Q2 2021 Northeast Bank Earnings Call
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Good day, everyone and welcome to the northeast Bank for 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, JP Lapointe Chief financial.
Sir and Pat Dignan, Executive Vice President and Chief Credit Officer.
Last night and Investor presentation was uploaded to the bank's website, which we will reference and this morning's call. The presentation can be accessed at the Investor Relations section of the northeast Bank Dot 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 and the forward looking statements northeast Bank does not undertake any obligation.
And 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 and good morning, and thank you all for joining us today.
And I am Rick Wayne the 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 the executive Vice President.
After my comments.
J P and Pat and I will be happy to.
To answer your questions.
I'd like to start.
I'm looking at.
Slide number.
Free and the deck, which is the slide of financial.
Highlights for the quarter.
The first thing to note is we had.
Hum.
The records.
The amount of volume and our national.
Lending business.
With 90.
1 million invested on purchase loans.
And.
$84 6 million with our originated loans.
This was the resulted in a 70.
$76 million incur.
The increase.
Over our September 30 balance and our national lending business or not.
And nine 2% increase.
Over that link quarter.
That's one point.
We are looking.
Looking down next on the slide with respect to <unk>.
Triple P loans of course.
The program.
Well, it's not really opened and the December.
December 31 quarter. So we didn't have any volume.
Hum.
And I would point out that we are active.
Actively.
And engaged and originating.
The Triple P loans, and when we report and April we'll have much more of the.
Say on that.
The events of interest are close to the funds.
All of which were on our deposits were one point over the 3% for the quarter.
Acknowledging that for compared to other banks that's not.
As low as other banks for US we dropped 17.
This points and our deposit costs.
And J P <unk>.
Presents.
He's going to provide a more detailed and now.
And of the C.
C D is running off and the calendar year. So you can give them the idea of.
What might happen to our funding costs as we proceed through the year, but net.
Net interest margin for the quarter was five.
Five point.
<unk> three per cent.
Of course very strong.
And the return on our purchase loans.
It was 9.16%.
And we earned $8 two millions of dollars.
Which is the second highest quarter ever and 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.
Originated.
And return on assets.
Accuse me of return on the.
Equity.
It was $18 three 7% EPS was <unk> 98, a share and return on assets was 266, you can see looking year to date.
Those numbers are comparable.
Implying.
The quarter again.
At December 31.
Which was the solid just as it was for the September 30 quarter.
On slide four.
We provide some detail on our correspondent.
And the income.
As a reminder.
We act as a correspondent for.
And the group eight cap and loans source.
And there.
Purchasing of Triple P loans.
We.
The split the economics with them and we earn money both when they buy triple P loans.
And at a discount.
And then when the service loans.
And the difference between the two.
Spreads and as the borrowers pay 1% the borrowing from the fed is at 35 basis points close and servicing costs.
We share and half of that.
One.
Point is that for the quarter.
And as you can see on the bottom.
Ah graph they purchased an additional 1.3 billion.
<unk>.
The Triple P loans.
Of which over time, our share of the both the.
Discount and the accrued interest.
We will pick up another $4 $2 million will recognize over the next roughly couple of years.
And for the quarter.
We recognized $6 million of correspondent fee income as you can see and the top chart.
$1 million of that represented the share of the and the amortization of the corresponding fee.
$600000 of a representative of the amortization of the.
Accrued interest and for point $4 million, representing our share of the.
Servicing income.
So we were obviously quite pleased with that.
Making.
And the predictions of whether they'll buy more or not.
The fed window is currently open through March 31.
And if they do buy more.
And then that number will increase of course.
Turning to slide five.
And of Great interest always to investors is the.
Modification and deferral program.
And we provide the detail.
And this showing month by month, the amount of deferrals and we provided what's currently and deferral.
And then we compare that we'd 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 and five which had mentioned.
As the slide that refers to the principal and interest forbearance as opposed so.
Borrowers just going in and interest only which I'll talk about in a minute.
But for principal and interest deferrals.
Between the period March and December we provided of $142 7 million.
At the end of December only 26 point for millions of those remained on deferral and.
And then if you look at the list three columns you can see that.
Between 30, and 89 days of the delinquency is very small you can see that there was $2 3 million of those that were.
Originally on deferral and then of that were.
More than 90 days past due on December 31, and <unk>.
Pleased to report that.
One of the loans for $2 million has been brought the current post quarter. So that number if you back that out would be only 300000. So you can see that.
The performance of those loans that have come off of the.
