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, 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. 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 star one one on your touch-tone 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 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 gonna refer to the, in some cases, to the slide deck, that is on our website. I'm only gonna focus on some meaningful highlights to try and provide some more detail into what has already been filed. First, I wanna just mention some financial highlights for the quarter, which are, and I'll refer to slide number three. For the quarter, net income was $8.3 million. EPS was $1.12 diluted. ROE was 13.07%.
ROA was 2.033%. Tangible book value was $33.57. During the quarter, we repurchased 108,000 shares at an average price of $37.88. Let me just at a higher level compare the quarter that just ended with the linked quarter to make the point that the current quarter was actually quite strong even though the income was lower than the linked quarter. The current quarter was $8.3 million, which is down $2 million from the linked quarter, meaning June 30th, which had net income of $10.3 million. This difference is really attributable to two factors.
One, the correspondent income was down $2.3 million compared to the linked quarter, and the provision was $ 1.7 million difference from the linked quarter. In the current quarter, we had a provision for $850,000, and in the linked quarter, we had a credit to our provision, to our allowance for $880,000. If you take a look at these two items, $1.7 million and $2.3 million, that's $4 million, which on an after-tax basis is $2.8 million. As I mentioned, we were down $2 million. You know, but for those two, our income would have been higher in this quarter. 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 national loan portfolio, which benefited from both increases in the prime rate and increased interest and fees collected upon payoff of some loans. That was 7.85% on the originated yield. We had purchases of $77.5 million, and the yield on that, or the return on that was 7.1%, which was meaningfully lower than in the linked quarter. The linked quarter, that number was over 9%.
I don't have it exactly here, but over 9% in the June 30 quarter. The difference of that, which is substantial, 210 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 linked quarter. Why is that? Well, the 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 of a, i t's kinda good and bad. If you get an early payoff, you generate more accelerated income, and so your return is higher.
On the other hand, the loan pays off, and then you don't have that loan to generate interest income in the following quarters. That's the good and the bad news. It did have the impact, the effect of having the transactional or the accelerated accretion fees lowered by 210 basis points. 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 purchase loan book. For this quarter, that ratio was 5% doing some rounding. If we go back and look at the average for the prior 14 quarters, it was about 8%.
We had substantially less payoffs, which generated, as I've explained, less transactional income. Our loan book is growing because those loans weren't paid off. Now in terms of the national lending portfolio growth, if we look at the linked quarter and our national loan portfolio, it increased $167 million or 13.5% increase from June 30th, 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. Now I'm gonna segue into the correspondent fee income, and how we're replacing that reduction in income with net interest income.
I'm gonna refer to slide 29 in these comments. First, our base net interest income, and by that I mean our interest income before any, what we call transactional income or, you know, accelerated accretion or those things, was for the quarter $22.6 million, compared with $20.1 million for the linked quarter. Our base net interest income quarter to quarter increased by $2.5 million or 12% because our loan portfolio is growing and we're benefiting from a higher rate interest environment. You know, if we look at the correspondent fee, that's been declining, you know, every quarter. In the current quarter it was $1.4 million compared with $3.7 million for the linked quarter. It decreased by $2.3 million.
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. This answers the question that investors raised when we generated so much capital from the PP P activity. Knowing that the PPP income had a shelf life, you know, when that goes away, can you replace that by growing your balance sheet? 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.
Non-accrual loans were $13.7 million, and that was 93 basis points or 0.93% of total loans. Those are, given our line of business, very strong numbers. Finally, you know, 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 our loan book, you know, from October going into the end of October. We just recently closed on it going forward, which will be a benefit in subsequent quarters.
With 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. If you have a question, please press star one one on your touchtone phone. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star one one on your touch-tone phone. Alex Twerdahl from Piper Sandler is on the line with a question.
Thank you. Good morning, guys.
Good morning.
Good morning.
First off, Rick or Pat, I was hoping you could comment on this, you know, this volume in October, and I guess to a lesser extent during the quarter, in the purchase market is obviously a big kick-up relative to what we've seen recently. 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, you know, potential credit changes, or if it's really, or something else that we should be thinking of. I'm just kind of curious what's driving the higher volumes.
Pat, you wanna respond?
Sure. It's certainly, you know, rate driven. Anytime there's movement in the market like this, there's balance sheet repositioning on the part of sellers. 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 on the part of the sellers.
Okay.
Alex, I would add to that, and as we've talked in prior calls, you know, we are so well situated to take advantage of these opportunities in the marketplace. I know you know this, but if there's anyone on the call that doesn't, you know, a lot of the folks that work here, you know, came out of Capital Crossing Bank, which all we did was purchase loans. When we have opportunities to look at pools coming in, we have, you know, first the expertise to be able to underwrite all of these loans and service them, and we have the capital to be able to buy them. It's really a great way to grow our loan book to do that.
