Northeast Bank

Good day, everyone, and welcome to the Northeast Bank Financial Year 2021 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, JP 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 a 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 Rick Wayne. Please go ahead, sir.

Good morning, and thank you all for joining us today. With me are JP LaPointe, our Chief Financial Officer, and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments and JP's, JP, Pat, and I would be happy to answer any of your questions. If we turn now to the slide, page three, entitled Financial Highlights. I want to discuss in a little detail some of the items in here. First, let me leave with the headline. For the quarter, we had $21.4 million of net income, and for the year, $71.5 million. For the quarter, EPS was $2.54. And for the year, $8.55. For the quarter, we had return on equity of 37.97%, a shade under 38. And for the year, 37.44%.

And return on assets for the quarter of 4.55%.

and just about the same at 4.53% for the year. Obviously, incredibly strong numbers that we're very proud of. How did we get there? Let me talk first about the quarter, and then I'll talk about the year. For the quarter, we did total loan volume, this is bank-wide, of $710 million. I'll do a little rounding for this conversation. That includes Triple P. For the quarter, we originated $114 million of loans in our national lending business, which fueled net growth of $50 million or an increase of 10.5% over the linked quarter. On the purchase side, we purchased, we invested $30 million dollars and at a price of 95% and with pay downs that was more or less flat. For the quarter our average deposits were 41 basis points down from 74 basis or excuse me not down from as compared to 74 basis points for the entire year. I want to spend a little time talking about NIM because with the advent of Triple P, it gets a little confusing the calculations. So if you look at the highlight page, now I'm talking about for the quarter, a NIM under GAAP was $399, a shade under $4. But this was highly influenced by holding Triple P loans on our balance sheet for some time. So we provide a second number for NIM of 455, and I would point out this is not GAAP, but it's informationally helpful, we believe. In this calculation, we remove the amount of interest income from Triple P while we held them on our balance sheet because we only get 1%, and then, of course, we remove The cost of funding those, which were generally 35 basis points from under the Fed window, and, of course, the average PPP loan balances. So, you know, when you look at that, we get 455. But there's one other component, again, non-GAAP, but informationally helpful, that impacts that. We have a lot of cash that runs through our bank because all of the loans that are forgiven that LoanSource has, those payments are locked box and they go to our bank and therefore our checking account, our deposit account balances are quite high. So if you remove those and also the 10 basis points that we earn while we have that cash, the NIM would be $556,000. Again, not GAAP, but this is much more representative of what our NIM would typically be without Triple P. Not that we wish that. We earned a lot of money on Triple P, obviously. And I won't go in as much detail on the year other than to say with Triple P and with our national lending business and some other lending we did, we did a total of $3.32 billion. And in our national lending business for the year, between purchases and originations, we did a total of $478 million, which is net growth in our national lending business year over year of 11.5%. Finally, I want to make the point, this is not listed as a data point, it's in our earnings release. But during the quarter, we repurchased 194,000 shares of stock at an average price of $29.56. If we turn to page four, this provides a lot of detail on our correspondent fee income. The first I'd like to do is bring your attention to the bottom table, the first column, the fifth row. You can see that in the fourth quarter, Loan Source purchased $4.371 billion of loans, which is obviously a big number. Kudos to them. Most of this was purchased at the end of the fourth quarter. And this is from the loans that they purchased. We get a half of a share of the income from that. And so you can see cumulatively they purchased $11.2 billion through the program, which ends... on the 31st of July. I want to point out that the, I'm sorry, this slide is moving around a little bit here. I want to get to the right number. That at the end of the, as of June 30th, they had about $8.3 or $4 billion that they were still servicing And that compares with an average of about $6.9 billion for the quarter. So that's a good sign of more servicing income in the