Northeast Bank

Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2020 Third Quarter Earnings Results Conference Call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer, J.P. 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 the 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. The question and answer session for this call will be conducted electronically following the presentation. 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 risk 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'd like to turn the call over to Rick Wayne. Please go ahead, sir.

Thank you very much. Good morning, everyone. 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 your questions. Before I start, Let me say that our thoughts are with the individuals, families, and communities, healthcare workers, and first responders affected by COVID-19. It is unimaginable the toll the pandemic is taking around the world. We're doing our best to help the many affected by COVID-19, including donating N95 masks to local hospitals, contributing to local food pantries, homeless shelters, and youth programs. We are providing accommodations to borrowers through payment forbearance and meeting the needs of our employees who face new challenges while working at home. We are participating in the Paycheck Protection Program, having originated 194 loans totaling $37.2 million in the initial phase and hope to originate even more if funds for a second phase are appropriated. Friends, investors, and other constituents of the bank often kindly and genuinely ask how we are doing. We are doing well. In order to protect our employees and customers, We only service deposit customers in branches, 8 out of the 10 which have drive-thru windows. Other than employees working in those branches, almost all other employees are working at home. Thanks to an exceptional IT and operations group, we've been able to conduct business virtually, no pun intended, the same as before the COVID-19 crisis. On the lending side, we are sourcing and underwriting business, closing and funding loans, and managing our portfolio. On the deposit side, we continue to allow for opening new accounts online and continue to service the needs of our customers. It's certainly a different environment, but our professional, hardworking, adaptive, and dedicated team has risen to the occasion. On this call, we would like to cover four topics. A review of financial results for our third fiscal quarter, recent changes in our Tier 1 leverage and total capital ratio limits, activity in the share repurchase plan, and a deep dive into asset quality. For the third quarter of fiscal 2020, after the close of the market yesterday, We announced quarterly net income of $1.9 million, or 21 cents per diluted common share, a return on average equity of 4.6%, a return of average assets of 0.6%, and net interest margin of 5.5%. Earnings were negatively impacted by an increased provision for loan losses of $3.3 million, or 26 per cents diluted common share of which $3 million was allocated to the SBA portfolio and also a non-recurring income tax expense of $554,000 or six cents per diluted common share related to the recapture of tax reserve for loan losses triggered by the repurchase of common stock during the quarter ending March 31. Turning to slide three. During the third quarter bank wide we generated $119.7 million of loans which brought the quarter end loan portfolio to $1,034,000,000. Loans closed in the third quarter included $113.8 million in our LASG of which 48.8 million were originated and a record 65 million were purchased. The weighted average yield of the LASG loans originated in the third quarter was 6.8% as of March 31, all of which were variable. The total return on purchase loans for the quarter was 10.05%, which included $2.5 million of transactional income. Those of you who have followed our story know that in connection with the merger in 2010, the Federal Reserve and the Main Bureau of Financial Institutions or MBFI imposed numerous conditions on the approval of our merger application. Over the years, some of the conditions have sunset, some have been waived, and last May, the then holding company for the bank was dissolved, and the conditions with the Federal Reserve were no longer applicable. I'm very pleased to report that the remaining regulatory conditions have been waived. The bank's board has reduced the Tier 1 leverage ratio limit from 10 percent to 9% and the total capital ratio limit from 13.5% to 12%. The impact of this change is shown on slide four, where based on capital at March 31, loan capacity has increased by 143 million from 255 million to 398 million. With this change, we are now in conformity with the capital limits of many other banks, and we have additional capacity to prudently, and I say prudently, grow our balance sheet. In October 2019, the bank adopted the share repurchase plan for up to 900,000 shares. As indicated on slide five, during the third fiscal quarter, the bank repurchased 416,700 shares at an average price of $12.83. The repurchase of shares during the quarter increased tangible book value by 26 cents per share. At quarter end, 483,300 shares under the plan remained available for repurchase. Asset quality is always important for a bank, and an understanding of it is critically important at this moment. I will spend the remainder of the presentation discussing our loan portfolio, referencing slides 6 to 14. The remaining slides in the book are those that we typically provide, and at your leisure, please review those, but I believe today A focus on asset quality is the best use of our time. As you will see, our $980 million LASG portfolio, which represents 80% of our loan book, and $76 million of our community banking division portfolio, which represents 7% of our loan book, both have low LTVs. Our $50 million SBA portfolio, which represents 5% of our loan book, not surprisingly consists of weaker credits with higher LTVs, but now with the additional reserve, have a substantial allowance to absorb credit losses. Now that I've spoiled the punchline, let's examine the information on the slides. Slide 6 provides a breakout by of our $1,034,000,000 portfolio, which consists of 2,384 loans. Of note, the $908,000,000 purchased and originated LASG portfolio has weighted average LTVs ranging from 49% to 56%. The aggregate $76,000,000 commercial and residential and consumer portfolios in our community banking division have weighted LTVs of 51% and 65% respectively. The $50 million SBA portfolio has a weighted average of LTV of 78%.

Slide 7 breaks out the $908 million LASG portfolio by collateral type.