Sellers like to deal with us because we have a, you know, a reputation for being able to execute, to be a very good counterparty for them. You did hear a forward-looking statement, which I won't bore you with again, but, you know, we're seeing a lot in the pipeline now. There's a lot of loans coming to market. I should point out that doesn't mean we're gonna buy a lot more because it's, you know, you bid on them one at a time. But we're seeing more volume now than, I think we've ever seen. Would you agree, Pat, with-
Definitely.
On the volume?
There is some portion of the availability that's credit driven. More than in the past few years. Again, the stuff that we're focused on is primarily rate driven.
Would you-
In other words, not a lot of big credit issues in the loans that we've been successful purchasing.
Do you have any thoughts 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, you know, obviously the dynamics with supply and demand. I'm just curious, you know, without necessarily giving away all the, you know, all the secret sauce, you know, how you think about bringing on additional volume in any given quarter versus making sure you get the best pricing possible.
Well, you know, one we have with the capital, we have a lot of capacity to grow our loan book. Secondly, I'm gonna just go through three or four things that we think about when we buy without, as you said, giving away the secret sauce. You know, when we look at loans, we're obviously mindful of credit quality. You know, first point, making sure that we're bidding at a level that we're comfortable that, you know, we are with the LTV to what we're buying. You know, when we think about pricing, you know, we bid generally to a certain yield, mindful that, you know, you need to be competitive of course.
We're not the only ones bidding on loans, so you're, you know, partly driven by what the marketplace requires, for a bid. 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. Secondly, we find in a bunch of these loans that, you know, sometimes there's what we call shadow interest, where there may have been a default at one time and there's the customer balance is more than, you know, than the original UPB for it or what we pay.
Let's, you know, I don't want to put numbers out there because that would be related to the secret sauce. But, you know, we know we're gonna do better than just the, what the math tells us on the yield to maturity, for those reasons. I don't know if it's exactly responsive, but.
The other thing is that going back to the pricing question is what doesn't show up on our disclosures is the much larger numbers of loans that we look at and either lose or pass on.
Because you can't get there on those.
I mean, yeah, in preview, this is really directional because I don't have the numbers exactly in front of me. You know, at one point, you know, when we went through kind of the funnel in a particular quarter, not this quarter, we may wind up buying something like 15%-20% of the stuff we look at or less.
Right.
Because there's a lot of loans that come over the transom, so to speak, that, you know, we don't bid on. Previously, there was a lot that we bid on we didn't win.
There's definitely some deals out there now where the sellers are shocked at the pricing, are concerned about taking the hit.
I think, Alex, the kind of the punchline to this is, we had predicted this after COVID, but we were wrong. Right now, there's a lot of opportunity to buy loans. We're buying them at, you know, better pricing, as you mentioned in your question. It's, you know, so we're trying to grow our balance sheet in addition to the originated activity, which was, you know, record-breaking last quarter, with the purchase loans.
Got it. Thanks for all that color. Onto the transactional income, and appreciate your comments on sort of where that shook out this quarter relative to the previous 14 quarters. You know, how should we think about that? Because it strikes me that when rates moved up back in 2017, 2018, 2019 time period, we didn't see necessarily that transactional income fall off a cliff. But then again, that was a much different increasing cycle. You know, as you look forward, and I know obviously there's the forward-looking statement, but do you think we're gonna see lower levels of that of early payoffs relative to history?
I mean, maybe give us a little bit of thought around, you know, 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, you know, we would have a customer who would 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, you know, it's really easy. They don't need a new appraisal. They don't need new legal documentation. You know, they mostly have to sign, you know, a two-page extension agreement. Very low friction costs. Then we would offer them what would be, we would think would be a good rate, you know.
This is when way before rates went up, say we would offer them, you know, 5.5% because rates were so low, but we had the loan, and we had the capacity. They would still leave us because they would get an offer, you know, at 4%. But not anymore. You know? Borrowers that are with us, their opportunities to refinance us out are less, and they're more expensive. It's easier for us to keep that loan, and we are trying to. You know, when you think about, you know, the purchase, the return on our purchased loans, it really depends going forward on the level of the prepayments. You know, if I were to estimate, I think this quarter was unusually low.
You know, 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. I think that, you know, what we got, you know, what we had this quarter was unusually low. I would expect it to be at least over eight, you know, going forward. Again, subject to any given quarter, it depends on the payoff. That number. Directionally, you know, I would think it would be higher this fiscal. You know, also, you know, the purchase loans generally are not variable. I mean, there are some that are and some that reprice, you know, at different intervals. It's not like our originated book that's, you know, tied to the prime, mostly all of it. Or so for now.
