Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2022 First Quarter Earnings Results Conference 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 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 northeast.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 would like to turn the call over to Rick Wayne. Please go ahead, sir..

Thank you, and good morning. And thank you to all of you for joining us today. As noted, I am Rick Wayne, the Chief Executive Officer of Northeast Bank and with me on the call are JP Lapointe, our Chief Financial Officer; and Pat Dignan, our Chief Credit Officer and Executive Vice President.

After my comments, JP, Pat, and I would be happy to answer your questions. And I'd like to start with some comments on our financial highlights which is on Page 3 of the slide deck. First, I'd point out that we earned $9.9 million for the quarter, which was $1.20 per earnings per share.

Our return on equity was 16.7% and return on assets was 2.41%, results we were very, very pleased with. If we take a look at our – still on Page 3 at our national lending activity for the quarter, we purchased 35.4 – we invested $35.4 million on the $37 million of UPB and we originated $94.5 million of loans with a weighted average rate of 5.87%.

As I've mentioned in previous calls, our originated loans are very predominantly floating rate, tied to prime with floors baked into them and in today's rate environment, 5.87% on new originations was very strong.

And those factors contributed to – we put a few different numbers around net interest margin one is kind of a typical one, accounting everything all in, which was 4.74%.

But if we take the PPP impact out of that and subject to the language in Footnotes 4, we saw 6% NIM, which kind of would be what would be standard if we didn't have the impact of the PPP activity in that account. On the – our purchased loan return was 9.19%, very, very strong with a fair amount of discount that was accelerated because of prepayment.

During the quarter, we repurchased 102,311 shares at $29.91. Finally, before I get into a little bit more detail, I want to comment on our joint marketing agreement with NEWITY. That's a new name to you, NEWITY, it's a substantively the successor to ACAP, who we originally entered into the agreement with. The principles are the same.

They open – they started a new entity and changed the name. I don't really want to overpromise on this. It's got a lot of potential. On the other hand, it could turn out not to generate that much. So, I don't really – I don't want to provide any numbers until we have them. I can say that the platform is substantially complete.

They are going out to, as you may recall, NEWITY has, subject to getting some approvals from some of the sellers of the loans to Loan Source about over 100,000 customers potentially that they can market to who already have PPP loans.

Generating this kind of loan activity, the customer acquisition costs can be high and in the case of what they have, it's going to be very, very small, because they have access to all the customers already. The portal is going to open up over the next couple of months of this calendar year with a soft opening to make sure it all works.

The initial product is a $25,000 loan under the SBA 7(a) program. It's a product that the – doing all of the paperwork that you need to do under the SBA program is less.

It carries within an 85% guarantee and you can get very good pricing on those loans and our expectation, if we get some volume, would be to sell those loans, the 85% guarantee piece in the secondary market. So there is not a lot to report as to what has happened.

I would expect that when we speak again in January, we'll be able to provide some more news on that. If we now turn to Page 4, which is provide some detail on our correspondent fee income, which of course, has been a substantial portion of our income while this has been around and it hasn't been around that long.

The – if you look at the bottom of Page 4, you can see since the fourth quarter of 2020, through the first quarter of 2022, that's our fiscal quarter, Loan Source has purchased $11.2 billion of PPP loans. And as of September 30, this is in the last footnote, there has been $6.6 billion – there is $6.6 billion remaining at September 30.

And I will talk a little bit more on the next slide about what's happened in round one, what's happened in round two. Again, on the bottom, you can see in the total line that the total income then was to be amortized was $19.46 million. And as of the end of September, $9.7 million remains.

And if you look up at the top three numbers, the one I want to point out for a second is the amortization of purchased accrued interest or initial – these are – the loans are paid up sooner than we had thought. So we needed to accelerate $720,000 in this quarter.

So we have the right relationship between that purchased accrued interest and the outstanding balances. If we turn to the next page, you can see we've broken up on round one and round two. Round one, which was $5 billion of purchases is now $549,000, there is only 11% remaining.

In round two, there is 99% remaining of the $6.15 billion at the end of September, but they just recently opened up their portal.

And our – I won't bore you by reading the whole forward-looking statement again, but roughly speaking, we think most of this income from this correspondent activity will be recognized by the end of this fiscal year for us or maybe a little bit into the following year or following quarter of the next year, but that will give you some idea as to our view.

