Northeast Bank

Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2021 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 Digman, Executive Vice President and Chief Credit Officer. Last night, an investor presentation was uploaded to the bank's website, which we'll 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 the 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 statement. At this time, I would now like to turn the call over to Rick Wayne. Sir, please go ahead.

Thank you. Good morning and thank you all for joining us today. I'm Rick Wayne, the President and 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. For purposes of my comments, I'd like to use the slide deck that we uploaded as a reference tool. Turning to slide number three, which is the slide after the forward-looking statement, I want to highlight a few points here. One, on our purchase loans, for the quarter, We purchased, we invested $39.9 million on $42.5 million of UPB. We bought this literally the last eight of the quarter, so the income from this pool, from this purchase was not reflected in our quarterly results, but will of course be on a go-forward basis. For the year, this is now through three quarters, we purchased or invested $136 million. And I would compare that for the full year of FY20, where we purchased, invested $171 million with a quarter to go for us to make apples to apples comparison. On the originated side, We originated $69.3 million of loans, which brings us to $194.8 million for nine months, and our entire volume for FY20 was $171 million, which, of course, was impacted by COVID. But we are originating a lot and have been a big pipeline for I'm going to spend a little time now on the Triple P and then in the future slides I'll go into some more detail. In the quarter we originated 2.25 billion. I want to say that again, that's a lot. 2.25 billion of which we sold 2.14 billion to the loan source. generating a pre-tax gain of $33 million. As you know from our previous calls, we act as a correspondent to Loan Source, effectuating their borrowing from the Fed to purchase loans, and we share in half of the revenue for that in the quarter The quarter that just ended, we earned $6 million. And for the three quarters of our fiscal year, we have earned $16.8 million so far. Our average cost of deposits for the quarter was 54 basis points. And JP is going to have a lot to say about that, because we consider that to be a really meaningful accomplishment. as we're focusing more and more on improving our funding composition and cost of funds. And then I want to also highlight for the quarter, while our NIM all in was 393, if we exclude the impact of the Triple P, our NIM was 506. Obviously, a really strong number. A little bit down from prior quarters, because recently with all of our capital and our loan capacity, you know, we've tried to be able to buy loans where LTVs are really low. That is to say performance expectations are high even if some of the yields are lower. You know, just I would point out we sit here today with Tier 1 capital of $218 million, significantly higher because of all of our earnings. And our loan capacity today is $900 million. Our earnings for the quarter were $34.2 million. You may have seen in the headline from our earnings release, we called it record earnings. It certainly was added a lot more. We didn't have a way to describe it other than record earnings. $34.2 million in 4.06 earnings per share and 71% return on equity and 7% almost return on assets. It's quite a quarter. And, you know, for the year, for the nine months, we've earned $50 million, $6 EPS, 37% return on equity and 4.5% return on assets. Those are numbers we're obviously very proud of. On page four, we provide, as we have in the past, some detail on our correspondency because it is so material. I want to first bring your attention to the bottom table, first column, where it shows Triple P loans purchased by LoanSource through March 31. They have purchased $6.86 billion of loans. That includes the $2.1 billion that we sold them this quarter, which we sold to them at CAR. So there was no discount on that to be amortized. But if you look across the discount when they purchased those, now I'm talking about the aggregate amount, was 8.7 million. That gets amortized over roughly two years. And the quarterly income from that was $1,098,000. You can see that in the second column. And it is also the first number in the table above. Also, when they buy loans, they pay for the accrued interest typically. The total of all of that was $7.8 million and $922,000 was brought into income this quarter. And finally, we share in half of the servicing income. As a reminder, the servicing income is the difference between the the rate the borrowers pay, which is 1%, the cost that LoanSource borrows from the Fed, which is 35 basis points. So there's 65 basis points on the outstanding Triple P loans, plus the servicing costs, and we get half of that. And that was $3,950,000 for the quarter. And so that was a total of $5,970,000 that we recognized in the quarter. On the next slide 5, which I'm just going to go over quickly because it's going to frame part of the discussion on the slides that follow, this shows that we have at the end of the quarter a loan book of $1.2 billion. This does not include our Triple P loans on our balance sheet. And you can see that out of the billion, too, the lion's share of that is in our national lending activity, of which purchase loans are $433 million, $256 million in direct originated loans, $216 million in portfolio finance. I think something really, well, two things are really interesting, one on the slide, one not. What's interesting is you can see how low the LTVs are in the column to the far right, 50% on the whole portfolio, and even less in our national lending. And there's a little bit more detail on slides that follow. I'll highlight a little bit of it. But these slides have been in the deck before and are just updated. So those of you that want to look through the detail are able to do so. But a point I want to make that is not on this particular slide is our whole loan book is 2,200 loans. 