future while the PPP loans are outstanding. Finally, on this page, I would draw your attention to the, now I'm looking at the top table, from loans that they purchased before we amortized and brought an income of $1,080,000 from part of the correspondence fee that we deferred, $972,000 from the amortization of purchase accrued interest, and finally, $4.6 million, which was our share of the servicing income, on the PPP portfolio that LoanSource had during the quarter. If we go to the next page, on page five, this is a summary of our loan portfolio at June 30th. I just want to talk about a few items here. you can see that our total loan balance at the end of the quarter was $1,041,000,000. That was 2,161 loans, and most impressively, with a weighted average loan-to-value of 49%. Let's see, I'm going to skip through a few slides and move to slide number eight. This is a slide that provides some detail on our national lending portfolio. You can see at the pie chart on the right, we are a national lender. We're in 44 states with the largest concentration in New York at 36%. At California, at 18%. The next one's Florida, and you can see that we have spread out over the other 41 states. One of the things, as you've heard me say many times, we like to manage the risk by being really careful on the collateral. I mentioned earlier the weighted average LTV was 49%. But another thing that we focus on is investment size per loan. You can see that only 10% of our portfolio are loans greater than $9 million, which provides a lot of protection. And you can see below on the pie, it has the collateral types that we have a fair number of them. you know, kind of the hallmark is we're, you know, generally looking at loans that are secured by cash flowing collateral, not making construction loans or land loans or condo development, et cetera. Let me see what we will go to next. On slide nine has some metrics on asset quality, and we really have a... A terrific quarter from an asset quality perspective, thanks to our great asset management team. Our delinquencies were down to $11.3 million at June 30th compared to $16.7 million on March 31th. This is in the earnings release on slide 9 that I'm going to talk about in a minute, but it's a good reference point. And non-performing assets were $20.4 million at June 30th, down from $25 million at March 31. The tables on this slide, the one in the upper left, shows the NPAs to total assets and NPL to total assets. And you can see in the last bar, that MPAs are down to 94 basis points over total assets, and MPLs are down to 1.8 over total loans. The other charts make the same point. And you can see the classified loans, these are our loans that we rate 8 or higher, are down from 15 million to 10.8 million. Very, very, very solid. improvement. Slides 10 and 11 provide the detail on our deferral program as of June 30th. We're down to $1.9 million, and you can see in the last three columns the aggregate total of those are $900,000 delinquent out of the total $125 million originally deferred that we still have on our balance sheet. Some of those that were originally deferred have been paid off. And on slide 11, I should have mentioned slide 9 are those where we gave a forbearance principle and interest. And on slide 11, where they were only interest only, it's down to $5 million, and only $100,000 of that is going there. On page 12 is a slide that shows the turnover in our non-performing assets. And I'll just bring your attention here. To the third column that says that March 31, we had 25.8 million, I mentioned that earlier, that were non-performing. During the quarter, we added 1.5 million, rounded a little bit, but we had 6.9 million that were resolved, bringing the number down to 20.4 million. Great progress. I'll make one comment on the allowance, and I think JP may be talking about it a little bit more. We did have a negative provision this quarter. The biggest component of that, you may recall, at the end of June 30, 2020, in the middle of COVID, around the S, we had a high level of that's overstating it. We had some concern about our SBA portfolio that may require a bigger allowance. We took at it again this year when we looked at the performance. We determined that we didn't need all that and we released a portion of that. There are a bunch of slides that we provide every quarter on collateral types and weighted average LTVs. The purchase portfolio, when they were and what is the outstanding balance relative to that, and how much we have in interest reserves. But I don't think I need to go over all of that with you. It's there for your ability to take a look at when you want, if you're interested. But there's a lot of detail there. And with that, I will turn it over to JP, who I believe will start on slide number 20.

