Northeast Bank

Good day, everyone, and welcome to the Northeast Bank fiscal year 2020 fourth 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 northeastbank.com under events and presentation. 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 Thank you very much. Good morning and thank you all for joining us 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 our comments, we would be happy to answer your questions. Before I start, let me say our thoughts. continue to be with the individuals, families, communities, healthcare workers, and first responders affected by COVID-19. It's unimaginable the toll the pandemic is continuing to take around the world. We are doing our best to help those affected by COVID-19, including donating masks to local hospitals, contributing to local Food Pantries, Homeless Shelters, and Youth Programs. We have been providing accommodations to borrowers through payment forbearance and meeting the needs of our employees who face new challenges while working at home. As we'll discuss, we've been actively participating in the Payroll Paycheck Protection Program as well. Friends, investors, and other constituents of the bank often kindly and genuinely ask how we're doing. And we continue to do well. To protect our employees and customers, we only service deposit customers and those branches that have drive-through windows. Other than employees and customers, Other than employees working in those branches, almost all other employees are working at home. Thanks to an exceptional IT and operations group and a dedicated team of other professionals, we've been able to conduct business virtually the same as before the COVID-19. It is certainly a different environment, but our professional, hardworking, Adaptive and dedicated team has risen to the occasion. On this call, I'd like to focus on the Paycheck Protection Program, or Triple P, which has been quite meaningful to our bank, our correspondent banking income, LASG activity, deferments, and also stock repurchases. After my comments, JP will provide a high-level overview of our financial results. For the fourth quarter of fiscal 2020, after the close of the market yesterday, excuse me, we announced record quarterly net income, excuse me, just a cough, not sick, record quarterly net income $11.2 million. were $1.33 for diluted common share. A return on average equity of 28.4% and a return on average assets of 3.1%. Those are remarkable numbers. I just want to repeat. A return on average equity of 28.4% and a return on average assets of 3.1%. A record for us. For the year, we also had a record. with earnings of $22.7 million or $2.53 per diluted common share, a return on average equity of 14.2% and a return on average assets of 1.8%. Turning to slide four, through June 30th, we originated Approximately 4,400 Triple P loans in the aggregate amount of $487.5 million to borrowers with tens of thousands of associated jobs. Late in our fourth fiscal quarter, we sold $457.6 million of our Triple P Loans to Loan Source, generating a pre-tax net gain of $9.7 million, or approximately $6.7 million of net of tax. $29.9 million of loans not included in the sale, plus Triple P loans that we originated after June 30th, We will sell after June 30th, so we can expect to see that in our first fiscal quarter. Turning to slide five, we previously announced we had entered into an arrangement with Loan Source to act as their correspondent with the Federal Reserve in order to facilitate their ability to purchase Triple P loans from other banks and finance the purchase through borrowings from the Federal Reserve under the program known as PPP-LF. Under this arrangement, eligible borrower from the Fed can borrow with 35 basis points. And for us, this has been a, has been, and potentially will be in the future, a significant source of income. Under our arrangement with Loan Source, we share or we get paid one half of the net gain on any purchases plus one half of the servicing income earned on their Triple P portfolio that they purchased. Looking at the slide, in June, they purchased 1.3 billion, I'm rounding a little bit, of Triple P loans, including the 457 million they purchased from Northeast Bank. That generated a fee of us, for us, of $2.9 million. Just this week, LoanSource purchased an additional $1.6 billion of loans, including $44 million from us, a relatively small amount, which generated an additional $5.6 million of correspondent fee income for the bank. So where we are now, we have been paid 8.5 million dollars of correspondent fees which we haven't recognized in any material way in income that 8.5 million will be recognized over the estimated life of the 2.9 billion dollar triple P portfolio. In addition to that the servicing income that's earned on that 2.9 billion dollar We will receive half of that servicing income. meaning that LoanSource now has until, unless extended longer, until December 31 to purchase Triple P loans, which if they did, would generate income for us as I had described. We're not making a prediction here whether they will or they won't, but they certainly have done a lot so far. If we turn down to slide six, This is an interesting slide which shows the balance of our LASG portfolio at the end of the last quarter, March 31, through the balance on June 30th. And what you can see here, which is very unusual for us, is that our portfolio declined by 6% over those three months. and as those of you know who follow us, we've had growth in our LASG portfolio virtually every quarter. And the reason that it declined is that we had relatively small number of purchases, only 13 million, and small numbers of originations, 33.6 million. None of that's surprising. We mentioned in our last call which was in April that we did not expect that we would have a lot of volume either in purchased or originating for this quarter. The pandemic was just taking off. People were getting adjusted to it. People were staying home. Not focusing so much on crawling more money or buying properties and banks not so much and other sellers thinking about selling loans. We did have a fairly significant amount of payoffs, $100 million of payoffs and amortizations. And in this particular case, we're of the view that was a good thing because in particular, some of the loans that got paid off, we were happy to have them paid off. Not that