2,200 loans. And we originated triple P loans of 22,000 in the quarter. It's just a remarkable amount of volume and such a tribute to just the great team we have, except for those working in the banking centers who are busy and they're doing a great job and we appreciate them going there. But virtually everybody else is working at home. And in addition to the 22,000 Triple P loans, we were quite busy in our core business of originating and purchasing loans, which I will talk about shortly. In fact, I'll start to talk about it right now. You can see this is a bridge that shows what our national lending bulk looks like at 1231 and what it looks like at March 31. And there's both good news here and then there's a point of I want to talk about where we have both a challenge and an opportunity. So if you look at the originated loans, we originated 69 million. That's a really good number. There's a slide that follows, that goes back and looks back five quarters, and you'll see that's the second best quarter we've had in a long time. And the runoff, though, was $74 million. I'm going to come back to the runoff point in a second. We purchased $40 million, and we had runoff of $25 million. And so the really good news is we had a lot of volume. And I think what we have to do a better job at on a go-forward basis is retaining more of our portfolio. And we're going to start to focus on that and report on that. And the way that we're going to improve on that, I don't want to make a prediction because, for example, on our purchase loan book, I mean our portfolio finance book, those loans typically get paid off when the underlying loan pays off, one of the opportunities we're going to look at is to see on some of those loans if we can refinance those loans. That would be one. Secondly, getting in front of our loan book by a lot, looking at 120 days in advance or more and talking to borrowers about trying to refinance for them. And all that's within the parameter, obviously, of making good credit decisions and making sensible choices. For example, on our purchase loan book, whether the best thing to do when you do a discounted cash flow analysis is extend or get paid off, and also considering credit. But our goal is to grow our loan book. As I mentioned earlier, we have $900 million of loan capacity, which is a tremendous opportunity This is not a prediction at all. There is a forward-looking statement. I will just point out the obvious. If you can grow your loan book, virtually double it, one would expect your earnings to increase substantially. On slide seven is the slide that I alluded to earlier, which goes back through Q3 of FY20. You know, you can see in the current period of $69 million of originations, which is the blue bar, that is better than all but the first quarter that we did $84.6 million. And the $40 million of purchases is a good number. As we've said forever, purchases are transactional. It's lumpy. Again, without making any predictions, I will tell you that both are Our purchase pipeline and our originated pipeline are full. On slide eight is a slide. You have seen this before. It takes our national lending portfolio, and it slices it by different metrics. The first one is investment size, and you can see that in the upper left, that only 9% of our loan book are loans more than $9 million. There is a footnote there, a footnote one, which I would highlight, you know, that the average size overall is $712,000. On our originated book, the average loan size is $2.3 million, and on purchase it's $406,000. I'll remind you that, you know, we have over $200 million of tier one capital now, so we are We really value the low concentration risk that we have. You can see in the slide below on collateral type, we break it up by category. I want to highlight two things, which I'll talk about in more detail in a second. Retail is 16% of our... I apologize for the phone ringing. We're all working at home. I hope it's not distracting. The retail is 16% of our national loan book, and hospitality is seven. And, you know, a question we get asked frequently, you know, given those are areas that have been of some concern, you know, what do we think about our credit risk? And I'm going to talk about that in a second. But first, let me go to the chart that's in the middle. that shows the collateral distribution by state. We're in 45 states. We have half of our portfolio in New York and California. The rest is spread out throughout the different states. There is a slide on nine that shows our asset quality metrics. You can see that they have improved in the quarter. And particularly I would bring your attention to on the classified commercial loans. These are our internal ratings of eight, nine, and 10, down from 20 million to 15 million. I'll talk about the allowance briefly in a minute or so. On slide 10, This is always of interest to investors is how did our loans that we modified do? The answer is they've done well. We had two kinds of modification or forbearances we provided borrowers. One was a principal and interest forbearance. Typically for three months there were a few that we had to give another one to or we wanted to give another one to. You can see that if you look at the grand total, we did 142 million of these. Through March, only 13.9 million were still outstanding. And if you can look at the delinquency status, we have a relatively small number of delinquencies there, 3.8 million on 125 million, the most of which we expect to be cleared up in the near future. And then we also provided, going to slide number 11, we provide detail on interest-only deferrals. And you can see that out of the 46.7 million, only 14.6 million are still in deferral. And out of those, only 100,000 are The link went between 30 and 59 days. Really great performance. Going to slide 12, we always have probably a higher number of nonperforming assets than other banks do by nature of our business. And one thing we've never pointed out before, but I think it's important, and we've done it on this slide, is to make the point that it's not static. We have Loans that go into non-performing, loans that go out of non-performing. And so if you look at the balance of non-performing loans at December 31, it was $30.5 million. During the quarter, we added $4.7 million. The $12 million got resolved. The net of that was the non-performing loans came down by $7.5 million at 25%. But the most important and important takeaway is there's lots of movement in this non-performance category. You know, our allowance is on page 13 where we break it out in a lot of detail. The only point I want to make here is that the accounting for purchase loans, you do not have a general allowance. You just have specific allowance where there's impairment. And so if you look at the percentage of our allowance for our originated loan book, We're now at 1.48%, which is very high compared to where we used to be. I should say much higher compared to where we used to be. And then my final point before I turn it over to JP is on the hospitality and retail credit risk. So you can see here we break it out. I'm in those two categories. Hospitality is the second listed one. And then retail is the second one from the bottom. We break it down by different channels, directly originated, portfolio, finance, and purchase. But you can see that in both cases, the loan-to-values are 51%. So we don't expect at all any meaningful credit losses in those categories. And they've been performing actually quite well. It's certainly within the realm of Some of those at some point may have some performance issues, but so far so good with those. Let me see. And I think with that, there are a bunch of other slides that follow around this, but I will let you look at those as you would like. And obviously, and of course, if you have any questions, we'd love to talk to you. And with that, I'm going to turn it over to JP. Thank you.