Thank you, Rick, and good morning, everyone. As Rick indicated, I'll pick up on slide 20, which shows the quarterly interest cost of our deposit portfolio, which has decreased significantly over the past five quarters from 1.51% in the comparable prior year quarter to 41 basis points in the current quarter and stood at 30 basis points at the end of the quarter. We've achieved a significant interest expense savings through the combination of our efforts to shift the makeup of our deposit portfolio from time deposits to transaction accounts along with a low interest rate environment. Turning to slide 21, this slide shows the change in the composition of our deposit portfolio year over year. The holdback accounts include the loan sources collection account, which was $860 million at June 30th, 2021. Excluding holdback accounts, our community banking deposits as a percent of deposits have increased from 49% of our total deposit portfolio a year ago to 69% at the end of the current quarter while ABLE Banking and Bulletin Board CDs have declined to 31% combined. 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 18% of our deposit portfolio in the comparable prior year quarter to 37% in the current quarter. As you will see in more detail in the next slide, a significant portion of the deposit balance is attributable to the PPP collection account, the balance of which we expect to remain elevated over the next several quarters as elevated PPP collection activity continues. Additionally, we had interest rate savings in all types, but the most significant savings were seen in the money market and CD portfolios, in which the weighted average rates decreased by 62 basis points and 84 basis points, respectively, over the one-year period. Turning to slide 22, This slide shows the 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 short-term investment and deposit balances and is subject to significant fluctuation. This slide also excludes the impact of $400 million of short-term brokerage CDs that were taken out in January 2021 to help fund PPP loan activity and matured prior to the end of the linked quarter. The rate on the BRPCDs was 15 basis points, and this funding source is not expected to be recurring, which is why it has been excluded from this slide. Over the past year, we have generated approximately $7.1 million in annual interest expense savings in our deposit portfolio, decreasing from $12.6 million in July 2020 to just $5.5 million in June 2021. Moving ahead to slide 24, This slide provides detail on our potential additional future interest expense savings on our CD portfolio, of which 80%, or $223 million, is scheduled to mature in the next 12 months. Based on the current weighted average interest rate of 1.36%, this cost amounts to $3 million in annual interest expense savings. Slide 25 shows our quarterly revenues over the past five quarters, which have decreased by $20.3 million from the linked quarter and increased by $10.6 million from the comparable prior year quarter. Revenues excluding PPP gains have increased $100,000 from the linked quarter and $7.7 million from the comparable prior year quarter. Additionally, our non-interest expense has decreased $209,000 from the linked quarter and $741,000 from the comparable comparable prior year quarter, which demonstrates our continued ability to increase revenues while maintaining flat or slightly lower expenses. The primary driver for the decrease in non-interest expense from the comparable prior year quarter was a decrease in salaries expense of $1.7 million, primarily due to a decrease of $1.4 million in bonus expense, along with an increase of $733,000 in deferred salaries contract expense related to PPP origination. attributable to the high level of PPP activity. Offsetting this decrease was $522,000 of additional expense during the current quarter associated with the PPP correspondent relationship, primarily related to marketing and advertising costs that we share with them. This concludes our prepared remarks. At this time, we would like to open up the line to Q&A.

Thank you. We will now begin the question and answer session. If you would like to ask a question, you could do so by pressing star then one on your touchtone phone. Once again, please press star then one on your touchtone phone. We will proceed in the order that you signal us. We will take as many questions as time permits. Our first question comes from Alex Trudall from Piper Sandler. Your line is now open.

Hey, good morning, guys. Good morning, Alex. First off, I wanted to drill in a little bit more on the national originated portfolio that showed some fairly nice growth this quarter. And last quarter you talked, Rick, about some new strategies to try to retain a portion of that portfolio that was rolling recently. at a pretty fast clip. Is that what's driving the growth? Is not just originations, but also retaining more of what was rolling off? Or is there something else we should be thinking about?

I think the growth had to do mostly with the volume that we originated in the quarter. You know, the runoff was roughly the same as it's been in the past, but slight improvement. You know, that's a process, as I indicated in the other call, trying to retain those loans was not something that was going to happen, you know, in one month or one quarter. It's going to take a while to improve that, but it really had to do with the volume. It was a lot of loans that we closed, and that business has been steadily growing through a lot of, you know, we've done a fair amount of marketing and branding and We have great business development folks and calls coming inbound from existing customers, growing and bringing in new customers. And I will say we are also starting in August, we have a new senior business development person starting in the Miami area who will be responsible for helping us grow our loan book in the Florida and southeast area. um, and some nationally. And then we have another person, senior business development officer, um, starting in, uh, um, in August as well, uh, in Southern California. Um, and so our, you know, our hope and expectation is that we'll be able to grow our origination book even more. You know, you recall, I'm sure from the slide we went over, um, we have, uh, meaningful portfolio in California and in Florida, and we hope to have more. So that's exciting for us as well as continuing growing organically as we have.

