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; 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 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. .

[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 will 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 JP Lapointe, our Chief Financial Officer; and Pat Dignan, our Chief Credit Officer and Executive Vice President.

After my comments, JP, Pat and I will be happy to answer any of your questions. .

I'd like to start out with a few highlights on Page 3 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%, 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 8-K 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 $152 million of loans, which reflected an increase on our originated portfolio of $61.3 million or 9.9% compared to the linked 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 or 30% compared with June 30, 2021. .

I want to comment also on our purchased loan activity. For the quarter, we invested $24 million on UPB of $32 million, which is a bigger discount than we previously had. Half of the deals that we did were direct as opposed to through loan sale advisers. On the question of the discount, that was primarily directed from 1 transaction.

And then the others were 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 4 and 5. I want to make a comment on our correspondent fee income. One, as we have mentioned from the very beginning, the income from our PPP activity and, in particular, are asset 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 PPP 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 PPP loans they have, have come down by 75%, and we share in the servicing income. So as 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'd also expect to see a decline in this quarter and in quarters that follow.

And we were always asked the question that we have -- we increased our capital by a significant amount because of our PPP activity, both our originations and our correspondent income, as I mentioned, and then 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 originated loan book, that's gone up 30% from the beginning of the year. If we take a look at -- and this is -- we'll be referencing with 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 million, 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 2 factors. .

Our national lending book over that period, and 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, we 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 nonperforming assets increased by $3.3 million or 16% since December 31. Very happy about that. I also want to make a comment about our exclusive marketing agreement with annuity around trying to originate 7(a) 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(a) volume because annuity is continuing to build out the platform, which is not nearly as easy as one would think with all of the Is to dot and Ts 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.

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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 e-mails to the 100,000-plus PPP 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 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 accept expectations too high on this or too low with our investment in dollars in this has been relatively small, $500,000 or $600,000 so far. .

It's got a 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 7(a) 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. .

[Operator Instructions] Our first question on line comes from Mr. Alex Twerdahl from Piper Sandler. .

First off, Rick, I missed what you said earlier on -- 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 purchased loans as it stands right now with rates kind of poised to go much higher over the next couple of 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 want to 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 results are binary, you win or you don't win. We're seeing a fair amount of volume now. And so 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'll ask Pat to comment on that, please. .

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 advisers that banks who are sitting on a lot of fixed rate assets and who funded short for many years are considering selling before rates continue to increase.

So we expect there will be quite a bit of volume coming up. At least that's the feeling among the loan sale advisers and on the street. .

We haven't seen a ton of volume yet. But again, we're expecting 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 color. And then one thing that really jumped out at me, I know you didn't do a huge amount of purchases in this -- the quarter end, but it looked like the discount that you got on those loans was a lot larger than what we've been seeing over the past -- I don't know, almost a 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 as the market and the pricing gotten better all around?.

No. It's -- I had mentioned this as well, but I'll clarify it. The large discount was really attributable to one sort of unique transaction. And so the pricing other than that one was typically where we are. So I wouldn't overly generalize about the pricing in the market.

It was just that -- we've had a really good buy on one transaction, and that's what drove it. .

Okay. And then the originate 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 in other geographies, are you continuing to add more people? Can you maybe talk a little bit about the pipes there? And is that something that also should accelerate into a rising rate environment or into the spring months and maybe just give us a little bit more color on what you're seeing in the originated business.

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Well, first on the people, as you mentioned, and I've mentioned over the past calls, we have hired more business development folks, not since our last call, to be clear, but we now have 4 outside senior lenders, 2 in New York, 1 in Miami, 1 in Southern California. We are looking to hire more.

We'd like to be able to hire a person or persons in Texas and another 1 in California and another 1 in Florida, and we're having conversations. And I'll just point out that all of the credit around that occurs in Boston. .

So we get senior lenders that can source business for us and then all the underwriting occurs in Boston. And you're right that the volumes on the originated side, closed loans has been great. We're over $150 million last quarter. I want to say $160 million and change. And this quarter, over $150 million.

We have reasonable expectation that, that's a pretty good number for us where we are now, with 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 in the range of prime plus -- to the prime plus 2.75 , something in that range.

And the net interest income that I mentioned, the improvement over a year ago, it really doesn't reflect much of an increase in prime, the 25 basis points that occurred so far happened 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 any of the increases, which the talk is there won't 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 of quarters, but really have remained quite stable given all the growth that you've seen. .

Yes. The -- when you -- I want to be careful. I don't want to announce specific salaries for people we hire, but kind of that -- people get a very good base. But the real upside for somebody is a bonus. 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 -- 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 -- it's not a formulaic. They don't get a commission, there's not a formula.

But they can come in and they can make fair amount of money if they do a lot of volume. 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. .

So one point I want to make on the noninterest expense, and I don't have a number on this, but as we go into the fourth quarter, typically, we have more incentive comp at the back end as the compensation committee makes that determination is bank-wide, I'm talking about now based on how we do for the year.

So I would expect that, that the salary -- the compensation number in our noninterest expense would go up in the quarter that ends June 30, as it typically does. .

[Operator Instructions] Okay. 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. We try and make our material that we provide as helpful and as transparent as possible. If 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. Thank you for participating. You may now disconnect..