Northeast Bank

Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2021 First Quarter Earnings Results Conference call. This call is being recorded, and with us today from the bank is Rick Wayne, President and Chief Executive Officer, JP LaPointe, Chief Financial Officer, and Pat Dignam, 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 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 the 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, Erin. 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 J.P. LaPointe, our Chief Financial Officer, and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments, J.P., Pat, and I will be happy to answer your questions. First, let me just make a general comment. about how we're doing at the bank. We get calls somewhat regularly from different investors and others and asking, like many businesses, we're still working at home, except for the nine branches that we have open. Everyone is healthy, and our business is doing remarkably well while we're all working at home. This is now going on since the beginning of March. Now let me proceed with some of the conversation around our quarterly results. And I'm going to reference the slides that were loaded up yesterday, which you have. Starting first on... The financial highlights slide on page number three, I think that kind of the headline is, you know, with really great earnings, $7.8 million, or 94 cents per diluted earnings per share, a return on equity of 18.5%, and a return on assets of 2.49%. Let me just say that again. Return on equity of 18.5%. Quite a number. During the quarter, our loan volume was a little bit under $76 million, which includes $23 million of triple P loans, which would be originated. We also... originated $40.9 million of loans in our national lending group. And we purchased $4.6 million or invested $4.6 million on $5.8 million of UPV. I'm going to talk about both of those in more detail in a little bit. Our net interest margin was $4.95 and excluding Triple P was 5%. If we turn to, let me just, turn to page four, I want to comment and provide some detail on our correspondent fee income. And so there's a slide on page four that the first part of the slide on the top, designated correspondent fee summary, takes a look at what has happened on the purchase side by loan source through September 30th initially. You can see that in the quarter that ended June 30th, our fourth fiscal quarter, loan source purchased, and I'll do some rounding for this, the numbers are there, $1.3 billion. And then in our first fiscal quarter ending September 30th, they purchased $2.1 billion for a total of $3.4 billion. We derived on the purchase side income in a few different ways. First, when they're purchased, we get a share of the discount when they buy the loans because they're buying them at a discount. And our share on that aggregate of $3.4 billion was $8.2 million. Secondly, when they buy the loans, similar to buying any security, they have to pay for accrued interest. And our share of that was 3.5 billion roughly. So the total of all of that, the total of all of that is $11.7 million. I would add, and this was after the quarter end, but you can see it on the slide, that they purchased in October another $614 million The corresponding fee on that was $353,000, and the purchased accrued interest was $1.5 million, our share, for a total of $1.9 million. You may wonder why the corresponding fee was so low, and that's because at the time they buy the loans, they need to refinance with the Federal Reserve, which provides financing to pay off all the interest. So... that tends to reduce the correspondent fee, but ultimately comes out to be the same because they owe less money to less, because they pay the interest expense to say accurately. If you look at the bottom of that slide, we break out the components of the 4.7 million of correspondent fee that we recorded in the quarter. There was 822,000 of a correspondent fee, which represents the amortization of the $8.2 million correspondent fee in the above table. It's roughly over two years. There's also the amortization of the purchased accrued interest, you recall. I just said that when they buy the Triple P loans, they have to pay accrued interest, and that $279,000 is the amortization of the 3.4 billion above. And then we also get a share of the servicing income, which is the spread between the rate the borrower pays, which is 1%, that's a triple P borrower, and the cost of borrowing from the Fed, which is 35 basis points. So there's roughly 65, not roughly, there's 65 basis points on $3.4 billion through September, now $4 billion starting in October, less the cost of servicing that. So you can see that it's been quite a profitable transaction for us, and I hope this level of detail makes it easier for you to understand the components. Moving on to the next slide, We wanted to provide some detail on our deferment program, which I know is of great interest to all of you. And so the slide on page five is a slide that shows for every month, May, March through August, in which we provided a full deferment for three months. And you can see that we did over that time period, a total of $136.2 million of deferments to borrowers. And we were, of course, pleased to do it to help them out. These were total, not forgiveness, but just forbearance of loans for, their loans for three months. And at the end of September, we only had 26.8 million of those that were still being deferred, and the biggest chunk of those are some of the ones we granted in April for three months. We provided them with an additional three months. So it's 26.8 that's still on deferment, 109.1 million off deferment, and of those, only $300,000 were more than 30 days delinquent as of September 30th. Very, very pleased with that result. On the next slide on page six is a breakout of deferments in which we gave interest only, and this ran from March through July, same kind of analysis. We gave out 44.7. Some of those have come off. There were only 35.9 million at the end of September, and none of those are more than 30 days past due, which we're very pleased with, of course. Moving on to slide seven is a slide that shows our lending activity, both originated loans and purchased loans for the five trailing quarters. And, you know, you can see in here that on the originated basis, I'm looking at, you know, even pre-COVID, of course, originated going back to Q1 of 20 was $40.6 million, a very large quarter, and Q2 of 20, that was the end of our I mean that was not the end, that was the second quarter fiscal 20, 96.6 million and 48.8 million and then 33.6 million June 30th and this quarter 40.9. So