Q1 2021 Northeast Bank Earnings Call
Good day, everyone and welcome to the northeast think fiscal year 2021 first quarter earnings results Conference call. This call is being recorded.
As today's from the Bank, it's Rick Wayne President and Chief Executive Officer, She people point, Chief Financial Officer impacting <unk> Executive Vice President and Chief Credit Officer.
Lastly, investor presentation.
The bank's website, which we'll reference in this morning's call. The presentation can be accessed at the Investor Relations section of <unk>.
He spends dot com under events and presentations.
He may find it helpful to download this investor presentation and follow along during the call I'll.
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 Inc. Forward looking statements are based upon the current expectations of northeast <unk> management and are subject to risks and uncertainties.
Actual results may differ materially from those discussed any forward looking statements.
Northeast Bank does not undertake any obligation to update any forward looking statements at this time I'd like to turn the call over to Rick Wayne. Please go ahead Sir.
Thank you Aaron good.
Good morning, and thank you all for joining us today.
I am Rick Wayne the Chief Executive Officer.
Officer of northeast Bank.
And with me on the call are GPU a point.
Our Chief Financial Officer, and Pat Good Man.
Our Chief Credit Officer, and Executive Vice President.
After my comments JP, 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 so.
No more regularly from different investors and others.
Asking like many businesses were still working at home.
Except for the nine branches that we have open.
Everyone is.
As healthy.
And our business is.
Going remarkably well.
While we're all working at home.
This is now going on since the beginning of.
Mortgage.
Now let me proceed with.
Some of the Oh.
A conversation around our quarterly.
Results.
And I'm going to reference the slides.
That were loaded up yesterday, which.
Oh you have.
Starting first.
And he financial highlights slide.
I'm on page number three.
I think that the kind of the headline is you know with a really great earnings $7.8 million.
Or 94 cents per diluted earnings per share.
Our 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, and a half or sense.
Right a number.
During the.
Quarter.
Our loan volume was a little bit under 76 million, which includes 23 million of Triple B loans.
Which would be.
Originated.
Yeah, we also.
Originated 40.9 million Oh.
Oh loans, our national lending group.
And we purchased.
Four point.
Sixmillion or invested 4.6 million and 5.8 million up you could agree when I talk about both of those and in more detail.
And a little bit.
Our net interest margin was 4.95.
Excluding triple Crown was 5%.
If we turn to.
I mean just.
Turning to page.
Sure.
I'm.
I want a car I want to comment and provide some.
Detail our correspondent C.
Income and so there's a slide on page four.
The first.
Part of the slide on the top.
Designated correspond to see summary.
Takes a look at what has happened.
On the purchase side by long source through September Thirtyth. Initially you can see that.
In.
The quarter that ended June thirtyth, our fourth fiscal quarter.
Well source purchase and I'll just surrounding credits the numbers are there.
So 1.3.
Billion.
And then in the our first fiscal quarter ending September Thirtyth.
Repurchase.
2.1 billion for a total of 3.4 billion.
We derived from on the purchase side income.
In a few different ways.
First.
When their purchase we get a share of the the.
The discount when they buy the loans that are buying at a discount and our share on an aggregate of 3.4 billion.
8.2 million secondly.
When they buy the loans yes.
Similar to buy any securities they have to pay for.
For accrued interest.
And art and our share of that.
It was 3.5 billion roughly so the.
The total up all of that.
The total of all of that is 11.7.
Millions of dollars I would add and this was after the quarter end, but you can see it on the slide.
That they purchased in October another 600 and.
$14 million.
The corresponding fee on that was 353000.
Andy purchased accrued interest was a million five our share where total a million nine.
You May wonder why the correspondent fee was so low and that's because.
At the time, they buy the loans they need to refinance.
With the Federal reserve was provide financing they have all the interest.
So.
It tends to reduce the correspondent people. It ultimately comes out to be the same because they have less money to less because they pay the interest expenses say accurately I.
If you look at the bottom of this slide.
We breakout.
The components of the 4.7 million of course.
Correspondent fee that we recorded in the quarter.
It was 822000 of a corresponding fee which represents.
The amortization of the 8.2 million correspondent fee and the above Paypal.
It's roughly over two years.
