to those that are listening to this call. Appreciate your support. I hope you found that interesting. If there are things that you'd like us to cover in future calls, let us know. And if we can, we will. And with that, again, I thank you.

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