Northeast Bank (NBN) Q2 2022 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2022 Second 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 northeastbank.com under Events & 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] 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. Good morning, and thank all of you for joining us today. With me on this 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 your questions. Last night, we uploaded an investor tech. And this morning, I'm not going to go through page-by-page on the assumption that we provided the information, and I'm sure those on the call have read it, but I do want to amplify a few points -- well, more than a few. First, let me just say, we know it was a great quarter in almost every aspect. And I will, in my following comments, explain why we think that is true. First, just some earnings and key ratio highlights. We had net income of $11.4 million, which compared to $9.9 million in the linked quarter, up 15%. Earnings per share were $1.42 diluted. Return on equity was 18.8%. Return on assets was 2.9%. NIM was 5.24%. And if we exclude PPP from the NIM calculation, the NIM would have been 6.44%. Obviously, those are really outstanding numbers. Let me first start with a discussion of the loan activity. To state the obvious, if you increase your loan balance and maintain high rates, we're going to have an increase in net interest income, which is what occurred. We had a record $261 million of purchases and originations, and that's a record by a lot. The originations were $168.4 million, and the purchase loans were $92.1 million. Also, our rates in our portfolio remained high at 8.96% on our purchase portfolio and $6.48 on our originated portfolio. And I'll remind you that most of our originated portfolio, well, virtually all of it, is tied to prime and floats. And so as rates go up, as they will, we're going to be picking up additional interest income from that portfolio. Just to put this in context, our loan portfolio -- well, national lending portfolio increased by $112 million or 11% from the linked quarter. And if we go back a year, it increased $207 million or 23% over the past year. And then the final point I want to make on this is that our -- because our loan book grew and we've maintained our rates, our base net interest income, that is before transactional income, increased by $1.7 million from the linked quarter. And so this is -- our plan is that as the corresponding fee over time goes down, we will make up for that and hopefully more -- much more by growing our loan books. And so with that, let me turn to the correspondent fee for a second. And for this, I would ask you to go to Slide 4. With the correspondent fee income, it went down to the linked quarter -- from the linked quarter from $7.8 million to $6 million in this quarter. And the reason that it went down is the biggest component of the correspondent fee income is on the line called -- or servicing interest, which is our share of the servicing income that is earned by loan source on the loans that they purchased. And that one line item went down by $1.6 million from the linked quarter. And the reason for that is that loans are being forgiven at a very fast clip now. And to describe that a little bit more, in total, loan source purchased $11.2 billion of loans, and it was the balance at the end of December 31 was $4.6 billion, which is down $2 billion from September 30. And so when those PPP loans get forgiven, there's obviously no servicing income on those, and therefore, that number goes down. They're paying down at roughly the pace of $500 million per month. I suspect that will continue at that pace for a while, and then there'll be some tail to it, but we can expect that over time, the correspondent fee income would go down, I'd say, over time. I suspect most of it will be recognized -- not all of it, but most of it through September 30 of this year. I want to make a comment on our provision because we had a credit provision of $1.1 million, and that was due to the performance of the SBA portfolio. At the start of COVID, when we looked at the SBA portfolio, which by its nature has higher credit risk on the unguaranteed piece, when COVID started, we put in an additional $3 million on the unguaranteed portion of the SBA portfolio. And fortunately, that portfolio has performed remarkably well. And this quarter, we reversed out about $1.1 million or so from the reserve against that portfolio. But it still is a healthy reserve on it of 5.2%, but it's not the 10% that we previously had. Noninterest expense, it decreased $2.1 million from the linked quarter to $11.2 million primarily because the linked quarter had $1.6 million of nonrecurring correspondent expenses associated with the wrap-up of the PPP. And so our noninterest expense for the quarter was $11.2 million, and those who'd like to do the modeling, I think that's a pretty good number. You may think about $45 million for the year. On asset quality, those slides are 10 through 12, again, strong. Delinquencies were $14.6 million or 1.23% of total loans. As I've said before, in the case of our business, particularly around the purchased loans, those delinquencies will look higher than a traditional community bank. And the real question is to look at the charge-offs on our originated loan book, where we've done, I don't know, $1.8 billion or so, in that range. Our charge-offs are, ready? Zero. And in the case of the purchased portfolio, where the returns are, on a weighted average, about 11.5% more or less, the weighted average charge-offs are 8 or 9 basis points and really terrific asset quality. On the COVID deferrals, they virtually all worked out. The ones that we provided a P&I deferral, 99% are current. And in the case of interest-only, they're also performing remarkably well. So now I want to make a comment on deposits, which are slides 20 through 24. And over the last year, 1.5 years, we've made a conscious effort to reduce our reliance on higher cost bulletin board and able CD and money market deposits with a focus of bringing down that cost by growing our deposits to our Community Banking division, which includes deposits in our footprint, of course, both consumer and business, also meaningful number for deposits from municipalities, which we're trying to -- state and municipalities, which we're continuing to grow as well as a focus on getting deposits from our National Lending customers. And that's really paid off. Our average cost of deposits for the quarter were 36 basis points, which compared to a year ago, it was 103 basis points and 2 years was 198 basis points. Now of course, some of that or a fair amount of that is rate driven. But if you look at the slides, you'll see how we have changed the composition of the deposits. Also, on the share repurchase activity, I know this is near and dear to a bunch of our investors. For the quarter, we repurchased 340,000 shares at a weighted average price of just under $34. And finally, I want to make a comment on our 7(a) program with NEWITY. As you recall, we signed a 5-year exclusive marketing agreement with NEWITY, which is formally ACAP -- or the people are the same people, I should say more accurately. Again, starting with trying to remarket small balance -- or I should say, starting to market SBA 7(a) loans to most of the 115,000 customers that Loan Source has been purchasing their loans, our first foray is looking at small balance working capital loans under $25,000. We spent a lot of time along with NEWITY building out the technology, which is substantially complete. We've just -- NEWITY has just started to invite existing Loan Source customers in a phased rollout to apply for these small balance working capital lines. As I said before, I don't want to overpromise or underpromise, we'll see how this performs. We're certainly optimistic, but we will see. And we will have better numbers to report to you after the quarter now when we meet again in April. And with that, I would like to turn it over to you for questions.