There's also the amortization of the purchase accrued interest you recall I, just said that when they buy the triple p. loans, they have to pay accrued interest.
And that 279000 is the amortization of the 3.4.
Mhm billion above.
And then that and then we also get a share of the servicing income.
Which is the spread between the.
The rate the borrower pays which is 1% thats a triple b borrower.
And the cost of borrowing from the fed which is 35 basis points.
So there is roughly 65 now roughly the 65 basis points.
And 3.4 billion through September now 4 billion starting in October or.
Less the cost of servicing that so you can see that.
It's been quite a profitable.
Profitable transaction for us and I hope yes.
This level of detail.
Makes it easier for you I understand the components.
Moving on to.
Next slide.
We wanted to provide some detail on.
On the on our deferment.
Program, which.
Which I know is of great interest.
To all of you.
And so this slide on page five.
Slide nine shows for every month May March through August.
In which we provided.
Uhhuh deferments for three months.
And you can see that we did over that time period, a total of 136 point.
Point $2 million.
Oh deferments to borrowers that were of course pleased to deal with to help them out.
These were.
Total not forgiveness, which is forbearance of loans.
Loans for their loans for three months.
And at the end of September we.
We only had 26.8 million.
Those that were.
Still into being.
Being deferred and the biggest chunk of those are some of the ones. We granted in April for three months.
We recently provided them with an additional three months.
So its 26.8 its still on the permit.
Hundred and 9.1 million off deferment.
And of those only $300000.
We are more than 30 days delinquent as of September Thirtyth.
I'm very very pleased with that result.
On the next slide on page.
Six is a breakout.
Hub to deferments in which we gave interest only.
And this ran from March through July same kind of analysis.
We gave up 44.7.
Some of those have come off.
There were only 35.9 million.
At the end of September.
And and none of those are more than 30 days past due.
Rich.
We're very pleased with of course.
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Moving on to slide seven.
Slide.
That shows how our.
Lending activity both originated loans.
And purchased loans.
For the five trailing quarters.
And.
You can see in here that on the originated basis.
Looking at the event.
Even pre co that of course.
Originated going back to Q1 of 2000 was 40.6 million very large quarter in Q2 of 20 that was the end of our.
I mean that was not the and that was the second quarter and fiscal 20.
96.6 million.
$48.8 million, and then 33.6 million June Thirtyth and this quarter 40.9, So we saw a fair amount of activity.
I think as we mentioned on the.
Other call, 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 more portfolio finance loans.
Where 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 I'm roughly half of that.
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.
So 40% sometimes less than that.
And the other half of it where.
Loans directly to borrowers.
Where the LTPS where sub 60%.
Virtually all of those.
Set up with.
Interest reserves, giving us protection for all or most of our loan.
That was.
Yeah, that's the story on the originated portfolio.
On the purchase portfolio.
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There was only 4.6 Ms.
Million invested for the quarter.
Few comments on them one is we've looked at a lot.
In the quarter.
But we couldn't find even though we looked at a lot you can find a lot that we were able to buy a lot of it were asset classes that we.
We're interested in taking now hotels.
Restaurants.
Big box retail.
Plan.
Setter.
And then there's a whole big chunk of that whereas you know, we just couldn't get there on the pricing.
You know as we say almost on every call 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 those caveats in this important point wireless and up.
In October.
We have already put $80 million of purchase loans under contract.
Repeat that number it's a big one.
About $80 million of loans under contract.
Which will close in November.
So were obviously quite happy with that.
Mix is a great transaction for us and.
Subject to.
Remind you is a forward looking statement, we think we're going to.
Meaningful opportunities.
To that.
Moving on to.
Slide eight.
On slide eight you can see.
The roll forward of our loan.
Portfolio.
We could go.
Go down by about this is now of our national lending portfolio.
Which is the way we refer to that now rather than LSG.
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 originated prior to that.
Okay.
It's mostly flat we originated as I mentioned earlier about 41 million and we had $45 million of Paydowns are the reason that the port.
Folio went down by about 30 million, mostly was that on the purchase side, we purchased 4.6 million.
And we had $33 million of.
Pay downs.
Yes, you can imagine what the bar will look like.
At least this portion of the purchase price next quarter.
With not $4.6 million, but at least $80 million.
And I remind you we're only in.
The end of October and now we have a couple more.
