Northeast Bank

Good day, everyone, and welcome to the Northeast Bank fiscal year 2021 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, 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 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 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 Mr. Rick Wayne. Please go ahead, sir.

Thank you, Vanessa. 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 the Executive Vice President. After my comments, JP, Pat, and I will be happy to answer your questions. I'd like to start with looking at slide number three in the deck, which is a slide of financial highlights for the quarter. First thing to note is we had a record amount of volume in our national lending business with 91 million invested on purchase loans and 84.6 million with our originated loans. This resulted in a $76 million increase over our September 30 balance in our national lending business, or a 9.2% increase over that linked quarter. That's one point. Looking down next on the slide with respect to Triple P loans, of course, the program was not really open, December 31 quarter, so we didn't have any volume. I would point out that we are actively engaged in originating triple P loans, and when we report in April, we'll have much more to say on that. Of interest, our cost of funds which were on our deposits, were 1.03% for the quarter, acknowledging that compared to other banks, that's not as low as other banks. For us, we dropped 17 basis points in our deposit costs. When JP presents, he's going to provide a more detailed analysis of the CDs running off in the calendar year, so you can get an idea of what might happen to our funding costs as we proceed through the year. Net interest margin for the quarter was 5.23%. Of course, very strong. The return on our purchase loans was 9.06%. And we earned $8.2 million which is the second highest quarter ever in the bank's history, only behind the quarter ending June 30th when we had a fairly significant gain from the sale of the PPP loans that we had originated. And return on equity was 18.37%. EPS was 98 cents a share and return on assets was 2.66. You can see looking year to date, those numbers are comparable, implying a quarter again, December 31, which was solid just as it was for the September 30 quarter. On slide four, We provide some detail on our correspondent fee income. As a reminder, we act as correspondent for the group ACAP and Loan Source in their purchasing of Triple P loans. We split the economics with them and we earn money both when they buy Triple P loans at a discount, and then when they service loans, the difference between the spread, that is the borrowers pay 1%, the borrowing from the Fed is at 35 basis points plus the servicing costs, we share in half of that. One point is that for the quarter, as you can see on the bottom graph, They purchased an additional $1.3 billion of triple P loans, uh, which, uh, over time, our share of the, uh, both the discount and the accrued interest, uh, we will pick up another $4.2 million or recognize over the next roughly couple of years. Uh, and for the quarter, we recognize $6 million of correspondent fee income. As you can see in the top chart, $1 million of that represented the share of the amortization of the correspondent fee. $600,000 of it represented the amortization of the accrued interest. And $4.4 million represented our share of the servicing income so we were obviously quite pleased with that without making any predictions of whether they'll buy more or not the Fed window is currently open through March 31 if they do buy more then that number will increase of course turning to slide five of great interest always to investors is the modification and deferral program. We provide detail on this showing month by month the amount of deferrals we provided, what's currently in deferral, and then we compare them. We look at the performance and compare that with the prior quarter when we reported. So you can see if you look at the, and now the first slide on five I should mention is a slide that refers to principal and interest forbearance as opposed to borrowers just going on interest only, which I'll talk about in a minute. But for principal and interest deferrals between the period March and December, we provided 142.7 million At the end of December, only 26.4 million of those remained on deferral. And then if you look at the last three columns, you can see that between 30 and 89 days, the delinquency is very small. You can see that there was 2.3 million of those that were originally on deferral and then off that were More than 90 days past due on December 31. I'm pleased to report that one of the loans for $2 million has been brought current post quarter. So that number, if you back that out, would be only $300,000. So you can see that the performance of those loans that have come off of deferment is excellent and the numbers on deferment has come down significantly. relative to the amount we originally put on significantly. When you compare it with September, there was certainly moves. Some borrowers that were on deferral came off, and then a few new ones came on, but kind of the balance is more or less the same. Moving on to slide number six. This is a slide that shows the... referrals for borrowers that elected to go on six months interest only. And these are really terrific results. You can see that from March through November, there were $46.6 million that went on six month interest only. At the end of the December, there was only 6.7 million remaining. And of the ones that came off, the 46.3 million Only $200,000 were more than 30 and less than 59 days left delinquent, and only 100,000 were between 60 and 89 days delinquent, and nothing was more than 90 days delinquent. On slide number seven, you can see that... We have a slide where we break down our loan book, which at the end of December was a little bit over $1 billion by the weighted average loan to value in the different categories. We do provide in the slide deck a lot of information on this that I've gone over last quarter and the two quarters before that. I'm not going to go over that in detail today. Obviously, it's in the deck for anyone to look at. I would point out the kind of the punchline here is that our weighted average loan-to-values portfolio-wide are 51 basis points, 51%, excuse me, quite low. And as I say, there's much more detail following in the deck. On slide eight is a slide that shows the... asset quality metrics, you can see that at the chart in the upper left for the quarter, the ratio of non-performing assets to total assets and non-performing loans to total loans was higher compared to the link quarter and previous quarters. I would point out that at the end of, after the quarter, A $6 million loan that contributed to those numbers was paid in full, which if taken out of that calculation, the non-performing assets, the total assets would be 2.2%, and non-performing loans, the total loans would be 2.45%, only a slight increase over those numbers on September 30th. And in our business, our non-performing assets or non-performing loans from time to time can go up, they can go down. They're typically higher than other banks. The thing I always encourage you to think about is the level of charge-offs over time, which have been remarkably low. The final point I would make before Turning this over to JP is on the volume around our purchase loan activity in the quarter. You know, we saw 26 pools for $912 million of the kind of assets that we could bid, the kind of assets we would bid, you know, performing loans typically in the size we would look at secured by cash flow and collateral in the U.S. Out of those numbers we reviewed, which is a preliminary look at 24 pools for $363 million, and the reason we don't review them all in detail is sometimes it's clear from what we see that we're just not going to be a competitive bidder or it's not the right kind of fit. We wound up bidding on 11 pools for $132 million, and we purchased nine pools for $98 million. That is the unpaid principal balance, the customer balance. So we did buy those as a discount, as we mentioned earlier and indicated on one of the earlier slides. I do also want to mention before I actually do turn it over to JP is on slide number nine, um, our allowance slide. And I want to first make the point that, um, on our billion dollar portfolio, um, under, um, under gap, you know, you don't have a general reserve against the purchase loan. So you can see that's a smaller number, but we are buying those as a, at a discount. And then you can see the detail with respect to the other categories. We've certainly added a lot to our reserve over the last year. At December 31, 2019, the reserve was $5.4 million. And a year later, it was $9.9 million. And on our original, keeping in mind, I said we don't have much of reserve because that's the way the accounting works on the purchase loans. If we focus on our originated loan book, December 31, 2019, it was 4.8 million for 77 basis points of allowance to total loans. And then a year later, on the quarter that just ended, it was 9.3 million and a ratio of 1.6% of the allowance over total loans, which is quite an increase. Following on slide 10, 11 through 15 are the detailed slides on loan to value, which you may find interesting to look forward at at your leisure. And of course, if you have any questions, we would be happy to answer those. And with that, I would ask JP to start his presentation on slide 16. JP.

