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.