Permit is excellent and the numbers on deferment of has come down.
Relative to the amount we originally put on significantly when you compare it was September there was there was certainly moves some borrowers.
Borrowers, Iran deferral came off and then a few new ones came on but kind of the balance.
As more or less.
The same.
Moving on to slide number six.
This is the slide that shows the.
The referrals for borrowers that elected to go on six months interest.
The only and these are really terrific results you can see that for March through November there were $46 $6 million debt.
And then on six months interest only at the end of the December there was only $6 7 million.
Remaining and.
One of the ones that came off the $46 3 million.
Only $200000 were.
More than 30, unless and 59 days left.
Delinquent.
And only 100000 were between 60 and 89 days delinquent and nothing was more than 90 days delinquent.
No.
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 and the different categories.
We do provide and the slide deck.
A lot of information.
And this that I've done over.
The last quarter and the two quarters before that.
And I can go over that and detail today, obviously, it's in the deck for anyone to look at.
And I would point out the kind of the punch line the areas that are.
Weighted average loan to values portfolio wide.
51 basis points, 51% excuse me.
Quite low and as I say, there's much more detail.
Following the debt.
On slide eight is the slide that shows the Hum.
Asset quality metrics.
And can see that at the chart and the upper left for.
For the quarter of.
Ratio of nonperforming assets to total assets.
And non performing loans to total loans.
Was higher compared with the linked quarter and previous quarters.
I would point out debt at the end of.
After the quarter.
$6 million alone that contributed to those numbers was paid and pool.
Which are taken out of debt calculation and now.
Nonperforming assets to total assets would be 2.2% and.
Nonperforming loans, the total loans of the $2 four 5%.
Only a slight increase over those numbers on September <unk>.
30th.
And you know and our and our business are.
Nonperforming assets.
Our nonperforming loans from time to time can go up they can go down there are typically higher than other banks.
The thing I always encourage.
You have 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 J P is on the the volume around our purchase loan activity and the quarter.
We saw 26 pools for.
For $912 million.
Of the kind of assets that we could bid the kind of assets, we would be performing loans typically and the size. We would look at secured by cash flow and collateral and the U S.
And out of those numbers, we reviewed which is the preliminary.
Look at 'twenty, four pools for $363 million.
And the reason, we don't review of mall and detail as sometimes it's clear from the what we would say that we're just not going to be of competitive better or it's not the right kind of.
Fit.
Wound up bidding on 11 pools for $132 million.
And we purchased nine pools.
Or of 98 million and that is the.
Yes.
Unpaid principal balance of the customer balance. So we did buy those of discount as of the mentioned earlier and indicated on one of the.
Earlier slides.
I do also want to mention before I actually do turn it over to J P is of the on slide number nine.
Our allowance slide.
And then wanted to first make the point that.
And our $1 billion portfolio.
Under.
Under GAAP.
And you don't have a general reserve against the purchase loans and so you can see that's a smaller number of bubble you're buying those.
The discount.
And then you can see that the.
The detailed with respect for 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 nine point.
$9 million and.
On our original it keeping in mind I said, we don't have much of reserve because of the limits the way the accounting works on the purchase loans, if we focus on our originated loan book.
At December 31, 2019.
It was $4 8 million.
Or 77 basis points of allowance to total loans.
And then a year later on the quarter that just ended and it was $9 3 million.
And the ratio of 1.6% of.
Of the allowance over total loans, which is.
And then and quite an increase.
Following on slides 10, and 11 three.
Through 15.
The detailed slides on loan to value.
Which you may find interesting to look forward at your.
Sure.
And of course of you have any questions, we would be happy to answer those.
And with that I would ask J P.
Starting the presentation on slide 16 J P.
Thank you Rick and good morning, everyone.
I'll jump to slide 23, which shows and the mix of the deposit portfolio for the past five quarters.
Slide showed 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% and the comparable prior year quarter, while all other deposit types of increase 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 180% and the comparable prior year quarter to 1.0 of 3% during the current quarter.
Additionally, the cost of deposits at December 31, 2020 was only 87 basis points and two.
The 25, we show that we have $277 million of Cds at a weighted average rate of 184% maturing over the next four quarters, which includes $125 $3 million at 2.09% maturing in the quarter ending March 31, 2021 day.
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 and the prior year comparable quarter to $21 9 million and the current quarter of 30% increase year over year.
The 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 noninterest expenses remained primarily flat.
<unk> slightly over this five quarter period, demonstrating the bank's ability to control operating expenses as we continue to grow our revenue streams and.