Months at that.
Going on to.
Slide nine the next group of slides.
We.
Well would be helpful to continue to put in here, although I'm not going to go through on line.
Line by line.
You may recall that.
In the quarter ending March 31.
We provided a lot of detail.
On our.
On our loan book.
And some investors that suggested to us that we continue to keep this data in there.
So we put.
Put it back.
You can see that.
As I mentioned.
Our loan.
Balancing.
Loan portfolio has gone down a little bit some.
Some of the headlines of this year.
I can see that on a weighted average basis.
Gil TV is.
53%.
And.
As you recall for the purposes of this calculation.
We are using the appraisal at the time that the loan was originated.
This hasn't been.
Reappraise other than in the ordinary course, we you know we look at loans and get new valuations from but generally speaking.
These are the values.
At the time of origination.
On slide 10.
As a.
Hi charts, you've seen these before let's take a look at our national lending.
Lending.
Business.
Looking starting at the.
The Pie chart on the upper right hand corner that shows.
On purchase loans.
That our net investment basis is 91% of purchased loans.
Below that in terms of geography.
Our largest.
He is in New York.
And then, California, and then spread out among a lot of states.
Moving to the upper.
The left hand corner, you can see that the.
Average investment size is 600 and.
$92000.
It's a lot of loans a lot of that is purchased and.
And below the breakdown you can see the breakdown of the collateral types.
On page 12.
You can see we.
Again.
Bye.
Different.
Collateral types, we breakout.
The national lending.
Ltvs on a weighted average basis.
It's.
50, 50%.
It was a little bit higher.
The first slide I showed you because in some of our.
Loan balance was 53% for the whole portfolio.
Because the lending in our community banking division, but national lending is 50%.
Hum.
Of course.
Averages can be misleading because it.
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% more than 70%.
So.
88% of it.
Is under 70, and only 20% between 60 and 90% so good ltvs.
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On.
Slide number.
13.
We have some further analysis of the.
Purchase portfolio.
In terms of.
Wouldnt, how alumina loans originated and what's happened to them is that things really.
Interesting, we've broken up the.
The purchase.
Book.
Clean.
The.
Loans that were originated before 2009 and after 2009.
Can see the 62% of it.
Is.
After this before 2009, so is a lot a lot of seasoning.
And a lot of pay down on those slides.
And then you can see on slide.
For team, we take a look at loans that we have where we have.
Interest reserves, you're going to see that in our portfolio finance.
83% of those loans have interest reserves with.
Weighted average duration of.
6.2%.
And then on direct originated loans.
40% of it.
Of the portfolio with a weighted average duration of 7.2%.
Theres some more.
Break out of the.
Portfolio in the community banking Division on page 15.
And then on page.
16 is a breakdown of the weighted average portfolio.
LTPS and our SBC portfolio.
And you can see that of the 50 million on our books.
Just under 7 million is guaranteed 40.
$43 million Unguaranteed.
And you can see the breakout by the.
The different collateral types.
Ill just remind you.
That while loans that are on guaranteed.
To the extent that we split that.
The ER we share the.
Any lost with the ASP.
Pro rata, so we share and 25% of them the collateral value and as JP will talk about in a second.
So we have a large allowance associated with that.
On that note.
Yes, JP to takeover.
Thank you Dave.
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 Thirtyth 2000, $19 million to $9.5 million.
For 1.02% of total loans as of September Thirtyth 2020.
Excluding purchase loans and the related allowance our allowance to covered loans is 1.55% at September Thirtyth 2020, an increase from 80 basis points at September Thirtyth 2019 as.
As you May recall from our Q3 fiscal 2020 earnings call, we significantly increased our allowance for loan losses as of March 30, Onest 2020, as a result of the COVID-19 pandemic and its effect on our loan portfolio.
The increase was largely concentrated in DSP and Ustašas loan segment, whose inherent risk of loss significantly higher given the nature of the borrowers and they're typically higher ltvs as Rick indicated through.
Through September Thirtyth 2020, the allowance for SP, a newest senior loans has increased $3 million since September Thirtyth 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 a pandemic until.
News.
Moving to slide 18.
Our asset quality metrics for our nonperforming assets and nonperforming loans have remained fairly consistent over the past three quarters, even with the 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 Thirtyth 2020, with one basis point of average loans being charged off which is lower than the previous period show.
