Q3 2022 Northeast Bank Earnings Call

Yes.

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Okay.

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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 northeast Bank Dot 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 Touchtone 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 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'll now turn the call over to Mr. Rick Wayne Mr. Wang 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 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%.

Our 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 79588 shares at $34.71.

Sure.

And in April through today.

We repurchased an additional 82000 shares at.

At $34 43.

Combined.

From January through April to date.

We have repurchased 162000 shares.

$34 57.

We recently filed an 8-K and put out a press release.

Where the.

Board.

Approved and the regulators regulators approved the repurchase of an additional.

1 billion 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 loan.

Sure.

Which reflected an increase.

On our originated portfolio of $61 3 million.

For nine 9%.

Compared to the linked quarter ended December 31 2021.

And if we go back to the beginning of our fiscal year. Our originated loan book has increased hunter.

$157 million or 30%.

Compared with June 32021.

I want to comment also on our purchase.

Loan activity.

For the quarter.

We invested $24 million.

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$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 advisors on the question of the discount that was primarily directed.

From one <unk>.

Transaction.

And then the others were typically price or price typically where we are.

With respect to the activity in there in the March 31 quarter typically that quarter.

From a purchase perspective is light.

And.

And the activity we saw was even lighter.

And then for a light quarter.

With the gigantic forward looking statement that you just heard.

Our expat, we're seeing a lot of volume in the quarter that we are in.

And when we reconvene in July we will have a chance to report.

And on the success in the quarter.

And so.

That's where we are.

I wanted to focus if you go on slides four and five will make a comment on our corresponds in fee income.

One as we have.

You mentioned from the very beginning.

The income from our Triple P activity and in particular.

Our as a correspondent for the loan source was that revenue was going to.

Go down over time and <unk>.

Some point.

Go away.

We're starting to we've been seeing 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 loans 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 b loans, they have come down by 75%.

We share in the servicing income so as that portfolio comes down our share of the servicing income.

Also goes down and Thats why were seeing a decline of that we'd also expect to see.

Decline in this quarter and in the quarters.

That's that follow.

Dan.

Yes.

We were always asked the question that we have.

We increased our capital by a significant amount because of our triple B activity, both our originations and our correspondent income as I mentioned and then.

The 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.

We take a look at and this is 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 point.

Sure.

And that compares from a year ago.

Two 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, 'twenty one.

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%.

So.

With that increase in our loan balance.

We generated a lot more interest income and then of course, we had savings.

And 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.

And then we will be able to keep increasing our income of course.

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 nobody.

Around trying to originate seven eight 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 <unk> volume because annuity is continuing.

To build out.

So platform, which is not nearly as easy as one would think with all of the.

Just to dot and T's to cross to ensure that.

Joining 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.

They are.

Borrowers in a much more user friendly way getting really close to solving the issues around the SBA process that hi.

Hi, just described.

Italy their marketing approach.

Was to send out.

E mail to the 100000 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 firms.

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 we when we reconvene in July we will have some tangible results to report.

From the very beginning of this.

I said I don't want to X set expectations too high on this or too low.

Our investment in US dollars and this has been relatively small five or $600000. 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 <unk>.

Customers are interested in a low balance.

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But we will have more to report on this.

And I think with that.

I will.

Turn it over to.

Our listeners too 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 zero one on your Touchtone phone.

If you wish to be removed from the queue. Please press zero two.

If youre using a speakerphone you may need to pick up your handset first before pressing the diverse once again do you have a question. Please press <unk> one on your Touchtone phone and we're standing by for questions.

Our first question on line comes from Mr. Alex <unk> from Piper Sandler. Please go ahead.

Hey, good morning, guys.

Good morning.

Hey, 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 youre talking about the purchase loans can you just confirm that comment and maybe talk a little bit more about about the market for purchased loans as it stands right now with rates kind of poised to to go much higher over the next couple of quarters.

Of course before I do that Alex I, just wanted to clarify I think I misspoke in my presentation.

Said that nonperforming assets.

Inc 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.

The quarter that ended March 31 is typically a.

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.

Sure.

