Northeast Bank (NBN) 2023 Q1 法說會逐字稿

(Operator Instructions) 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, our 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) 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 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, 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 #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 add at a higher level, compare the quarter that just ended with the late quarter. To make the point that the current quarter was actually quite strong even though the income was lower than the late quarter. So, the late quarter was -- the current quarter was $8.3 million which is down $2 million from the late quarter, meaning June 30, 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 late quarter. And the provision was $1.7 million difference from the late quarter. In the current quarter, we had a provision for $850,000. And in the late 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 but for those two, our income would have been higher in this quarter. And 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 represented 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 -- the return on that was 7.1%, which was meaningfully lower than in the late quarter. The late quarter that number was over 9%. I don’t know exactly but over 9% in the June 30 quarter. And the difference of that, which is substantial on 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 late quarter.

And so why is that? Well, 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 lower 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 purchased portfolio. I'm now talking about the purchased 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, (inaudible) lending portfolio growth, if we look at the late quarter in our national loan portfolio, it increased $167 million with 13.5% increase from June 30, 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 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 refer to slide 29 in these comments. First, our base net interest income and by that, I mean our interest income before and 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 late quarter. So our base net interest income quarter-to-quarter increased by $2.5 million of 12% because our loan portfolio is growing and we're benefiting from a higher rate interest environment.

Then if we look at the corresponding fee, that's been declining every quarter. In the current quarter, it was $1.4 million compared with $3.7 million for the late 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 raise when we generated so much capital from the PPP activity and knowing that the PPP 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 nonaccrual 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 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. (Operator Instructions) Alex Twerdahl from Piper Sandler is on the line with a question.

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 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 -- potential credit changes or if it's really -- or something else that we should be thinking of. Just kind of curious what's driving the higher volumes.

Certainly, now recently, any time there's a 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 in a part of the sellers.

I would add to that. Alex, I would add to that, and as we've talked in prior calls. We are so well situated to take advantage of these opportunities in the marketplace. I know you know this point, if there's anyone on the call that doesn't -- a lot of the folks who worked here came out of Capital Prosing 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 apply 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 we 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 come in the market. I do so 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 (inaudible).

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 loans 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 source, 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 would just go to do three or four things that we think about when we buy without the secret source. 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 bid to generally to a certain yield mindful that you need to be competitive.

Of course, we're not the only ones bidding on loans. So partly driven by what the marketplace requires for a bit. 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 there's -- sometimes there's what we call shadow interest where there may have been in default at onetime and there's the customer balance is more than the original UPB port or what we pay. And so, I don't want to put numbers out there because that would be related to the secret source but we know we're going to do better than just what the math tells us on the yield and maturity for those reasons. I don't know if 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 disclosure is the much larger numbers of loans that we look at and either lose or pass on if we can't get there on us.

I mean yes, 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 a particular quarter, not this quarter that 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 transom, so to speak, that we don't bid on. And then there's a previous, there was a lot that we did 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 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. So we're trying to grow our balance sheet in addition to the originated activity, which was record breaking last quarter with the purchase bonus.

On to the transactional income, and I 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 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. As you look forward, and I know obviously, there's the forward-looking statement, but do you think we're going to see lower levels 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 will be a good loan. The customer was 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 is really easy. They don't need a new appraisal. They don't need to legal documentation. They mostly have to sign a 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 rates went up, say we would offer them 5.5% because rates were so low, but we had the loan and we have the capacity, and they would still leave us because they would get an offer at four. So that and more. So, borrowers that are with us, there are opportunities to refinance those out or less, and they're more expensive. And so, it's easier for us to keep that loan and we are trying to. When you think about the purchase -- the return on our purchased loans, it really depends going forward on the level of the pre-payments. If I were to estimate, I think this quarter was unusually low.

No, 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 depends on the payoffs. So that number. But directionally, I would think it would be higher. This feels – I’m thinking also, the purchase loans generally are not variable. I mean, there are some that are and some that reprise different intervals. But it's not like our originated book that's tied to the prime, mostly all of it or so for now. That’s all for now.

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 any strategies or updated strategies on funding and the incremental growth that we should be thinking about.

We have some strategies, primarily in the community bank and our national lending and corporate and institutional deposits included in the municipal in the community bank to continue to grow the balance sheet to fund the growth. Obviously, with the lower level of pay downs, we 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 it acquired us to go out 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.

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

Originally, we are a very big pipeline on the originated side. Yes, I mentioned earlier, we had a record amount of volume in the quarter that were ceded. The pipeline, both in judged 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. I mean the pipeline is very large, but that's a very general statement to that question. Do you want to narrow 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 nonbank lenders has really benefited us with our cost of funds and with our restructures and we're able to -- we're a pretty attractive alternative relative to previous years. And so we're able to be not only more volume, but pick year with respect to the assets that we use.

You had mentioned in your preliminary write-up ballots about our business development officers now. They've been with us for a while, but now they're really heading stride in terms of value. And plus there's a lot of organic growth. So that existing customers are just calling in for new financing needs. And the number of -- in the case of portfolio finance a number of those borrowers leveraging nonbank 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 on the year conferences and those kind of things. So we're very optimistic about the volume we could do on the originated side.

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

No, I think the number I have 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 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.

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 about use of capital and what price you'd have to buy back. So I mentioned in the prior quarter, on the current quarter, September 18,000 shares we bought back early. Currently, one of the things that's happening now is because we've increased our loan book so much that what would 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. $1 billion, JP is correct. JP correct me, but I make it smaller, he doesn't mention, but $1 billion, that's a big (inaudible). 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 -- well, that's all I would say on that point.

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

We can. I would say studying the book 7(a) loans, JP, do you have a number of what they have done kind of through September. It's not a lot actually. So they booked around $2 million. They're actively doing it. There seems to be some changes with the SBA around the processing of the 7(a) 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 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 wouldn't really factor a big number in your analysis because so far has not been the case.

Thank you. (Operator Instructions) 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, those that are listening to this call. I appreciate your support. I hope you found that interesting. If there are things that you like us to cover in future calls, let us know. And if we can, we will. And with that, again, thank you.

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