Is that, Rick, the first time that you're going to have actual boots on the ground permanently in Florida and in California?

Yeah, I'm not excluding our foray into 7A hotel lending, which we're not doing. But yeah, for our national lending, it'll be the first time.

And are there additional markets beyond those that you're looking to kind of get boots on the ground? Obviously, it's shown some tremendous growth, and it seems like it's got a really nice runway ahead of it still.

I'm sorry, I didn't mean to talk over you. It's a little bit hard on the call. Say that? I'm sorry, Alex, go on.

No, you're probably going to ask enough of the question already.

Oh, so I did interrupt you. I thought I had interrupted you. I feel better. Yeah, there are other markets we would be interested in. Texas is a great market, you know, would be for us. And, you know, we'll see. We have a lot of capital now. One of the things... Before pointing out, though, on capital, one of our new directors, Bill Mayer, who I don't know if you know, Alex, but he was head of banking at Goodwin Proctor, which is a great – they're our lawyers, and they represent a lot of banks, and he's been sitting in our meetings, and he was making the point it's so nice for him to see a bank like ours with a lot of capital being careful. So we want to grow our balance sheet, but we want to grow it carefully, meaning not losing principal. But there are other markets, you know, where, well, as I say, Texas would be one. And one of the lessons that we learned, everyone learned during the pandemic is, you know, you can operate with people that are working outside of, you know, the headquarters. We still would have, of course, all of the credit decisions, you know, the asset management, when I say credit, all of that encompasses and loans, asset management taking place here. But for originations. You know, if we can get more people on the ground, we think it's a way to grow that business, which we would like to do.

Yeah, that's great. And then just switching gears to the purchased market, which has been sort of, I don't know, I guess an average quarter, this most recent quarter. And, you know, maybe it didn't pan out exactly as we thought it might have a year ago. Not necessarily a bad thing, you know, all things considered in the world. But, You know, one thing that has certainly been a major theme of 2021 has been some giant bank mergers, at least relative to what we've seen in the past. Now, can you maybe talk a little bit about, you know, when you think about the pipeline for loan purchases, you know, it seems to me that, you know, amongst merger activity, there's generally concentrations that need to be reduced and, you know, as these portfolios get marked, et cetera. Do you see an opportunity for additional loan purchases coming from merger activity or anything else?

Well, there's certainly historically, as you pointed out and know, mergers have historically created the opportunity for purchasers of loans to buy them because in the combined entities, they frequently want to get rid of some of the loans for various reasons. So there is that opportunity. You know, I'm reluctant to make a suggestion or a projection. I was so wrong on what I thought was going to happen when the pandemic started. I really thought there was going to be huge opportunities to buy loans, which didn't pan out. Um, I say this though, um, you know, we look at a lot, we looked at a lot, you know, this quarter and this year we were, um, less successful in buying loans, more competitive, um, than, than I would have, I would have guessed. Um, And so we still look at everything that comes out that's within our wheelhouse, as they say, meaning loans secured by cash flowing collateral in the United States in the sizes that we look to. And now with more capital, we can look at larger individual purchases. We look at a lot. Our team is quite busy. And while we did $170 million this year, That's a good number, just to kind of put it in perspective. That's solid. I thought maybe we would do $300 or $400 million. We could have if we had won some more pools that we had bid on, but $170 is a pretty good number. I'm reluctant to say what comment other than we look at a lot that comes out, and I'd rather just report. I know this doesn't make your job easier, which I apologize for, but you know, I'm reluctant to put out a number other than to say, I could say this with comfort, you know, over the last five years or so, you know, we've done between 150 and 200 million a year, you know, I'm comfortable and subject to the forward-looking statement that was read initially saying that I think is kind of a reasonable target. Could it be a lot more than that? It could be. You know, I don't really think it's going to be out of that, you know, I don't think it'll be out of the low side of that range, but You never know. We look at big pools, and maybe one of these days we'll buy a big one.