Thank you, Rick. And good morning, everyone. I'll jump to slide 23, which shows you the mix of the deposit portfolio for the past five quarters. This slide shows the results of our efforts to raise non-maturity deposits over the past year. At December 31, 2020, time deposits represent 37% of total deposits compared to 52% in the comparable prior year quarter, while all other deposit types have increased as a percentage of total deposits over the same period. Turning to slide 24, we show the declining cost of deposits over the trailing five-quarter period. The average cost of deposits has decreased from 1.80% in the comparable prior year quarter to 1.03% during the current quarter. Additionally, the cost of deposits at December 31st, 2020 was only 87 basis points. On slide 25, we show that we have $277 million of CDs at a weighted average rate of 1.84% maturing over the next four quarters, which includes $125.3 million at 2.09% maturing in the quarter ending March 31st, 2021. The annual interest expense for the CDs maturing over the next four quarters is $5.1 million. This shows our ability to continue to reduce our cost of funds over the next 12 months. Moving to slide 26, 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 $21.9 million in the current quarter. 30% increase year-over-year. This significant increase during the current quarter is primarily due to the corresponding fee income of $6.1 million, as Rick described in his earlier remarks. In contrast to increasing revenues, non-interest expense has remained primarily flat, increasing slightly over this five-quarter period, demonstrating the bank's ability to control operating expenses as we continue to grow our revenue streams. On page 28, The chart on the left shows our purchase loan return and originated loan yield, while also showing our net interest margin. While the purchase loan return and originated loan yield have remained flat from the linked quarter, the net interest margin expanded by 23 basis points to 5.23%, excluding the effect of PPP in the linked quarter. 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 your question, please make sure your mute function is turned off to allow your signal to reach our equipment. We will 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 telephone to ask a question. And I see we have our first question from Jeffrey Kixis with Piper Sandler. Please go ahead, sir.

Good morning. Good morning, Jeff.

Let's start off on PPP and your correspondent banking agreement. Can you please give a high-level overview of all the different ways in which NBN earns the income from this relationship and How do you expect the relationship to continue to drive earnings going forward?