Page 6 is a slide of our portfolio. You can see we have almost 2,100 loans or $1.74 billion and what I do want to highlight on that. So I get to the page, is that our national lending division has almost $1 billion in its portfolio $990 million.

And let me just see, I think, we'll move to Page 9, which provides some statistics on our national lending portfolio, the top one is size. You can see that only 11% of our portfolio has our loans greater than $9 million. We provide all of the breakdown of the collateral types and we are now in 45 states, really is a national lending business.

Going to the next slide on asset quality, you can see that the percentage of non-performing assets to total assets is 160%, which is high, compared to the linked quarter.

But the linked quarter, as we talked about, the balance sheet was inflated, because of all of the cash in the collection account and highlight two other things on the right side, the classified loans are $12.7 million, up a little bit from June 30, but down from the preceding quarters and charge-offs are three basis points.

They were four basis points last quarter and that's really – we think, a really good statistic when you think about the rates that we're earning the – on our purchase and originated loan book.

On Slide 11, you can see that the deferral program is virtually done as we have out of the – we had $118 million of loans in our deferred where we gave P&I deferrals too. There are no parties under deferral anymore, and it – and the delinquencies are pretty low on that.

And on interest-only out of the $40 million, only $4.5 million remain and the performance of those loans is also excellent. On the next slide, we show kind of a rollover of our – it’s a bridge rather, I should say, on our non-performing assets. I'll just highlight in the case of loans. We added $5 million and $2.5 million came off.

So there was a slight increase in there. And in our OREO, the balances came down by about $880 million grant compared to June 30. There is a lot of information in the deck having to do with the allowance and how much we have in each group. We provide that, so you can look at that and we've done that in other quarters and I am not going to do it now.

And then also the loan-to-value in our national lending portfolio on Page 4, I won't go through all – I will not go through all of this by collateral types.

But in summary, I would point out that the $990 million has a weighted average loan-to-value of 48%, which is really what we do is we try and loan where we have really high confidence in the collateral value. I am going to again slip through the remaining slides, and I am going to now ask JP to start in on Page 20.

JP?.

JP, are you muted? Do you have yourself muted?.

You know what? I am not sure where JP.

Operator, is everyone is still on the call and can you hear me because I can continue with this?.

Yes. I can see JP, but - and that's why I interjected with are you moderated. .

Okay. .

But he doesn't seem to be. .

Okay. Why don't I – can everyone hear me, though? I am sorry. Everyone listening with the technical difficulty. We are in different places. Operator, can everyone hear me? I can continue..

You can go ahead..

Okay. Thank you. I won't do as good a job as JP would, but I will try going through these slides and doing this. On Page 20, this is really a great slide on the quarterly cost of deposits. And the green line shows what our average cost of deposits are by quarter. And if we go back a year, it was 1.20%.

And then, for the quarter that just finished, our first fiscal quarter, it was 39 basis points that – and we have a little dot there showing 45 basis points, which is what it was at the very last day of the quarter.

It's slightly elevated, no doubt because the amount of deposits and the collection account from the Loan Source was probably lower at that point in time, but that is a very good trajectory that we are working on. If we go to Slide 21, and I've talked about this before as has JP.

One of our objectives is to change the composition of our liabilities and reduce the amount of higher cost deposits, both through ableBanking and on the bulletin board, which is a place that banks and others – mostly banks, would buy CDs from us using our products as part of their treasury function and increasing the amount of deposits in our community banking division.

And so, if we look at the top of the Slide 21, you can see that if we compare the year September 30, 2020, with just the September 30, 2021, that our deposits in our community banking division have grown $174 million.

And the deposits in the ableBanking, which are higher priced have been reduced by $120 million, and on the rate board or bulletin board by $63 million. We just think that's really, really great and it's a lot of work by our folks and our community banking division in Maine to do that. And we have reorganized that group.

We have a person in charge of business banking where we are seeking deposits from businesses in Maine and generally without big borrowing needs, we have a higher – the former deputy treasurer in Maine to go after municipal deposits, which we've had great success in. And we have a whole program to try and bring in retail deposits as well.

So, and then I'll just finally comment, if you look at the bottom of Page 21 that our checking deposits have – accounts are up $148 million year-to-year. And you can see the higher-priced money market below and the CDs are down in the aggregate about $205 million..

Rick, can you hear me now?.

I can, but I was on such a role, but please come and take over..