[Operator Instructions] And our first question on line comes from Mr. Jeffrey Kitsis from Piper Sandler.

First, I wanted to start on the national origination business. You guys had a really nice quarter there. Can you talk about what factors drove the big growth, and how sustainable that is over the next handful of quarters?

Of course. What we've hired, as we -- as I mentioned before, some outside business development offers, some additional ones offices, we have. And now two in New York, in Miami, one in California. We have a lot of organic growth too, customers that just -- our existing customers and have additional financing needs. We've done a lot to market our origination business. And we have a very good niche, which is focusing on roads, particularly in the portfolio finance business that the borrowers are borrowing needs are too small for the big banks, and now what a traditional community bank would do. And I think we have momentum with as I don't know if every quarter will be $168 million, but we do expect we're going to have very good volume each quarter for this. Pat, do you want to add anything to that? .

That was a good summary. I would just add that the -- that we're able to float in a niche rate below nonbank lenders with respect to pricing, and there seems to be growing demand for quick execution and our pricing advantage is paying off.

Appreciate the color. Next up, I wanted to talk about the purchase market. Has something in the market for loan purchases changed, which could suggest that volume would pick up going forward, or was this quarter strong volume more a function of seasonality?

I think it was -- this quarter, we had a big purchase of $68 million or $70 million included in that number. We often bid on pools that large -- they're very competitive. And so I think that was a big contributor to the large portfolio, the purchase for the quarter. I expect -- I wouldn't predict that every quarter is going to be as large as this one on the purchase side. I would expect that we will get our fair share as we have in the past, but I don't think anything has particularly changed in that market from the previous quarter -- or quarters.

Got it. I wanted to ask a little more about the NEWITY deal. What is it about the small balance working capital loans under $25,000 that you guys really like as a lending product? And what is it about that product that you think will particularly appeal to the customers that ACAP brought on?

So first of all, it's a -- you can get very good pricing on the product. It's prime plus 4.75%. Typically, with SBA loans, the maximum you can get is 2.75% over prime. This is a big underserved market that will benefit from this working capital loan. It's also -- if you want to do it in a lot of volume, not that it's simple, simple, but it's easier, less eyes and ties to cross than the larger SBA products, so it can be highly automated. And we think, when you compare this product with some of the other loans that come to -- some small balance loans for businesses, this has a lot of benefit over those. It's got a 7- or 10-year amortization as opposed to be doing 6 months or a year or 2 or 3 years. That's a big advantage. And the rate is much better than typically what you see for some of the nonbank lenders doing these loans that they approved in a day. And it's also a product that most banks are not doing and don't want to do. Because unless you do it in volume, which is our expectation, it is very -- pretty expensive to offer one of these $25,000 loans to a borrower. So kind of wrap that up. We don't think there's a lot of competition for this. We think there's a lot of need for it. The pricing is good for -- our expectation is we will sell these off and hold. And the guarantee is large on these. It's currently 90%. And so it's got a big guarantee on it. And we think there'll be a lot of demand. But as I said, I don't want to overstate that until we can report what the actual numbers are. And would after we do this, and we'll take a look at other 7(a) products as well, but we're starting with this. And one of the things -- it's not only marketing to the existing loan source customers. We're going to different states to talk to the economic and development offices of those states to see where we can provide this because, as I said, there's a big underserved population for this kind of loan product, and then also going to other banks and try and white label the product for them. For example, on our website, there's a link where customers can come, they quick on it, and then they wind up on the NEWITY website to do it, and our hope is that we can do that with other banks as well.