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 Thirtyth 2019 quarter to 1.19% during the current quarter.
Additionally, the cost of deposits as of September Thirtyth 2020 was only 1.05%.
We also have $180 million of Abel and Bolton 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 Thirtyth 2020.
The annual interest expense for the April and Bolton 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 cities would only cost us $900000.
Given our current funding position, we have let maturing Cds run off and have now for 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 a higher cost funds and excess deposits continue to roll off.
Switching to slide 25, as you can see here total revenue excluding PPP games has continuously increased over the past five quarters from $16.9 million in the prior comparable quarter.
$20.3 million in the current quarter, a 20% increase year over year. This.
The 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 noninterest 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 Cuba today.
Okay, we would like to ask a question. Please T cell by pressing the star key followed by one on your Touchtone telephone.
The speaker phone to ask a question please make sure check.
Have you mute function turned off to allow your signal to reach our equipment will proceed in the order that you should know us and we'll take as many questions as time permits once again. Please press star one on your Touchtone phone to ask a question.
Any do you have a question in from Jefferies, Jeff Hi, Chris Your line is open.
Good morning.
Good morning, Jeff.
Congrats on a strong quarter I was hoping you could please.
Give us some more clarification around the accounting on not loan sourced fees I. Appreciate the color that you did give but.
But I was hoping you could help us understand some of the drivers for forward looking modeling purposes sell it seems like there are different.
Yes, I think that will cause.
These items to fluctuate for example.
And I felt PPP lines Mike.
Would depend on you guys selling more occupancy pilon, but other items like the correspondent fees me.
Amortization of purchased accrued interests are going to depend on other factors. So I was hoping you could run through that please thank you.
Shaping 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 three and a half million dollars.
Right now thats being recognized over and approximately life of two years.
However, we have to monitor the underlying loans that are associated with that so if the loans pay off quicker than the recognition of that.
Kurt income would speed up.
If all the loans Delta for two years and we take that.
Straight lined over the two year period.
So it kind of depends on when the loans are forgiven and how all of that reacts to how we recognize that over.
Over that period. The other aspect is the earned net servicing interests, which is.
We fluctuate based on.
The average balance of the loans that loan sorts has.
As Rick indicated whether or not they repay the PPP elephant that they borrowed from the fed reserve at any given period and then what we earn it each month on that those loan balances. So you know floaters continues to purchase loans in the balance of the portfolio that they are servicing gets bigger.
And those loan sales there for a longer period of time than that number could grow.
Grow and continue to see large for a period of time.
Whereas if you know the loans forgiven in a shorter period of time than that number will run down a little quicker.
Tough to estimate not not knowing exactly how.
How many borrowers are going apply for forgiveness and when they're going to.
Apply and receive forgiveness, if they do so.
So I.
I hope that answered your question on how you can model it and you know if you want to build into 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 sounds like the correspondent purchase accrued interest thats kind of depend on loan forgiveness speeds and the on net servicing interest thats kind of fluctuate more based on just the balance of the ones with the launch of our SASSA there their volume of question.
Okay and then.
On.
On deferrals.
It looks like deferrals of ended sooner.
For full payment deferrals those are almost on now but the interest only deferrals are sticking around a little longer.
Was wondering if you could please talk about.
The factors that caused the interestingly deferrals last longer is that by design or those typically so that well the simplant because they were for six months.
We conducted a mostly.
I think when we no doubt that when we.
Talk again after the end of next quarter.
So those will all be ups occurring there, they're coming off the pearl mostly in October.
Not in September.
It's just that they were longer the other one to three months. These are six months.
Got it. Thank you and then last question out.
Hoping you could give an update on the on the purchased loan market I. Appreciate the color that you guys have already put $80 million of purchase loan under contract. So.
So far in October.
Just wonder where do you see that trending over time, and if you're seeing any any more competition for these loans or up or competition remains well, we thought with buyers exiting the market. Thanks.
Not not loan which started in their spending has been a lot that's come to market I mentioned that in my comments.
Comments.
But what we saw in the quarter that ended September thirtyth.
We didn't see a lot that we wanted to.
Even when there is a lot of volume I think is going to be a lot coming.