Keep going if you want..

I am muting. You can start on Slide 22, please..

Thank you, Rick. Sorry about that. Turning to Slide 22, this slide shows the changes in our deposit portfolio and annualized interest expense monthly over the past year, while also displaying the impact of the PPP collection account, which impacts our short-term investments and deposit balances and is subject to significant fluctuation.

This slide also excludes the impact of $400 million of short-term brokered CDs that were taken out in January 2021 to help fund PPP loans and matured during the quarter ended March 31, 2021. The rate on the brokered CDs was 15 basis points, and this funding source is not expected to be recurring, which is why it has been excluded from the analysis.

Over the past year, we have generated approximately $5.6 million in annualized interest expense savings in our deposit portfolio, decreasing from $10.4 million in October 2020 to just $4.8 million in September of 2021.

Moving ahead to Slide 24, this slide provides detail on our potential additional future interest expense savings on our CD portfolio, of which $191 million is scheduled to mature within the next twelvemonths. Based on the current weighted average interest rate of 1.17%, this cost amounts to $2.2 million in annual interest expense.

Slide 25 shows our quarterly revenues over the past five quarters, which when you exclude the PPP gains have increased by $1.9 million from the linked quarter and increased by $6.8 million from the comparable prior year quarter.

Additionally, our non-interest expense has increased $3.9 million from the linked quarter and $3.4 million from the comparable prior year quarter.

This increase from the linked quarter is primarily related to an increase of $2.6 million in salary and benefit expense, primarily related to lower deferred salary contract expense during the current quarter due to minimal PPP originations during this quarter, along with increases in salary, bonus and payroll tax expense.

Additionally, there was a one point – an increase in loan expense of $1.4 million, primarily related to expenses incurred in connection with the wrap up of the PPP loan origination activity.

The increase from the comparable prior year quarter is primarily related to a $1.6 million increase in loan expense related to the previously mentioned expenses from PPP activity, along with a $1.2 million increase in salary and benefit expense, again related to higher salary and bonus numbers, along with lower deferred salary contract expense.

On Page 26, we show our net interest margin, which was 4.74% for the current quarter, an increase from 3.99% in the linked quarter and a decrease from 4.95% in the comparable prior year quarter.

Given the significant balance of short-term investments that we hold related to the corresponding relationship collection account, our net interest margin gets compressed.

Excluding the cash from the corresponding relationship and our PPP loan activity, net interest margin in the current quarter amounted to 6%, an increase from 5.56% in the linked quarter and from 5% in the comparable prior year quarter.

Finally, as shown on Slide 31, as we have continued to grow our national lending division portfolio and reduce the cost of our deposits, our base net interest income has consistently increased over the last five quarters, increasing $2.9 million or 23% over the comparable prior year quarter. That concludes our prepared remarks.

At this time, we would like to open up the line to Q&A..

[Operator instructions] And we have a first question from Alex Twerdahl from Piper Sandler. Mr. Twerdahl, please go ahead..

Hey, good morning, guys..

Good morning, Alex..

Good morning. First off, JP, I was hoping you could just go back to the expense commentary that you had and I know there is a couple of things in there that are kind of, I am not sure if non-recurring is the right term, but I think you said $1.6 million related to the wrap-up of the PPP program.

Can you just confirm that that's the end of that expense? Or is there anything that's going to linger into the – into subsequent quarters? And then, I also wanted to ask about anything else like, I know the – this agreement that you announced, this – the new SBA program that you announced during the quarter was going to have a shared marketing expenses.

Is there anything associated with that program that's already in the expense line or anything that we should be thinking about for future quarters?.

On your first question, that is correct. That is the end of expenses related to the PPP activity. There is nothing that will be incurred going forward as part of that.

And as far as the shared marketing expenses as part of the 7(a) program, there is some small dollars or some expenses related to getting the system up and running that was incurred in Q1, but small dollars that we've incurred to date as part of the 7(a) arrangement that we have with NEWITY..

Okay. And then, as I think about just sort of the right runrate for expenses going into the next quarter, I know that salaries and benefits and comp expenses were elevated in the third quarter.

Is that going to settle back down?.

Slightly, some of the stock comp was fully expensed during Q1, so there will be a little bit coming out of there that won't be incurring going forward.