we were concerned that we would have principal loss. As you recall in our conversation last time, In great detail, we went through all of our LASG portfolio and other portfolios, estimating what the loads of values were, you know, when they were generally on a weighted average basis in the low 50s. But we had some credits that could have had some problems paying, and we were just as happy to see those borrowers pay off, sometimes on their own volition and sometimes with some urging. from us. So I would, in order to summarize that on slide six, I would say that that is actually positive, even though it might be counterintuitive. And one of the things that we have talked about for a while now is the opportunity that will present itself to us, we believe, to be able to, particularly in the purchased area, but also in the originated area, As we go into this real estate cycle, as I said last time and I'll repeat again, we want to be conservative. We don't want to be aggressive in building a balance sheet now to regret it later. We want to make our balance sheet as strong as possible so when the opportunity really presents itself, we're in a strong position with a lot of capital that we have, the great skill that we have, in underwriting and managing commercial real estate loans. We want to take advantage of the opportunity when it's the right time. You've all heard the expression of catching a falling knife. Sounds unpleasant even to say it. We're not interested in doing that. You know, as we think about the year, you heard the forward-looking statements, I'm going to make one, but I expect that, you know, our volume, both on originated and purchased, will increase over the year as things tend to settle down. And so being conservative is important and making sure that our existing portfolio is strong as possible is also important. If we turn to slide seven, I think this is a really great and interesting slide. This is a slide We call it COVID modification summary. Others call it deferments, all the same thing. But we have put together a slide with more specificity than we could when we talked in April because it was too early then. But you can see that month by month, May through July, we indicate the amount of deferrals that we were granted. So the grand total of those, now these are three-month Total deferrals of principal interest. No payments for three months. You can see the grand total of that was $135 million. If we take that number and use it over our loan balance at June 30th, it's 14%. But let's see what happened to those where things could happen. In March, those And incidentally, this information, as of July 27th in March, we had original deferrals of $8.8 million. They are now, none of those asked for an additional deferral period. As of June 20th, July 27th, $7.2 million have paid. $1 million is under 30 days, which the call report purposes, as you know, is considered current. and only 600,000 more than 30 days passed too. April was a bigger month. We had $86.3 million of deferrals and we had out of those $19.20 million of those borrowers who requested and we agreed to an additional three months. But the balance is very strong. As of July 27th, 40 5 million, a little rounding, have paid, and 21.6 million are under 30 days, again, current for call report purposes, and none over 30. And with respect to the deferments in May and June and July, those are not scheduled to resume in August, September, and October. We are hopeful they will look like those that terminated from the ones started in March and April. And so when we sum that up, where we are on July 27, we have $60 million of total forbearance deferments, which now represents 6.19% of the balance on June 30. And that number includes the $19.8 million that rolled over from the original ones in April. That's quite a good number. and it's performing well. If we go to slide number eight, these are different modifications. These are modifications that we offer customers that they could go six months interest only, which frankly we prefer these. When we had, you can see the totals March through July, that was $50.5 million and they're all paying. We have 39.6 million that have paid on July 27th and 10 million that are less than 30 days, which we expect will be current. That represents 5.2% of the total loans. So that's a lot of detail on the deferments, but we think those are very good numbers and a great thanks to our excellent asset management team. On slide number nine are some metrics on our asset quality. I think as JP will mention that our delinquencies are down to $16 million and change as of June 30th, which is down from about $21 million, or maybe more. JP will give you the number on... March 31, and our non-accrual loans are also down as well. Again, not again, but on slide 10, there's some detail on our allowance. We had provided this last quarter as well. I always want to remind everyone that the accounting for purchase loans does not permit a general reserve on purchase loan. But we provide the detail as to what that balance is and what we have as specific reserves. But of great interest is that our allowance on our originated loan book is now $8.5 million on $584 million. That is coverage of 1.45%, which has increased dramatically over the year. Finally, on slide 11, we have some detail on our repurchase plan. As you may recall, when we reported on March 31, we indicated that out of the 900,000 repurchase plan approved in October of 2019, we had purchased 416,700 chairs. at an average price of $12.83. In the fourth quarter, that is the quarter we're reporting on now, that's our fiscal quarter, we purchased 436,398 shares at an average price of 14.04. So out of that 900,000 repurchased plan, We repurchased a total of 853,098 shares at $13.45. Remaining out of that plan, therefore, is 46,902 shares, roughly 47,000 shares. On July 21, we received and we announced that we had regulatory approval to repurchase an additional 600,000 shares that's spending no more than $10.2 million, which now gives us capacity of $646,902. And so that's what we have. We buy stock when we think it makes sense relative to where the stock is trading. The tangible book value is almost $20 now. And so stock price seems, the price has given us opportunities to buy stock, let me say it that way. And with that, I will now turn the call over to JP.