And I might be wrong on this is to be clear, but my view is that theres going to be a lot of loans coming to.
The market.
And yes.
Yes, there will be competition that the the 80 million that I referred to there were.
Lot of bidders.
But.
The right kind of assets, we can be very competitive so I am.
I expect that I can't say quarter to quarter.
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.
Maybe maybe my question.
Hey, Jeff the 80 million is obviously significant.
So.
That's a big month of October for Us.
Yes, definitely that's the Roche our production thanks for taking my questions.
Thank you Jeff.
And your next question in queue comes from David Lancaster, TC and asset management. Your line is open.
Hi, Good morning, guys congratulations on a another nice quarter.
Thank you I have a also a question on those the 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 in the first quarter fiscal year 2021.
The correspondent fees accrued interest in total and I think you said, it's going to be realized over two years.
It is it does it ended at the end of the first quarter first quarter 2021, our mix quarter might be see a line that said second quarter fiscal 21 in third quarter orders as the program over.
No the program.
No. The program is under current rules.
To buying loans.
Would run through December 31, because that's how long.
Though the fed is made available.
Financing.
Banks and non banks at 35 basis points.
So.
Excuse me that's sort of been expenses that were supposed to end September thirtyth tank right.
And then mix.
And then they extended the December 31.
So if they don't extend that the fed is not extend the borrowing window.
Have you.
So 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.
The triple pre purchasing could extend beyond December 31, okay.
So you confused can see on the chart.
There is already some activity.
For the quarter were now because.
Loan sources purchased $614 million on October right.
Right right right and it's possible.
And purchase more in November and December Okay. In the prior question that the gentleman asked I think you said.
Not necessarily realized over the next two years rate of leave it depends on how they are a pay off I would assume a correct me if I'm wrong that the.
It will be recognized largely in the earlier quarters waning down as you get to the.
The latter part of two years is that the fact your anticipation at this time.
We would think that a lot of the loans.
We won't be forgiven and therefore, the balances will come down.
So I think what you're saying is generally correct theres, a small number of loans in the portfolio.
That are five year loans.
And so to the extent that they are not forgiven submarine go longer. So we think as a starting point thinking about two years for amortization seems to make sense, but I would.
Great with your point Okay.
The second thing I Didnt see a comment as to the.
The buyback so I assume that you completed the 900000 share buyback also.
The number of shares outstanding last December was not roughly 9 million and now it's a little over 8 million. So thats still more shows that you bought back the 900000 am I correct in that assumption when you bought your mostly correct.
At the end of June we had out of the 900, we have 46000 remaining.
And then we had we did not buy any.
Stock back in the quarter that just ended September thirtyth.
So our capacity to buyback stock.
And 646000.
Which.
Consists of 46000 remaining from the 900000.
Plan.
Plus the 600000.
We recently.
Or in the last three or four months announced.
Mostly correct.
No.
I see that you announced another 600000 add on buyback shares when was that.
One month, LIBOR and Wendy JP windows are better.
July I think it was July 20, onest with the announcements that would have been in our Oh, we did a press release when that was approved.
What I.
Would have suggested you your original 900000 share buyback was what I would call a standby buyback that you didnt really plan to add on that.
The price the stock was selling when you announced it.
Yes, there was some kind of dislocation, which you have an amazing crystal ball because that.
Disastrous masters.
Yes, sure. So thats what the current of Irish took place a few months. After you announced that standby buyback that I was going to suggest that you authorized another standby because were in cranes your guidance still.
Of course, we've got an election coming up next week of that could be.
Yes, the volatility plus many states the cone of Iris is picking back up again.
We are going to get to know the locked down to go back.
We could have the same situation we had to.
Early this year in March I mean, there's just no way of telling when including two times, but I'm glad to see you have another stand by my back.
Hopefully, we don't have to use it but you never know.
Yes 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 one on your phone again that is static one I'm standing by.
Okay, you missing no questions at this time I would like to turn the call back over to Rick Wayne for closing remarks.
Thank you Aaron.
Well, thank you all for listening participating supporting us.
I hope the euro stave safe and stay healthy I look forward to talking to you at the end of.
Next quarter. Thank you all.
Hi.
Thank you ladies and gentlemen. This concludes today's conference. Thanks for participating you may now disconnect.
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