NBN - NASDAQ

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 Mr. Rick Wayne, President and Chief Executive Officer, JP Lapointe, Chief Financial Officer, and Pat Dignan, Executive Vice President and Chief Credit 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 a question-and-answer session. [Operator Instructions] 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. 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'd now turn the call over to Mr. 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 of 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. First, I want to just mention some financial highlights for the quarter, which are -- and I'll refer to Slide number 3. 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 linked quarter, meaning June 30, which has 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 linked quarter. And the provision was $1.7 million difference from the linked quarter. In the current quarter, we had a provision for $850,000. And in the linked quarter, we had a credit to a provision to our allowance for $880,000. So if you take a look at these two items, $1.7 million and $2.3 million that's $4 million, which on an after tax basis is $2.8 million. And as I mentioned, we were down $2 million, so, 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 7, 8 and 26. First, we had record originations of $181.7 million with a yield of 7.85% on our originated loan portfolio, represented national loan portfolio, which benefited from both increases in the prime rate and increased interest in fees collected upon payoff of some lows. So that was 7.85% on the originated yield. We had purchases of $77.5 million and the yield on that -- the return on that was 7.1%, which was meaningfully lower than in the linked quarter. The linked quarter, that number was 9% -- over 9%, I don't know 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. And the current quarter 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? Well, so why is it for it 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 -- the effect of having the transactional or the accelerated accretion fees lowered by 210 basis points. On the question of -- or 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 portfolio, 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 up. In terms of the loan portfolio, national lending portfolio growth, if we look at the linked quarter, in our national loan portfolio, it increased $167 million or 13.5% increase from June 30, 2022. If we go back and look a year ago, loans increased international loan portfolio by $412 million or a 41.6% increase in our loan book over the last year. That's quite substantial 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. Then if we look at the correspondence fee, that's been declining 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. 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 raise when we generated so much capital from the Triple P activity. Can you read -- 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, -- 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 or 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 would -- we are here to answer any questions that you might have.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Alex Twerdahl from Piper Sandler is on the line with the 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 pickup relative to what we've seen recently. And I know you've talked a lot about some of the dynamics that are driving. 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, potential credit changes or if it's really something else that we should be thinking of? I'm just kind of curious what's driving the higher volumes.

You want to take this Pat?

Sure. It's certainly rate driven. Anytime there's movement in the market like this, there's some 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 and a part of the sellers.

As I would add to that and we've talked in prior calls, we are so well situated to take advantage of these opportunities in the marketplace. I know, you know, but if anyone was on the call. who doesn't -- a lot of the folks that worked here 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, 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 to do that 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'd like to point out that doesn't mean we're going to buy a lot more because it's, you bid on them one at a time, but we're seeing more volume now than I think we've ever seen. Would you be [indiscernible]?

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 rate driven, not a lot of big credit issues in the loss 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 obviously the dynamics of supply and demand. I'm just curious, without necessarily giving away all the secret sauce, how you think about bringing on additional volume in any given quarter versus making sure you get the best pricing possible?

Well, one we have with the capital we have a lot of capacity to grow our loan book. Secondly, some of these go through a three or four things that we think about when we buy without -- you said giving away the secret sauce. When we look at loans, we're obviously mindful of credit quality, first point, making sure that we're bidding at a level that we're comfortable that we are with the LTV to what we're buying. When we think about pricing, we get to a generally to a certain yield mindful that you need to be competitive of course, we're not the only ones bidding on loans, so you don't know, 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 did. Because one, of course, you get early payoffs which enhance the yield. And secondly, we find that a bunch of these loans that there's -- sometimes there's what we call shadow interest where they may have been in default at one time and there's the customer balances more than the original UPB port or what we pay. And so let's -- 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 yields and maturity for those reasons. Unless it's exactly responsive, but…

The other thing is just that the going back to the pricing question, it's what doesn't show up on our disclosures. It's -- the much larger numbers of loans that we look at and either who's or pass on, because you can't get there almost.

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

There's definitely some deals out there now where the sellers are shocked that the pricing are concerned about taking the hit.