On page 28, the chart on the left shows our purchase loans returned and originated loan yield while also showing our net interest margin while the purchase loan return and originated loan yields have remained flat from the linked quarter and.
Net interest margin expanded by 23 basis points, the $5, 2% to 3%, excluding the effects of PPP and the linked quarter.
That concludes our prepared remarks at this time, we would like to open up the line to Q&A.
If you would like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone.
If you are using a speaker phone to ask a question. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We will proceed and the order that you stick in the loss and we will take as many questions as time permits once again. Please press star one on your Touchtone telephone to ask a question.
Yeah.
And I see we have our first question from Jeffrey <unk> with Piper Sandler. Please go ahead Sir.
Good morning.
Good morning, Jeff and Jeff.
Let's start off on PPP and correspondent banking agreement.
Can you please give a high level overview of all of the different ways in which Nbn earn fee income from this relationship and how you expect the relationship to continue to drive earnings going forward.
Happy to the.
The first.
We.
For US Big point is we split income.
We get a correspondent because we get we split the income.
And that's made and this.
Triple T activity the.
First way is when and it has we started with.
Hey, Catherine loans source.
And they buy loans at a.
The discount.
And we get half of that discount so.
And if I'm going to reference the slide as we're going through the Sophia and I'm now on slide four.
For everyone's benefit so.
When they buy loans at a discount.
<unk> share and debt.
And then I'm going to come back the have the accounting works and the second and secondly.
And when they buy the loans they have to pay for accrued interest at the time they buy them.
And we get that over time as well. So if you look for example, Jeff at.
At the slide on page four.
You can see that.
Over time.
We have purchased now I'm on the bottom chart. They have purchased for 7 billion.
Billions of dollars' worth of.
Loans.
And our share of the discount.
On those loans was $8 7 million.
And they also paid for accrued interest and that means that we're less proceeds to distribute from the sale of $7 2 million.
And so those two items get amortized over roughly.
Two years, so you can see that the correspondent and see.
The amortization and the quarter that just ended in December was the $1 61, which is highlighted.
Above the above chart the.
And the amortization of the accrued interest of that 7.2 million total was $613000.
And so thats got picked up as well and then finally when they hold the loans.
These loans generate servicing income because they have a $4 $7 billion for.
The folio.
And.
Net interest income of 65 basis points the.
Borrower pays 1% this is the.
The Triple P borrower and.
And.
Loans source for some of the fed and 35 basis points.
The difference of the 65 basis points on for $7 billion.
The cost of servicing those loans.
And that amount and we get.
Pay the half of and for us and the quarter.
For point $4 million, so those three components.
And up two $6 million.
The income for the quarter from us from the correspondent relationship.
Thank you that's very helpful.
I know you mentioned you guys are actively originating and PPP loans and round two.
Can you give us an update on what youre seeing so far and is the plan still to sell all of the production for the loan source.
Yeah.
And we're.
Since the let me just give a little context to this I, obviously don't have any numbers to provide but.
It seems like a reasonable possibility that after the window closed on round one at some point more stimulus would be needed.
And over that time.
The northeast has been working.
Closely with.
A cap and loans source the.
Build a platform.
Be able to process a lot of the triple P loans as.
As well as.
Entering into referral agreements with.
Parties that had originated and triple P loans last time and have decided this time they didn't want to what he is seeing the.
American banker or and other places where a lot of banks are not as interested and originating them interacting as referral sources for triple for.
Yeah.
For a capital loans sourced and northeast so.
Expectation is we will book.
The book.
Tripled free of loans and again I'm not providing a number.
And that we will.
Most likely sell those loans to.
Loans source as long as the.
No.
Fed's PPP.
PPP Lf window was open for them to be Financeable. So.
And certainly within the realm of possibility, we will see meaningful amount of origination activity this quarter and the sale.
Loans source this quarter as well.
Thank you.
And what are you seeing so far in terms of forgiveness from first round of PPP.
Slowly.
That's on the phone who.
As.
Very involved and this pad thing and do you want to comment on the forgiveness, what we've seen so far.
While we sold.
Our loans to each of them alone saw source and they have been processing.
Forgiveness applications and I think of.
Of all of the loans that they have something like a third of star.
Started applying for for forgiveness.
At the end of the program and the summer the extended the period of time.
People could apply for it so.
As you would expect most most folks are.
Our waiting until.
The for the no interest period.
And it comes to it and before the of.
<unk> for the forgiveness.
Thank you and great Pat pointed that Jeff I'm glad that Pat pointed that out because of.