Thank you, Rick. Good morning, everyone. Today, I will be providing a very high-level review of of our financial results and activities for the quarter ended June 30th, 2020. As announced in our earnings release that was made public after the close of business yesterday, net income for the quarter was $11.2 million, or $1.33 per diluted common share. Diluted net income per common share was up $1.12 from the quarter ended March 31st, 2020, which I shall refer to as the lynch quarter, and up $1.40 from the quarter ended June 30th, 2019, which I shall refer to as a comparable priority per quarter. Driving the results for the quarter ended June 30, 2020, was the net gain from the sale of PPP loans, as Rick discussed in his remarks. Compared to the last quarter, aside from the previously mentioned gain on sale of PPP loans, net interest income increased by $1.1 million, due to increased interest income of $758,000, primarily from the PPP loans, along with interest expense savings of $305,000, primarily from lower deposit costs. Compared to the linked quarter, the cost of interest bearing liabilities decreased by 48 basis points due to the lower rates from the FHLB and PPPLF advances, along with a 20 basis point savings on interest bearing deposits. Compared to the linked quarter, the provision for loan losses decreased by $2.6 million due to the large provision in the linked quarter to reserve for potential losses inherent in the loan portfolio, primarily for SBA loans in response to the COVID-19 pandemic, whereas the amount provided in the current quarter was primarily due to increased specific reserves on impaired loans. Non-interest income increased by $9 million, primarily due to the net gain on sale of PPP loans. Non-interest expense increased $87,000 from the linked quarter. Compared to the comparable prior year quarter, Net interest income increased by $96,000, primarily due to an $806,000 decrease in interest expense, which is due to lower cost deposits, as the cost of interest-bearing deposits decreased 36 basis points from 2.02% in the comparable prior year quarter to 1.66% in the current quarter. Additionally, interest income decreased $710,000 in the comparable prior year quarter primarily due to a decrease in the rate earned on cash held at the Federal Reserve. The provision for loan losses increased $643,000 from the comparable prior year quarter due to increased specific reserves identified and reserved for during the current quarter relative to the comparable prior year quarter. Non-interest income increased by $8.7 million from the comparable prior year quarter primarily due to the net gain on sale of PPP loans. Non-interest expense decreased $8.3 million from the comparable prior year quarter, primarily due to $8.3 million of reorganization expenses incurred in the comparable prior year quarter that were not incurred during the current quarter. Additionally, the weighted average rate of deposits at June 30th, 2020 was 1.38%. We also have an additional $151 million of ABLE and bulletin board CDs at a weighted average rate of 2.35% which are scheduled to mature in the first two quarters of fiscal year 2021. Given our current funding position, we have not been bringing new CDs on or rolling over maturing CDs. Therefore, the cost of funds may remain elevated until we bring lower cost of funds on the balance sheet. However, interest expense is expected to continue to decrease as the higher cost funds continue to roll off the balance sheet. That concludes our prepared remarks. At this time, we would like to open up the line to Q&A.