As far as the bonus and salary goes, the bonus where we come up with an estimate at the beginning of the year and we typically true it up at the end of the year, but compared to the same quarter last year, our base bonus assumptions are higher than where we were a year ago. So, we expect that to stay flat during the year.

And salaries, our headcount is just up a little bit from last year, also taking into account raises that we do in Q1 during the current year. But one thing that was incurred during the current quarter that will come out is, when we pay our bonus in Q1 every year, we do have some elevated payroll taxes that come into that quarter.

So that will come out from future quarters..

Hey, JP. Alex, we are in different places. So we are going to try and work through this together. JP, we have non-interest expense for the quarter of $13.3 million..

Correct..

So I am just looking at the press release. And we have $1.6 million that is, Alex asked about that is going away, which I think gets us to $11.7 million.

Out of the $11.7 million, how much of that – those roughly so we can give some sense of those expenses you are describing kind of the bonus and payroll taxes and how much of that is one-time in the quarter?.

Probably, $400,000 to $500,000..

So, it kind of gets us to $11.2 million. And then we had some – well, we have some ongoing marketing relating to the 7(a).

How much was that?.

That was pretty small dollars that we incurred in the quarter. I don't have the exact number, but fairly small so – we've done so far..

So, as we're thinking on the fly and this, I think, is safely to say from the numbers are here, Alex, it looks like $11 million kind of runrate when you knock out those items. I think that was with some more granularity of your question..

That's very helpful. Thank you. And then, I wanted to switch gears to the organic loan growth. I saw some really nice generation again in that national CRE generation platform. I was hoping maybe you can give us some sort of sense for where the pipeline is and sort of what you are seeing in that portfolio.

I know that you did some hiring in some new geographies and kind of where you are in terms of getting some new geographies up and running with the national CRE origination book..

I would love to talk about that, Alex, because there is a lot going on in that. As you noted in your report, there is always a lot going on in our company. We've really had a big focus on the – growing our originated book. And I'll just remind if there is some on the call that don't recall, we hired a new person.

And these are all senior business development folks in Miami and another one in Southern California, both places where we have a meaningful portfolio. And then, we have two in New York.

These are kind of outside business development officers and of course, we have a lot of organic growth from existing customers and then other borrowers who know Northeast Bank, and they are not coming in through a business development officer. So, $95 million of originations, we thought was a really great number. Our pipeline is robust.

We love the business.

We're in low LTVs with spreads over prime, floors structured with special purpose entities, generally bankruptcy remote with typically, sometimes recourse, but if not recourse, carve-out guarantees from usually substantial individuals or entities and our borrowers are – I don't want to use the word sophisticated, because that's not what I mean, but they know what they are doing.

And the way that our deals are structured generally, all of the loans to one borrower and as the guidance lines and portfolio finance or cross-collateralized and cross-defaulted, so they are highly motivated to pay their loans. We haven't lost $0.01 of principal in our originators’ book. And so, that's a great business.

Your question is what's the pipeline, the pipeline, as I mentioned, is robust. And I would expect to continue to see very solid numbers in there. What we also saw in the quarter, we had, I would describe as an average quarter on the purchase side, $35 million and it’s sort of disappointing, because we had a lot of payoffs in there.

The net loan growth was only $3 million in that. And I – but I would say that the purchase, as I've said ad nauseam, almost, the purchased loan business is lumpy and it really or how we're doing, and we need to kind of evaluate, kind of on a year-by-year basis, not a quarterly basis.

And I have a high level of confidence that we will put some good numbers on the scoreboards in that business.

Probably, I mentioned before with all the capital we have, even if we bid loans, which we need to sometimes to win them at with much less discount than we would previously get, we are looking if we can buy loans with low LTV, short duration and just a respectable yield given all of the capital we have, it's just incrementally profitable.

And I suspect we're going to start to see some of that being booked as we move through the current quarter and following quarters..

That's really helpful. I mean, just kind of elaborating a little bit on the purchased portfolio. It strikes me that, one, we are now getting to the phase for a lot of these COVID-related deferrals where they are the deferral periods are ending. And I know that a lot of these portfolios have performed very well for banks across the industry.

But I am curious if we're going to start to see some loan sales and reduced concentrations in some lines where banks kind of look back a year later and say, well, maybe we don't want to be as heavy in this type of loan following what happened over the last year. And the other thing in the industry that – is all the M&A activity.