we saw a fair amount of activity. I think as we mentioned on the other call, you know, we're being, we're always careful, always conservative, even more so now. Just a little color on the originated loans. Roughly half of that 40.9 million were portfolio finance loans where, and we've talked about this in the past, where we lend money to non-bank lenders to leverage their lending activities. But if you look at on that, on roughly half of that, the portfolio finance, if you look at our loan amount to the underlying value of the real estate, that secures the loan of our lender, of our borrower rather, you know, it's sub 40%, sometimes less than that. And the other half of it were loans directly to borrowers, you know, where the LTVs were sub 60%. Virtually all of those set up with interest reserves giving us protection for all or most of our loan. That was the story on the originated portfolio. On the purchase portfolio, there was only $4.6 million invested for the quarter. A few comments on that. One is we looked at a lot in the quarter, but we couldn't find, even though we looked at a lot, We couldn't find a lot that we were able to buy. A lot of it were asset classes that we weren't interested in taking now, hotels, restaurants, big box retail, land, et cetera. And then there's a whole big chunk of that that we just couldn't get there on the pricing. As we say almost on every call, if not on every call, Purchase business is lumpy. We have great expectations that, you know, over the next couple of years, we're going to see our fair share of loans to purchase, and we will. We want to be careful. And with all of those caveats, this is an important point you want to listen up. In October, you know, we have already put $80 million of purchase loans under contract. I'll repeat that number. It's a big one. You know, about $80 million of loans under contract, which will close in November. So we're obviously quite happy with that. This is a great transaction for us and subject to remind you as a forward-looking statement, you know, we think we're going to have meaningful opportunities to do that. Moving on to slide eight. On slide eight, you can see the roll forward of our loan portfolio. You know, it did go down by about, this is now our national lending portfolio, which is the way we refer to that now rather than LASG, same group. But you can see that the portfolio from June to September went down by about $33 million. Interestingly, if you look at the originated part of that, it's mostly flat. We originated, as I mentioned earlier, about $41 million, and we had $45 million of paydowns. The reason that the portfolio went down by about $30 million mostly was that on the purchase side, We purchased $4.6 million, and we had $33 million of paydowns. You know, you can imagine what the bar will look like, at least this portion of the purchase part next quarter, you know, with not $4.6 million, but at least $80 million. And I remind you, we're only in the end of October now. We have a couple more months at that. Going on to slide nine, the next group of slides we thought would be helpful to continue to put in here, although I'm not going to go through them line by line. You may recall that in the quarter ending March 31, we provided a lot of detail on our loan book. and some investors had suggested to us that, you know, we continue to keep this data in there, so we put it back. You know, you can see that, as I mentioned, you know, our loan book balance and loan portfolio has gone down a little bit. You know, some of the headlines of this, you can see that on a weighted average basis, The LTV is 53%. And as you recall, for the purposes of this calculation, you know, we're using the appraisal at the time that the loan was originated. This hasn't been reappraised. Other than in the ordinary course, you know, we look at loans and get new valuations from them. But generally speaking, you know, these are the values at the time of origination. On slide 10 is a pie chart. You've seen these before to take a look at our national lending business. Looking, starting at the pie chart on the upper right-hand corner that shows on purchase loans that our net investment basis is 91 percent of purchase loans. Below that, in terms of geography, our largest is in New York and then California and then spread out among a lot of states. Moving to the upper left-hand corner, you can see that the average investment size is $692,000. It's a lot of loans. A lot of that is purchased. And below the breakdown, you can see the breakdown of the collateral types. On page 12, you can see we, again, by different collateral types, we break out the national lending LTVs on a weighted average basis. It was a little bit higher on the first slide I showed you because of some of our loan balance. It was 53% for the whole portfolio because of the lending in our community banking division, but national lending is 50%. Of course, averages can be misleading because you need to take a look at them They're not all 50%, but the slide on page 12, I think, is really helpful, which makes the point only 2% of the book is more than 80%, and only 10% is more than 70%. So 88% of it is under 70%, and only 20% is between 60% and 90%. So good LTVs. On slide number 13, we have some further analysis of the purchase portfolio in terms of when the loans originated and what's happened to them. This, I think, is really interesting. We've broken up the purchase book between the loans that were originated before 2009 and after 2009, you can see that 62% of it is after, it's before 2009, so there's a lot, a lot of seasoning and a lot of pay down on those slides. And then you can see on slide 14, We take a look at loans that we have where we have interest reserves. You can see that in our portfolio finance. 83% of those loans have interest reserves with a weighted average duration of 6.2%. And then on the direct originated loans, 40% of it of the portfolio with a weighted average duration of 7.2%. There's some more breakout of the portfolio in the community banking division on page 15. And then on page 16 is a breakdown of the weighted average LTVs in our SBA portfolio. And you can see that of the $50 million on our books, just under $7 million is guaranteed. $43 million is unguaranteed. And you can see the breakout by the different collateral types. I'll just remind you that while loans that are unguaranteed, to the extent that we split the – or we share any loss with the SBA pro rata, so we share in 25% of the collateral value. And as JP will talk about in a second, we have a large – allowance associated with that. And on that note, I might ask JP to take over. Thank you, JP.