Great. Another question just on the buyback. You guys did some buybacks this quarter. It makes a lot of sense below tangible book value, above tangible book value. It still makes sense depending on your capital levels, but based on the fact that you guys have been growing tangibly, book value so quickly, and there's still a lot of unrealized gains from the PPP program, suggesting that book value should continue to go pretty rapidly. How are you thinking about the buyback today? I mean, you've got lots of capital. It seems like it still makes a lot of sense, but how are you thinking about it?

Well, we do have a lot of capital. I think there are two schools of thought on... Let me back up before the two schools are thought. So the absolute best thing we can do with our capital is leverage it and grow our loan book. You know, that math is compelling. We have room as of June 30th, we have enough capital before we make another penny in the quarter we're in to double the size of our loan book. And so obviously if you could add a billion dollars of loans, you know, earning a 6% spread, with relatively small increases in operational expenses, that's the most profitable thing you can do. You're often competing also as you go through each quarter, you make more money, you're accumulating more capital. Just to state that as one thing. So one thing you consider is what is your opportunity to grow your loan book? Let's assume for a second that we have capital. in terms of how you think about, you know, at what level would you buy? You know, I think there are a couple of competing, not competing, a couple of schools of thought is what I was going to say. One is, you know, you pay up to, you know, tangible book or where you think it might be on tangible book, you know, in some, you know, measure of time period, you know, where you say, what is the intrinsic value of our company? You know, we're trading at 31 bucks. What do we think it's worth? And, and over time, if you bought it, you know, a higher number, um, you'd probably be happy with that. You know, so that's kind of the thinking. I'm not obviously, you know, it's not appropriate for me to say what the number would be, but, you know, those are kind of the ways you think about it. Do you need the capital? Or do you think you'll need the capital? To quote one of our other directors who said, you know, we're really in a good position. We have a lot of capital, and I'm really not talking about myself. No, I don't want to be arrogant. Really smart team, you know. And so it's a really good opportunity in front of us, but, you know, we need to be careful about how we, you know, grow our loan book, continuing, you know, with high-quality assets as we have done.

Okay. And then, you know, last question for me on the originated, I was going to ask this earlier, the originated national portfolio. What are new loan yields at today?

In terms of pricing?

Yeah, the pricing is what would be the yield on new production.

JP, do you have the number for what was the yield?

On slide three, the originated loans for the quarter, the $114 million, was that a weighted average rate of $636 million? Great.

Is that the portfolio or is that the new originations?

That was the new originations that we had put on during the quarter.

Great. Thanks for taking my questions. Thank you, Alex. Thank you.

Thank you. As a reminder, if you have a question, please press star then 1 on your touchtone phone. And our next question comes from David Minkoff from DCM Asset Management. Your line is now open.

Good morning, gents. Congratulations on another great quarter on many fronts. I was going to ask about buyback. Alex touched on it. In late April, you increased the authorized buyback from 600,000 shares to a million shares, of which you bought slightly under 200,000. But I noticed the buyback expired on July 21, three months after you increased it. I think in the past, when you had the buybacks, they lasted a year. Why did you give yourself such a short window?

Let me clarify that. In July, we increased the buyback from, I want to say, $600 to $1 million, and it was also extended until July of 2022.

Okay, I think the release read July 2021.

Then we need to correct that. Okay. July 2022.

I guess, okay, this was the first time, and you kind of explained it under Alex's question, so the first time I saw you buy shares back at a premium to book value, and I would take that as a very strong vote of confidence going forward. I don't see any other way you could take it. Were you able to, you bought, I think it was 194,000 shares at $29.50 roughly. Were you able to buy any more shares after June 30th up until now, let's say?

You know, we haven't said anything about that. So I think we'll have to wait until we have another call again in October. We don't announce. you know, in between quarters on the buyback.

Okay, that's fair enough. And the other question I had was the great quarter, a lot of it had to do with the PPP, obviously. So it begs the question, how many more quarters do you see the earnings being affected by this? I think the PPP is winding down, basically, right?