I'm happy to. The first Bitcoin is we split income. Our correspondence, we split the income that's made in this triple P activity. The first way is when, and as we started with Bitcoin, ACAP and LoanSource, if they buy loans at a discount, then we get half of that discount. So I'm going to reference the slide as we're going through this. I'm now on slide four for everyone's benefit. So if they buy loans at a discount, we share in that. And then I'm going to come back to how the accounting works in a second. And secondly, when they buy the loans, they have to pay for accrued interest at the time they buy them. And we get that over time as well. So if you look, for example, Jeff, at the slide on page four, you can see that over time, They have purchased, now I'm on the bottom chart, they have purchased $4.7 billion worth of loans. And our share of the discount on those loans was $8.7 million. And they also paid for accrued interest, and that means there were less proceeds to distribute from the sale of $7.2 million. And so those two items get amortized over roughly two years. So you can see that the correspondent fee, the amortization in the quarter that just ended in December was $1,061,000, which is highlighted on the above chart. The amortization of the accrued interest of that $7.2 million total was $613,000. And so that got picked up as well. And then finally, when they hold the loan, these loans generate servicing income because they have a $4.7 billion portfolio that has a net interest income of 65 basis points. The borrower pays 1%. This is the triple P borrower. And loan source borrows from the Fed at 35 basis points. So the difference is 65 basis points on $4.7 billion less the cost of servicing those loans. And that amount we get, we are paid half of. And for us in the quarter, that was $4.4 million. So those three components add up to $6 million in of income for the quarter from us from the correspondent relationship.

Thank you. That was very helpful. I know you mentioned, you know, you guys are actively originating PPP loans in round two. Can you give us an update on what you're seeing so far? And is the plan still to sell all the production to the loan source?

We're... Let me just give a little context to this. I obviously don't have any numbers to provide, but it seemed like a reasonable possibility that after the window closed on round one, at some point, more stimulus would be needed. And over that time, Northeast has been working closely with ACAP and Loan Source to build a platform to be able to process a lot of Triple P loans as well as entering into referral agreements with parties that had originated Triple P loans last time and have decided this time they didn't want to. You see in the American Banker or in other places where a lot of banks are not as interested in originating them interacting as referral sources for a capital loan source in Northeast. So our expectation is we will book a triple P loans. Again, I'm not providing a number and that we will most likely sell those loans to loan source as long as the feds PPPLF window is open for them to be financeable. So, um, it's certainly within the realm of possibility. We'll see meaningful amount of origination activity this quarter and a sale of, um, a loan source this quarter as well. Thank you.

Um, what are you seeing so far in terms of, uh, forgiveness from first round PPP?

Sounds slowly. Um, Pat's on the phone who, um, is very involved in this. Pat, did you want to comment on the forgiveness, what we've seen so far?

Well, we sold our loans to ACAB and the loan source, and they have been processing forgiveness applications. And I think of all the loans that they have, something like a third have started applying for forgiveness. at the end of the program in the summer, they extended the period of time where people could apply for it. So, you know, as you would expect, most folks are waiting until the no interest period comes to an end before they apply for the forgiveness.

Thank you. I'm glad Pat pointed that out. Jeff, I'm glad that Pat pointed that out because it's worth highlighting that we're not the owner of the loans and all of the forgiveness work is being done by ACAP or a loan source. We do have some visibility into how they're doing and we have some visibility into some of the customers that we referred and how they're doing and they seem to have an excellent process for doing it but as Pat mentioned the the borrowers have not, you know, most of them have not come forward and have started it yet. Got it.

Thank you. Let's switch gears to the national purchase loan market. Can you talk about some of the trends you're seeing there? I know, you know, you guys only purchased, you know, 91 million of what you saw. So what happens to the rest of the volume? Like, Do other buyers come in and scoop them up, or is competition dried up for purchase close?

No, no. I mean, the numbers that I went over, it's kind of typical almost of every quarter. You know, we roughly – well, I shouldn't say of every quarter because the business tends to be lumpy, but I should say it differently, which, you know, it seems – I'm not buying 98 million. I'm looking at 912. We thought it was excellent. But to answer your question, to provide a little bit more detail, so when we see loan pools, they come across the proverbial desk, and we take a first look at them, and we go through and we say, out of the 912, which of these loans do we want to actually do work on? And we will knock out loans, for example, where you know, we didn't like the collateral type, you know, could be land, could be construction, you know, it could be something like that, or it could be a certain kind of assets we wouldn't be interested in buying the loan. Then we look at what is the seller expectation around pricing and what is their, so when we make it, you know, we make a determination and from, you know, from there we get down to the, you know, the 363 I mentioned earlier. And on those, then, we go through and we do a desktop analysis saying, you know, what do we think the collateral value is worth? What is the seller telling us it's worth? Again, what is their price expectation? You know, and is it worth it for us to spend a lot of time and some amount of money to do a full underwriting, which is what we do. And then from there, we wound up bidding on the 11 pools for the $132 million where we thought it was worthwhile. I'll remind you that when we do the underwriting, we know as much about the loan as anybody. It's just what we would do if we were to originate it. On your question, what happens to it, typically, I guess one of two things. Either somebody else comes in and buys it. There's buyers are interested in all kinds of different loans where occasionally there's not a trade, you know, or maybe more than occasionally. We saw that in the quarter-ended, I want to say, June 30th or September, I can't recall which, where we looked at a lot, but there was a lot of no trades then. That was when, you know, early on. It was probably June 30th when there were... sellers coming in with loans that were not desirable, could have been hotels or restaurants, so the pricing was, the bid-ask spread was wide, et cetera. But these things generally get purchased by somebody at some price at some point.