Right. Okay, that's helpful. Then just on the other side of the balance sheet on funding costs, I know you did some things to to improve the funding profile going into this. Given all the growth that we're seeing, you know, maybe talk about the any strategies or updated strategies on on funding and the incremental growth that we should be thinking about.
JP?
Yeah. Thanks, Alex. We have some strategies, you know, primarily in the community bank and our national lending and corporate and institutional deposits, you know, included in their municipal in the community bank, to continue to grow the balance sheet to fund the growth. Obviously with the lower level of pay downs, you know, we required more funding to bring on the balance sheet to fund the growth. Because you know, usually we see more funds coming in from the loans paying off early. And we didn't have that this quarter, so you know, it required us to go out and bring in more incremental deposits, you know, which, you know, can sometimes be a little more expensive than your existing deposits already.
You know, we do have some strategies that we're you know still looking to roll out and bring in funding as needed. Obviously we can supplement with other funding sources as needed if we have an opportunity you know for another big portfolio to purchase.
Okay. Thanks. Can you talk a little bit, Rick, about the pipeline on the originated national loans? I mean, obviously that growth has been huge for now over a year.
Yeah. The origination, you know, we have a very big pipeline on the origination side. Yeah, I mentioned earlier we had record amount of volume in the quarter that preceded the pipeline, both judged by, you know, what's in closing, where we have term sheets out that have been signed and returned with a deposit, where we have term sheets that are out that we're waiting to get back. I mean, the pipeline is very large. That's a very general statement to that question. Pat, do you wanna narrow it down at all?
Sure. Just as discussed in previous quarters, the lack of fixed rate alternatives or at least without long lockouts, and the increasing funding costs for non-bank lenders has really benefited us with our cost of funds and with our restructures and lockouts. We're a pretty attractive alternative relative to previous years. That's. We're able to be not only more volume, but pickier with respect to the assets that we pursue.
Yeah. You had mentioned in your preliminary write-up, Alex, about you know, our business development officers now. You know, they've been with us for a while, but now they're really hitting stride in terms of value. Plus, there's a lot of organic growth too, you know, that you know, existing customers, you know, are just calling in for you know, for refinancing needs. And a number of in the case of Portfolio Finance, a number of those borrowers that you know leveraging non-bank lenders, those numbers are increasing. We're doing a fair amount you know improve our brand in the marketplace, you know, through digital advertising and events with borrowers and coming up in the year conferences and those kind of things.
We're, you know, very optimistic about the volume we can do on the originating 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 had out earlier, I'd mentioned $52 million for the year. I think, you know, that's a pretty good number. I mean, if it went up, it would, you know, I think it go up a little bit, not crazy. I think, that's a reasonable number for the year. You know, to the extent we see any meaningful changes in that, we can update that, in one of our next calls. I think that's a reasonable assumption for the time being.
That's for the fiscal year, correct?
Yes.
Okay. Just two more questions for me. One is just, you know, given the growth and, managing excess capital, I'm just curious, you know, how if buybacks still make as much sense today as they did a couple quarters ago.
Well, there are two. You know, when we think about buybacks, you know, we think obviously about use of capital and, you know, and the what price you'd have to buy back. I mentioned in the prior quarter, we've bought back, you know, I mean, the current quarter, September, 108,000 shares we've bought back currently. You know, one of the things that's happening now is because we've increased our loan book so much that when we factor in the purchase loans that we described in the earnings release, you know, it used to be our loan capacity based on our capital was something like $100 million. A billion dollars, JP is pointing out. JP usually corrects me with, you know, but if I make a small error, he doesn't mention.
But a billion, that's a big one. Thank you. You know, now it's more like $500 million of capacity. We think about capital differently now based on the amount of opportunity in front of us and the stock price, you know, where it is. I think. Well, that's all I would say on that point.
Okay. Just a final question. I saw during the quarter that the Newity relationship looks like it went live in sometime in September. I'm wondering if you can give us any sort of update on anything there.
We can. You know, I would say they're starting to book 7(a) loans. JP, do we have a number on what they have done kinda through September?
It's not a lot. About $2 million.
They've booked around $2 million. They're actively doing it. There seem to be some changes with the SBA around the processing of these 7(a) loans, which might improve. They're at it. We'll see what happens. It's not a lot yet. You know. I will remind everybody when we started all of this, set the expectation that we didn't know then what they were going to do, whether it was gonna be a little or it was gonna be a lot. It's currently a small amount, but you know it could be much more. I wouldn't really factor it a big number in your analysis because so far it has not been the case.
Great. Thanks for taking all my questions.
Those are very good ones and a lot of them. Thank you, Alex.
Thank you. As a reminder, if you have a question, please press star one one on your touchtone phone. One moment, please. 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. Appreciate your support. I hope you found it interesting. If there are things that you'd like us to cover in future calls, let us know, and if we can, we will. With that, again, I thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.