Thank you, Rick, and good morning, everyone. Continuing on slide 17, we provide a breakout of our allowance for loan losses by loan segment. As you can see, our allowance has increased from $5.3 million, or 57 basis points of total loans, as of September 30, 2019, to $9.5 million, or 1.02% of total loans, as of September 30, 2020, excluding purchase loans and their related allowance. Our allowance to cover loans is 1.55% at September 30, 2020, an increase from 80 basis points at September 30, 2019. As you may recall from our Q3 fiscal 2020 earnings call, we significantly increased our allowance for loan losses as of March 31, 2020 as a result of the COVID-19 pandemic and its effects on our loan portfolio. The increase was largely concentrated in the SBA and USDA loan segment, whose inherent risk of loss is significantly higher given the nature of the borrowers and their typically higher LTVs as Rick indicated. Through September 30th, 2020, the allowance for SBA and USDA loans has increased $3 million since September 30th, 2019, Despite loan balances in this segment declining approximately $9.5 million over the past year, which we feel appropriately addresses the risk inherent in the portfolio as the pandemic continues. Moving to slide 18, our asset quality metrics for non-performing assets and non-performing loans have remained fairly consistent over the past three quarters, even with a declining loan portfolio. Classified assets have also remained consistent and have not increased significantly over the past three quarters. Net charge-offs were very low during the quarter ended September 30, 2020, with one basis point of average loans being charged off, which is lower than the previous period shown. Moving to slide 24, you can see the declining cost of our deposits over the trailing five-quarter period. The average cost of deposits has decreased from 1.84% in the September 30th, 2019 quarter to 1.19% during the current quarter. Additionally, the cost of deposits of September 30th, 2020 was only 1.05%. We also have $188 million of ABLE and Bulletin Board CDs at a weighted average rate of 2.21% maturing over the next two quarters, which includes $84 million at 2.22% maturing in the quarter ending December 30th, 2020. The annual interest expense for the ABLE and Bulletin Board CDs running off over the next six months is $4.2 million, which if we were to replace all of the maturing CDs with the same products, the annual interest expense on those CDs would only cost us $900,000. Given our current funding position, we have let maturing CDs run off and have not been bringing new CDs on. As a result, the cost of funds as a percentage of deposits may remain elevated until we bring lower cost funds on the balance sheet to fund loan growth as needed. However, interest expense by dollars is expected to continue to decrease as the higher cost funds and excess deposits continue to roll off. Switching to slide 25, as you can see here, total revenue excluding PPP gains has continuously increased over the past five quarters from $16.9 million in the prior comparable quarter to $20.3 million in the current quarter, a 20% increase year over year. This significant increase during the current quarter is primarily due to the corresponding fee income of $4.7 million, as Rick mentioned in his earlier remarks. In contrast to increasing revenues, non-interest expense has remained flat, even declining slightly over this five-quarter period, demonstrating the bank's ability to control operating expenses as we continue to grow our revenue streams. That concludes our prepared remarks. At this time, we would like to open up the line to Q&A.