Well, the PPP, yeah, the PPP has... is essentially done. It was completed for loans to be made substantially as of June 30th. There could be a few that, maybe it was May 31. It was either May 31 or June 30th. I'm getting confused now, but a few loans could trickle in, but it's essentially done on the, I would not expect any meaningful originations from us. Let me just say that. It could be, you know, two or three or four or five million that trickle in that are kind of in process. And then, The window for financing those closes through the Fed on July 31, so I wouldn't expect any really more purchases from loan source than we have indicated in our discussion this morning, which is $11.2 or $11.3 billion. In terms of the impact of the income, we have... about $13 million to amortize into income, I don't know, roughly over the next year, or how long, JP, roughly, is the $13 million going to be amortized into income?

We did some of it over two years, and some of it's a little longer, so probably over the next year and a half or so on an average basis.

And then, you know, we earn, let me say it differently, Loan Source has about $8.9 billion of PPP loans in its portfolio. The income from that is the spread is 65 basis points minus servicing costs. We get half of that, and, you know, we'll bring that into income as long as it's out. I would say, you know... Most of that income we assume will be brought into income through June 30, 2022. A little bit more we imagine will trickle in after that. We could be wrong on that. It just depends on how long it takes for those loans to be forgiven. What I've just described, I think that's our assumption, but subject to it's not within our control how long the loans are outstanding.

Okay, understood. And finally, how many branches do we have open at the present time?

We currently have nine branches, and we have filed with the superintendent of banks in Maine to close a very small branch that we have in Harrison, Maine, which we expect will be approved. We will have eight branches sometime starting in the fall.

I was going to ask whether you plan to open any additional branches. That could still be a valid question, I guess. You just closed a small one that wasn't that significant. Do you have any plans to open another branch or two?

We're actively trying to develop and increase, develop is not the right word, increase our core deposits in the Maine community, both through, you know, our branch network. The ones that we closed, you know, over the last year or a year and a half, we closed two branches. One we had in Lewiston, Maine, when we moved our corporate offices and we combined the Lewiston one with Auburn, and they're right next to each other. for those that are not familiar with Maine. And then the Harrison one was tiny. But we have branches in some markets, you know, relative to our size that are, you know, reasonable size. And we're trying to, you know, grow deposits there. We've reorganized that whole group. We now have hired the former deputy treasurer of Maine to help us get deposits in municipalities. And he's doing a really great job. We have replaced the person who is responsible for getting deposits out of our national lending customers. We tend to have some of them a fair amount of deposits. We've hired a person to be in charge of trying to get deposits from business customers in Maine that have borrowing needs but not high lending needs. Think Homeowners Association or lawyers, etc. We have a fairly active campaign now to bring in retail deposits. We've increased our marketing and hired a new person to be in charge of our branch network. So you saw in the slides and JP's discussion how much improvement there has been over the last year in repositioning our liabilities from higher expensive um, CD and money markets and able on a bulletin board, the much less expensive accounts. And we want to continue and grow on that. And now to answer your question, which was a long winded answer, whether we'll do it, you know, through more branches and markets that are good or more online presence, you know, TBD, uh, but we're trying to grow that business.

That makes sense. And, uh, appreciate the answer. And, uh, Thanks very much. Keep up the good work. Great job to you and your team.

It was delightful talking to you. Thank you. And I hope you're having a good summer.

Same to you. Okay. Thank you.

Thank you. We have no further questions at this time. Now I would like to turn the call over to Rick Wayne for closing comments.

Thank you. Well, I will wish everybody what I wish David, is a good summer wherever you're located. I hope so. the weather improves. It's really miserable in Boston area. But again, thank you for your support, for your interest. This is not the only venue we can talk in. If you have questions or you want to have ideas or ways we can provide more information in our slide deck that you think would be helpful, we're interested in having those conversations. And so feel free to contact Pat or JP or myself and anything that we're legally permitted to talk to you about, we would be happy to. And with that, I wish you a good day and soon to be a good weekend. Thank you.

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