With respect to the quarter, we're in without predicting at all what we're going to do because.

The results are binary of winter you don't win.

We're seeing.

A fair amount of volume now and so we will 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 of ask Pat to comment on that.

Yes.

Okay.

There is some activity we're seeing right now.

Concentrated in fixed rate fixed rate assets and is certainly a lot of.

Lot of feedback from the from the large loan sale advisers desktop banks, who are sitting on a lot of fixed rate assets funded short.

For many years.

Are considering selling before rates continue to increase so we expect that it would be quite a bit of volume coming up at least that's the feeling among Alonso advisors and.

And on the Street.

We haven't seen.

A ton of volume yet, but again, we're expecting in June is typically.

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 is I know you didn't do a huge amount of purchases in this.

But.

It looked like the discount that you got on those loans is a lot larger than what we've been seeing real fast.

Now 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 our rates are going or is there something else there as the market and the pricing gotten better all around.

No.

I have mentioned this as well at all.

Clarify it.

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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 I wouldn't.

Overly generalize about the pricing in the market. It was just we had a really good by on a one on one transaction.

And Thats what drove it.

Okay.

And then the.

The originated business has obviously been on fire in the last couple of quarters as you alluded to and you're showing in the numbers I know you've made some adjustments and added some people in other geographies.

If I can.

Continue to add more people can you maybe talk a little about the pipes there.

Is that something that also should accelerate into a rising rate environment or into the spring months.

And maybe just give us a little more color on what you're seeing in the originated business.

Well first on the on the people as you mentioned.

I've mentioned.

Past calls we have hired.

More business development folks not since our last call to be clear, but we now have.

For outside senior.

Lenders.

Two in New York, one in Miami, one in Southern California, we are looking to hire more.

We'd like to be able to hire.

A person in person or persons in Texas.

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And another one in California, and another one in Florida.

And we're having conversations.

And I'll just point out that.

That all of the credit around that.

<unk> in Boston, So we get senior lenders that can source business for us and then all of the underwriting.

Occurs in Boston.

And Youre 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 and change.

In this quarter.

Over 150.

We have reasonable expectation that thats pretty good number.

<unk> for Us, where we are now where the pipeline is.

Very very strong.

And virtually all of the loans that we're doing now.

Like the ones, we did before which are floating.

And.

<unk>.

And in the range of Prime plus.

To the prime plus.

75, something.

In that in that range.

And the net interest income that I mentioned.

An improvement.

Over a year ago really doesn't reflect.

How much of an increase in prime that 25 basis points that occurred so far happen.

Happened kind of mid March or so.

And that had a very small impact we're going to start to see a four.

The impact of that for the whole.

Quarter, now plus any of the increases which to talk because there will be.

A bunch, we will get the benefit of that as well.

Okay.

Great and then.

As youre looking to hire more people.

Can you give us 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.

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When you.

I want to be careful I don't want to announce specific salaries for people, we hire but.

Kind of that people will get a very good base.

But but the real upside for somebody as a bonus.

The lenders are really.

Bonus driven but to be clear there is 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 and we have a bonus pool and then we allocate that bonus pool based on People's contribution by lenders.

Set of Formula They will get a commission incentive formula, but they can come in and.

They can make a fair amount of money that they do a lot of volume.

We shoot for.

Lenders to do over time.

Once they get used to in place.

$100 million of more volume for the bank and if they do that with them.

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 that.

Noninterest expense.

Don't have a number in this but as we go into the fourth quarter typically we have.

More incentive comp at the backend.

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 compensation number in our.

Noninterest expense would go up.

In the quarter that ends June 30.

It typically does.

Great. Thank you for taking my questions.

Thank you Alex.

Okay.

Thank you once again for any questions on the line net zero then one on your Touchtone phone.

Goodbye.

Okay. At this time I see we have no further questions and now I will turn the call over to Mr. Wang for closing remarks.

Thank you Richard and thank all of you for.

Participating in our call and supporting our bank.

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Material that we provide is helpful and as transparent as possible.

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.

I wish you a very good day. Thank you.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating.

Okay.

Okay.