If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speakerphone to ask a question, please make sure to have your mute function turned off to allow your signal to reach our equipment. We'll proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star 1 on your touchtone phone to ask a question. And we do have a question in from Jeffrey Kitsis with Piper Sandler. Your line is open.

Good morning. Good morning, Jeff.

Congrats on a strong quarter. I was hoping you could please give some more clarification around the accounting on loan source fees. Appreciate the color that you did give. But I was hoping you could help us understand some of the drivers for forward-looking modeling purposes. So it seems like there are different things that will cause these items to fluctuate. For example, gain-on-sale PPP loans would depend on you guys selling more PPP loans, but other items like the correspondent fees and amortization of purchased accrued interest are going to depend on other factors. So I was hoping you could run through that, please. Thank you.

JP, you want to do that?

Sure. So we have the three different aspects that we broke out in the table on slide four, Jeff. We have the corresponding fee of $8.2 million and the purchase accrued interest of about $3.5 million. Right now, that's being recognized over an approximate life of two years. However, we have to monitor the underlying loans that are associated with that. So if the loans pay off quicker, then the recognition of that deferred income would speed up. You know, if all the loans stay out there for two years, then, you know, we would take that straight line over the two-year period. So it kind of depends on, you know, when the loans are forgiven and how all of that reacts to how we recognize that over that period. The other aspect is the earned net servicing interest, which fluctuates based on the average balance of the loans that LoanSource has, as Rick indicated, whether or not they repay the PPPLF funds that they borrowed from the Federal Reserve at any given period, and then what we earn in each month on those loan balances. So if LoanSource continues to purchase loans and the balance of their portfolio that they're servicing gets bigger, and those loans stay out there for a longer period of time, then that number could, you know, grow and continue to stay large for a period of time. Whereas if, you know, the loans are forgiven in a shorter period of time, then that number will run down a little quicker. Tough to estimate not knowing exactly, you know, how many borrowers are going to apply for forgiveness and when they're going to, you know, apply and receive forgiveness if they do. I hope that answered your question on how you can model it and, you know, if you want to build in some assumptions on loan forgiveness in the upcoming quarters. Rick, do you want to provide any more color on that?

No, unless Jeff has another question around the accounting part.

Thanks. That was very helpful. I appreciate it. So, it sounds like the correspondent and purchase accrued interest, that's going to depend on, one, forgiveness speed. and the earned net servicing interest that's got to fluctuate more based on just the balance of loans that the loan source has, so their volume of portion. Okay, and then on deferrals, it looks like deferrals have ended sooner for full payment deferrals. Those are almost done now, but the interest-only deferrals are sticking around a little longer. I was wondering if you could please talk about the factors that cause the interest-only deferrals to last longer. Is that by design? Are those typically?

Well, it's a simple hint because they were for six months. They haven't come up yet. I think no doubt that when we talk again after the end of the next quarter, those will all be off deferral. They're coming off deferral mostly in October, if not in September.

it's just that they were longer the other ones are three months these are six months got it thank you and then um last question i was uh hoping you could uh give an update on the on the purchased loan market um i appreciate caller that uh you guys have already put 80 million dollars of purchase loans under contract um so far in october um just wondering where you see that trending over time and if you're seeing any any more competition for these loans or uh or if competition remains low with buyers exiting the market.

Thanks. Well, there's been a lot that's come to market. I mentioned that in my comments. But what we saw in the quarter that ended September 30th, we didn't see a lot that we wanted to bid on, even though there was a lot of volume. I think there's going to be a lot coming. I might be wrong on this, just to be clear. But my view is that there's going to be a lot of loans coming to market. And, yeah, there will be competition. The $80 million that I referred to, there were a lot of bidders. But, you know, for the right kind of assets, we can be very competitive. So I expect that I can't tell you quarter to quarter, but I would say that over the next couple of years, we will see the percentage of purchase loans on our balance sheet increase from where it is now. Jeff, the $80 million is obviously significant. That's a big month of October for us.