I think that was kind of a punch line 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 are buying them at better pricing as you mentioned in your question. And it's -- so we're trying to grow our balance sheet in addition to the originated activity, which is 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. How should we think about that? Because it's surprisingly 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. As you look forward, I know obviously there's the forward-looking statements, 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 how you think maybe somebody would think about that over, maybe not necessarily over a quarter but over a year?

Well, two comments. One part of the retention is, we have a deliberate effort by our asset managers to retain loans. Because it was previously, we would have a customer. It would be a good loan. The customer would pay more time. The LTV would be lower and we would try and encourage the customer to stay pointing out to that customer that is really easy. They don't need a new appraisal, they don't need a new legal documentation, they mostly have to sign the two page extension agreement. And so very low friction costs and then we would offer them what would be -- we would think would be a good rate And this is when rate before rates went up, say we would offer them 5.5 plus rates for so low, but we have the loan and we have the capacity. And they would still leave us because they would get an offer at 4. But that [Technical Difficulty] anymore, so borrowers that are with us, there are opportunities to refinance us out or less and they're more expensive. And so it's easier for us to keep that loan than we were -- and we are trying to. When you think about the purchase -- the return on our purchase loans it really depends going forward on the level of the prepayments. 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 the loan book. But I think 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 that they also that number. But directionally, I would think it will be higher in this field. And [indiscernible] also the purchase loans generally are not variable. I mean, there are some that are and some that reprice different intervals, but it's not like our originated book, it's tied to the price, mostly all of it or so for 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 improve the funding profile going into this. But given all the growth that we're seeing, maybe talk about that any strategies or updated strategies on funding into incremental growth that we should be thinking about?

JP?

Yes. Thanks, Alex. We have some strategies, primarily in the community bank and our national lending and corporate and institutional deposits, included in there as municipal community bank to continue to grow the balance sheet to fund the growth. Obviously, with the lower level of pay downs. We're required more funding to bring on the balance sheet to fund the growth because usually we see more funds coming in from the loans paying off early and we didn't have that this quarter. So fired (ph) us one and bring in more incremental deposits, which can sometimes be a little more expensive than your existing deposits already. So we do have some strategies that we're 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 for a big portfolio to purchase.

Okay. Thanks. And then you talk a little bit, Rick, about the pipeline on the originated national loans? Obviously, that growth has been huge for now over a year.

Yeah. The origin I [Technical Difficulty] we have a very big pipeline. On the originated side, yes, I mentioned earlier we had a record amount of volume in the quarter that we're seeing. The pipeline both in -- just by what's in closing where we have term sheets out that have been signed and returned 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. Pat, do you want to narrow at all?

Sure. As discussed in previous quarters, the lack of fixed rate alternatives or at least without long lockouts that the -- and the increasing funding costs for non-bank lenders has really benefited us with our cost of funds and with our restructures and lockouts we're able to. 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…

You had mentioned in your preliminary write up balance about our business development officers now. They've been with us for a while, but now they're really hitting stride in terms of value. And plus there's a lot of organic growth too that existing customers they are just calling in for refinancing needs. and a number of indication of portfolio finance, a number of those borrowers 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 air conferences and those kind of things. So very optimistic about the volume we can do on the originated side.

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

So I think the number I have out earlier, I mentioned $52 million dollars for the year, I think that's a pretty good number. I mean, if it went up, I think it will 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 company.

That's for the fiscal year, correct?

Yes.

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

Well, there are two, when we think about buybacks, I think obviously by use of capital and what price you'd have to buy back? So I mentioned in the prior quarter, we back up, I mean, the current quarter of September, 108,000 shares we bought that currently. One of the things that's happening now is because we will pre-start loan book so much. But when we factor in purchased loans that we described in the earnings release used to be our loan capacity based on our capital was something like $100 million, $1 billion if he has point it. So JP correct me with, if but if I make a small error, he doesn't mention, but $1 billion, that's a big mistake. 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 where it is. And so I think 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 in sometime in September. I'm wondering if you can give us any sort of update on anything there?

We can. I would say that we're starting to book [indiscernible] loans. JP, we 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 [indiscernible] 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 don't really -- 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 want to factor it 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. [Operator Instructions] We have no further questions at this time. Now, I will turn the call over to Rick Wayne for closing remarks.

Thank you very much. Thank you 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, thank you.