Appreciate the color. Did you say the intention is to sell off the guaranteed portion and hold the non-guaranteed portion on balance sheet?

Exactly.

Got it. Okay. Next, I wanted to talk about asset sensitivity. I know you mentioned earlier in the call, most of the originated book is tied to prime and floats. Can you go through the rest of the portfolio, please? And remind us which buckets of the loan book are variable, and what they reprice off of? And also if any of the loans are sitting on floors.

JP?

Sure. Thanks, Jeff. It's around 92% of the national lending originated portfolio is variable with just about all of those loans tied to prime -- and all of those loans primarily have floors built in, which is typically the rate at origination. So I would say the majority of the originated book is variable. On the purchase portfolio, that varies based on the loans. Some of those are fixed and some of those are variable. I don't have an accurate breakout of what that percentage is, but there is a portion of those that do flow. I don't know if Pat has any more color on the purchase portfolio, and what percentage of those might be variable.

I don't. I think it's somewhere slightly more variable than fixed.

I would say, on the purchase book, of course, a big part of the income comes in from transaction -- early payoff of those loans. I should say I don't want to overstate it. But if we go to slide -- I just find this for a second.

In Slide 28, Rick, and that will show the breakout between the coupon and the regularly scheduled accretion and then the accelerated accretion from payoffs.

Yes. Thank you, JP. So on this slide, regularly scheduled interest and accretion from the purchase book was $6.64%, but then we picked up another 2.3% from payoff of loans to get us to about 9%. And that was an expansion of your question, Jeff, but I think the headline is all the originated portfolio was tied virtually all of its tie to prime.

Switching to capital, it was a nice quarter for buybacks. I was wondering, if you could give us an update, please, on what remains on the program, and how you're thinking about buybacks as an allocation of capital in 2022 in comparison with other loan growth initiatives you have in place?

JP, can you just -- how much -- how many shares are left out of the...

We have about 396,000 shares left to buyback as part of our approved plan.

And to answer your question on the way we think about it, for the longest time, we only bought stocks under tangible book. And to date, JP, how many shares that we bought back total? And then what's the weighted average price.

One second here. To date, we have repurchased almost 3.5 million shares at about $15 per share.

So that's obviously been terrific, but the price was much lower. We think about it, if we take a look at what our needs for capital. And of course, we do have -- as is pointed out to me frequently, we have a lot of capital -- and what we need to do -- the most profitable thing we could possibly do is leverage that capital and grow our earnings. And we made good progress this quarter. But we take a look at how much capital we have, what we think we're going to need, what do we think the opportunities are, and where is the stock price relative to tangible book. This quarter, we -- as I mentioned earlier, we bought the shares at a little bit less than $34. And once a tangible, JP, we ended up at $30.40. We're all in different places. That's obviously -- that's why we're talking to having a conversation around this. Was it $30.40, JP?

It was, Rick. Yes, that's correct.

So we bought at $34, and I think that's about as much as I can add. Obviously, I can't say at what price we would buyback stock, but those are the factors that we think about when we do it.

Last question was on expenses. In your prepared remarks, you mentioned something about $45 million. Was that referring to historical expenses or was that a forward-looking guide?

Forward-looking. I think we were living to this quarter, and I think that's a reasonably good number for the year. And that's $45 million annualized.

if we get strong loan growth, does that mean that there would be -- that expenses would come in higher than that $45 million number or does that $45 million number contemplate the strong loan growth that you guys have...

No. If we have very strong loan growth, then that number could get higher.

[Operator Instructions] And I'm showing we have no further questions at this time. Now I'll turn the call over to Rick Wayne for closing remarks.

Thank you. Well, thank you all for joining us and supporting us, and we look forward to talking to you in April. Thank you very much.

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