And can you just sort of remind us, when you're looking at these loans, where there – and you sort of see where they're coming from, how much of it might be generated by M&A activity and when two banks come together and they look at their combined portfolio, there is a need to reduce concentrations on various asset classes.

Is that something that you would expect to drive volume in future quarters?.

You wouldn't expect so, because that historically isn't what happened. It's not what happened in the first quarter to any meaningful degree. You would expect that to happen. You hear that – and you know better than I do that there is – expect that there will be a fair amount of M&A activity and you would expect that to happen. And so, we'll see.

Where – we do see where the potential is for kind of bigger transactions for us are, some of the big banks hold sales, I mean, every year, a couple of sales a year of some meaningful volume. And we are starting to see that. We're continuing to see that, I should say more accurately..

And so those banks that typically sell loans are continuing to, I know loan growth has been challenged across the industry. I am wondering if a need to retain assets has changed the way other banks think about their desire to sort of hold those sales..

I think that is a true statement that, in some cases, and you just read it an American bank or see with what's going on, banks are having trouble generating assets. There is always articles about that. And I just want to pause and make a self-serving statement in that regard.

I think one of the things that we like to highlight and I think it's important when we – people think about our companies, think about us as an asset generator.

One of the – I can't recall if we went over the stat in the prepared remarks, but apart from the growth on linked quarter, if you take a look at our growth in our national lending business, so that means purchased loans and originated loans, either portfolio finance or directly originated.

And you take at the – you look at the average balance for the quarter that just ended with the average balance for the same quarter one year ago, it's up almost 18%. And I think you would know that's a big deal. I don't think many banks are doing that. When you look at – and we do report this way, because people want to hear it's appropriate.

If you just look at a point in time quarter-to-quarter, we have one big loan that pays off and doesn't really reflect what the averages were. But almost a bit more, it's like 17.8%, when I say almost 18%, I don't mean 14%, I mean, like 17.8 - 17.8% or thereabouts.

That is really great growth average balance to average balance and that's what we're able to do as a company is generate assets. What we want to do is slow down paydowns, of course. But now to your question, a whole bunch of banks that don't want to sell loans, because they're having trouble generating assets.

And yet there are other big banks that come out with – for us what would be meaningful transactions during the year, two times, three times, et cetera.

And because we have so much capital and because our funding cost is so incredibly low now, that we can bid much more, when I say aggressively not on collateral value, we want that to be really rock solid, but giving up some yield, because it's incrementally profitable for us. And I expect we'll see more of that..

Right. A final question for me is just on the pace of buybacks that we saw during the quarter slowed down a little bit.

I was just wondering, is that a function of an appetite for repurchases? Or is it more of a function of what you are able to actually accomplish given liquidity in the market?.

No. It's more a function of where the price is than anything. We could – you just take a look at – let me put that on a full sentence. So it's really that our appetite at certain price levels. We ended the quarter with tangible book at around $29 and the average was just under $30 on the buyback, that's where we are.

It's not like we are not really – there is not a lot of volume in trading our stock. And so, last time we had the buyback, we went up buying a lot of shares at – I think, at $13 or something like that. And while our stock price is substantially higher than that now, it's not impossible that our stock price could go down further.

I was looking at it now, what I thought was a really great quarter we had, but this obviously, I am not objective because we're down today on, I mean, we're down $1.70 on 59,000 shares. So we're kind of looking at where the stock price where our appetite would be..

Okay.

So the buyback, depending on the stock price, you intend to remain active with the buyback and at least reduce the shares that you issued during the quarter?.

We had about 700,000 shares remaining in the buyback. I could be up a little bit, but we have that. And then we have a lot of capital. And so, at the right price, we were most likely be a buyer..

Thanks for taking my questions..

Those were good ones. Thanks – thank you, Alex..

Okay. [Operator instructions] Okay. And since there are no other questions coming in, I will now turn the call over to Rick Wayne for closing remarks..

Thank you very much. Thank you. For those of you on the call, I think at the next call, we're going to find out what happened to JP, where he went. I might – it's either a technology problem or he has a beautiful, little son named Miles, who has just turned three, and maybe he got distracted. We don't know.

But he did a great job coming back better than I would have. In any case, look forward to talking again in January after our December 31 quarter. It's a little bit early for this, but I wish all of you happy holidays as we move through Thanksgiving and the holidays in December. And on that note, I would say goodbye to you. Thank you..

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