Got it. Thank you. Talk about credit quality. I know some of the characteristics of your purchase loans can cause them to be recorded as NPL upon purchase. Can you talk about some of the trends there? I know you mentioned that, you know, there's a $6 million pay down at the end of the quarter that reduced NTLs, but is there anything that we should know about loans on NTL at NBN?

Yeah, I want to just say one thing. I'm sorry. But first, you know, generally, it happens occasionally, but we're not in the business of buying, you know, NPLs. You know, we're generally... in the business of buying performing loans, although sometimes, and this I think is what you may be alluding to, Jeff, sometimes when we buy a loan, it takes a little while. There's either sometimes in the transition from the prior lender to us or getting the H's set up or sometimes a borrower will have somebody whispering in his or her ear that, oh, that new, they must have bought it at a discount. If you stop paying them, you'll be able to get some of the discount that doesn't work. But, you know, generally it's not a huge number of, you know, what we're purchasing that goes on non-performing. You know, when you back out the $6 million from this program, that I mentioned from the, it was a large, that was an originated loan into Delhi, very unusual for us to have an originated loan to go, um, non-performing, you know, the number was a little bit higher than prior quarters, but, um, but, but not much. It's just the nature of, um, of, of our business that are, um, non-performing loans, you know, tend to look higher than, um, other, other banks. But as I said, um, You know, ultimately, it's the charge-offs. And when we look at what our LTVs are, you know, we don't expect, you know, any meaningful charge-offs at all, you know, above our reserve. You know, on any given loan, it could happen, I guess. But we, you know, are of the habit and have the history and have demonstrated an ability to not be in a business losing principle on what we either originate or repurchase. Okay.

Thanks. Um, and then, uh, LASG origination, or I should say national origination. Um, those were very strong this quarter. How should we think about the churn in the, uh, in the national originated book and how much do you have to originate in a given quarter, um, just to stay level?

Well, you know, you know, this quarter we originated a lot and we didn't grow it a lot. Um, But the amount of payoffs in the region is not always consistent. I think it tended to be a little bit higher this quarter, I think. I would say that, you know, if we're able to continue originating at the pace we have been for the first two quarters of this year, you know, I would expect that we would have reasonable growth on a net basis. in our originated loan book, it's kind of hard to measure it on any, you know, in any given quarter as to, um, what the payoffs would be. And we're going to pay for originating a lot of loans.

Absolutely. Absolutely. Last question. Um, expenses picked up a little bit due to correspondent expenses. Um, can you talk about what those are?

Yeah, we were, um, We have, as I mentioned earlier, we have been probably since the middle of August, end of August, along with ACAP and Loan Source, marketing for what we thought was going to be a new stimulus package. And, you know, those are the marketing and advertising costs primarily. You can't go to, if you put in ACAP or LoanSource and go to LinkedIn, you'll see a lot of advertising there. They're doing a lot of that. You know, there were some other costs associated with that as well, but that was the majority of it. I would point out, picking up, Jeff, on that point, I mean, they're real expensive, so the number that we have there is the real one. But if you kind of back those out, you know, we're still running at roughly a $10 million... expense, non-interest expense, a quarter of $40 million a year within a very reasonable, I mean, a small range. That's been pretty flat for quite a while as our revenue has gone up quite a bit, demonstrating the operating leverage available to our company, which we've talked about in previous calls a lot. Some we're very proud of.

Absolutely. Congrats on a strong quarter. Thanks for taking my questions.

Thank you very much, Chip.

And thank you. As a reminder, please press star 1 on your touchtone telephone to ask a question. I see we have no further questions. Now I will turn the call over to Rick Wayne for closing remarks.

Thank you very much, all of you, for listening. And for those of you that will dial in later when the presentation is online, Chip, thank you for the good conversation. And we appreciate all of your support and look forward to talking to you again in April. Thank you very much. Stay safe.

And thank you, ladies and gentlemen. This concludes our conference. you for participating. You may now disconnect.