Yeah, definitely. That's road strong production. Thanks for taking my questions.

Thank you, Jeff.

And your next question in queue comes from David Minkoff with DCM Asset Management. Your line is open.

Good morning, guys. Congratulations on another nice quarter. Thank you. I have also a question on those PPP loan chart. You may have actually answered it, but I guess I wasn't clear on it. So you show the fourth quarter fiscal year 2000 and the first quarter fiscal year 2021. and you have the correspondence fees accrued interest in total, and I think you said it's going to be realized over two years. Does it end at the end of the first quarter 2021, or next quarter might we see a line that says second quarter fiscal 21 and third quarter, or is the program over?

No, the program is under current rules to buy loans. would run through December 31 because that's how long the Fed has made available financing to banks and non-banks at 35 basis points. So, excuse me, that's already been extended. That was supposed to end September 30th, I think. And then they extended it to December 31. So if they don't extend that, the Fed does not extend the borrowing window, then there won't be any more loans, 1% loans to purchase. If they extend that and the regulators still say that you don't count that in your capital calculations, then the triple P purchasing could extend beyond December 31. Okay.

You can see into that, but

Just so you can see on the chart that there's already some activity in the quarter we're in now because LoanSource has purchased $614 million in October.

Right, right, right.

And it's possible they can purchase more in November and December.

Okay. In the prior question that the gentleman asked, I think he said, it's not necessarily realized over the next two years, ratably, but it depends on how there are payoffs. I would assume, and correct me if I'm wrong, that it'll be recognized largely in the earlier quarters, waning down as you get to the latter part of the two years. Is that your anticipation at this time?

Yeah, we would think that a lot of the loans will be forgiven, and therefore the balances will come down. So I think what you're saying is generally correct. There's a small number of loans in the portfolio that are five-year loans. And so to the extent that they're not forgiven, some of them are going to go longer. So we think as a starting point, thinking about two years for amortization seems to make sense. But I would agree with your point.

Okay. And the second thing, I didn't see a comment as to the the buyback. So I assume that you completed the 900,000 share buyback. Also, the number of shares outstanding last December was roughly 9 million, and now it's a little over 8 million. So that almost shows that you bought back the 900,000. Am I correct in that assumption?

Well, you're mostly correct. At the end of the June, we had out of the 900, we had 46,000 remaining. Yes. And then we did not buy any stock back in the quarter that just ended September 30th. So our capacity to buy back stock is 646,000, which consists of 46,000 remaining from the 900,000 plan plus the 600,000 that we recently or in the last three or four months announced. You're mostly correct.

I must have missed that. I didn't see that. You announced another $600,000 add-on buyback of shares? When was that? I must have missed that. What month was that?

JP, when did we announce that? July. I think it was July 21st was the announcement. So that would have been in our – we did a press release when that was approved.

Very good. I would have suggested you – Your original 900,000 share buyback was what I would call a standby buyback. You didn't really plan to act on that at the price the stock was selling when you announced it, unless there was some kind of dislocation, which you have an amazing crystal ball because that disastrous events with the coronavirus took place a few months after you announced that standby buyback. And I was going to suggest that you... authorized another standby because we're in crazy times still. Of course, we've got an election coming up next week, and that could be a cause for volatility. Plus, in many states, the coronavirus is ticking back up again. And, you know, we're going to get another lockdown and go back. You know, we could have the same situation we had early this year in March. I mean, there's just no way of telling. We're in crazy times. But I'm glad to see you have another standby buyback authorized. Hopefully we don't have to use it, but you never know.

Yeah, exactly.

Okay. I'm going to sign off, and congratulations for another great quarter.

Thank you, David. Nice to talk to you. Thank you.

And once again, if anyone has any questions, please press star then 1 on your phone. Again, that is star then 1. I'm standing by. Okay, and I see no questions at this time. I would like to turn the call back over to Rick Wayne for closing remarks.

Thank you, Erin. Well, thank you all for listening, participating, supporting us. I hope that you're all safe and stay healthy. I look forward to talking to you at the end of next quarter. Thank you all. Bye.

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