Thank you, Rick, and good morning, everyone. I will pick up on slide 20, which shows the quarterly interest costs of our deposit portfolio, which has decreased significantly over the past five quarters from 1.7% in the comparable prior year quarter to 54 basis points in the current quarter and stood at 49 basis points at the end of the quarter. The significant interest expense savings has been achieved from a combination of a low interest rate environment along with our efforts to shift the makeup of our deposit portfolio from time deposits to transaction accounts. Turning to slide 21, this slide shows the change in the composition of our deposit portfolio year over year. Our community bank deposits have increased from 44% of our total deposit portfolio a year ago to 73% at the end of the current quarter. Alternatively, ABLE banking has decreased from 31% to 17%, and bulletin board CDs from 25% to 10%. As the bottom table shows, the majority of the change in our product composition was in checking accounts, which includes demand deposits, which increased from 15% of our deposit portfolio in the comparable prior year quarter to 49% in the current quarter. As you will see in more detail in the next slide, a significant portion of the balance is attributable to the PPP collection account, the balance of which we expect to remain elevated over the next few quarters as elevated PPP collection activity continues. Additionally, there was interest rate savings in all types, but the most significant savings were seen in money market and CD portfolios, in which the weighted average rate decreased by 1.04% and 80 basis points, respectively, over the one-year period. Turning to slide 22, This slide shows a change in our deposit portfolio in annualized interest expense monthly over the past year, while also displaying the recent significant impact of the PPP collection account, which impacts our cash and deposit balances, and is subject to significant fluctuation. This slide also excludes the impact of $400 million of two-month brokerage CDs that were taken out in January to help fund PPP loans and matured prior to the end of the quarter. The rate on those brokerage CDs was 15 basis points, and this funding source is not expected to be recurring, which is why it's excluded from the analysis. Over the past year, we have generated approximately $9.6 million in annual interest expense savings in our deposit portfolio, decreasing from 15.9% in April 2020 to just $6.3 million in March 2021. Moving ahead to slide 24, this slide provides detail on our potential additional future interest expense savings on our CD portfolio, of which 78%, or $232 million, is scheduled to mature within the next 12 months. Based on the current weighted average interest rate of 1.42%, this amounts to $3.3 million in annual interest expense to the bank. Slide 25 shows our quarterly revenues over the past five quarters, which have increased by $36.2 million from the linked quarter and $40.9 million from the comparable prior year quarter. Revenues excluding PPP gains have increased $3.2 million from the linked quarter and $7.9 million from the comparable prior year quarter. Additionally, our non-interest expense has decreased by $792,000 from the linked quarter and $445,000 from the comparable prior year quarter, which demonstrates our continued ability to continue to increase revenues while maintaining flat or slightly lower expenses. The primary driver for the decrease in non-interest expense as compared to both the linked quarter and the comparable prior year quarter was a decrease in salaries expense of $858,000 and $847,000 respectively, primarily due to an increase of $4.4 million in deferred salaries contract expense related to PPP loan originations, partially offset by an increase of $3.3 million in bonus expense attributable to the high level of PPP activity. Additionally, during the current quarter, we had a recovery of $276,000 on our SBA servicing asset as compared to a $233,000 impairment charge in the linked quarter and a $215,000 impairment charge in the comparable prior year quarter. That concludes our prepared remarks. At this time, we would like to open up the line to Q&A.