It's worth highlighting that we're not the owner of the loans.
And all of the forgiveness work.
<unk> is being done by a cap.
For loans sourced we do have some visibility into.
How they are doing and we have.
Some visibility into some of the customers that we revert and.
Referred and how they're doing and they seem to have an excellent process for doing it but as Pat mentioned the.
The borrowers of not.
Most of them have not come forward and have started it yet.
Got it thank you.
Let's switch gears to the National purchased loan market can you talk about some of the trends youre seeing there.
I know you guys. When we purchased $91 million of what you saw so what happens for the rest of the volume might do other buyers come in and scoop them up for or is the competition dried up for for purchased loans.
No no I mean.
And the numbers that we did.
I went over.
<unk>.
And so it's kind of typical almost of every quarter we roughly.
Well I shouldn't say of every quarter because of the business tends to be lumpy, but I should say it differently.
It seems.
And that by $98 million.
And I'm looking at INR and as well with ours was excellent but to answer your question to provide a little bit more detail when we see loans pools they come across.
The proverbial desk.
And we take of course look at them and we go through and we say out of the nine to 12.
Each of these loans that we wanted to actually do work on and and.
And we will knock out loans for example, where we didn't like the collateral type.
Could be land could be construction could be something like that or it could be certain kind of.
Assets, we wouldn't be interested in buying the alone and we look at what is the seller expectation around pricing.
And what is there.
So when we make we make a determination and from from there we get down to the.
The 363, I mentioned earlier and.
And.
And on those and we go through and we do desktop analysis, saying.
What is the what.
What do we think the collateral value was worth one of the seller telling us it's worth it.
Again, what is the price expectation and as.
And it.
And with it for us to spend.
A lot of time and some amount of money to do a full underwriting which is what we do.
And then from there we wound up getting on the 11th the 11th pools for the $132 million, where we thought it was worthwhile.
And I'll remind you of that when we do of the underwriting we know as much about the loan as anybody.
Just what we would do if we were to.
Originated on your question what happens to it.
And typically.
One of two things either.
Somebody else comes in and buys it.
Buyers are interested and all kinds of different.
Loans or occasionally there is not of trade.
Maybe more than occasional and we saw that and the quarter ended.
I wanted to say.
June 30th of September I cant recall, which when we looked at a lot, but there was a lot of the no trades and that was when.
Early on and is probably June 30th Glenn.
Yes.
Sellers coming in with loans that were not desirable could've been hotels and restaurants, so the pricing was.
Bid ask spread was wide et cetera, but these things generally get purchased by somebody at some price at some point.
Got it thank you.
Talk about credit quality I know.
Some of the characteristics of your purchase one can cause them to be recorded as NPL upon purchase.
Can you talk about some of the trends there I know you mentioned guidance.
Does the $6 million pay down at the end of the quarter that reduced npls, but is there anything that we should know about.
And NPL and Nbn.
I wanted to just see one thing I'm sorry, the doesn't want to.
So first just the.
Generally.
And it happens occasionally, but we're not and the business of buying mpls.
And we're generally and the business of buying performing loans.
Although sometimes and this I think is what you might be.
Alluding to joke, sometimes when we buy alone takes a little while there is either sometimes and the transition from the.
Prior lender to us.
Sure.
And getting the HHS setup or.
Sometimes.
A borrower will.
And have somebody whispering and his or her here that all.
Of that new things they must of borders at a discount of you stopped paying them.
The only get some of the the discount debt.
And it doesn't work.
But generally it's not a huge number.
What were purchasing and that goes on.
Non performing.
And you back out the $6 million from.
This debt.
And from the levels of large that was and originated loans at the early very unusual for us to have and originated loans to go non performing.
The number was a little bit of higher than prior quarters, but.
But but not much it's just the nature of.
Of our business that are.
Non performing loans tend to look higher than.
The other.
Other banks, but as I said.
And ultimately of the charge offs and when we look at what the.
Our Ltvs are we don't we don't expect and.
Any.
Meaningful.
Charge offs at all and above our reserves and any given alone it could happen I guess, but.
And we.
All of the habit and have the history and have demonstrated an ability.
And not be and the business, losing principal on and we'll either originator of repurchase.
Okay. Thanks.
And <unk>.
And then <unk>.
That's G origination and I should say national origination.
Those were very strong this quarter, how should we think about the churn in the and the national originated book and how much do you have to originate and a given quarter just the state level.
Well you know it.
This quarter, we originated a lot and we didn't grow it a lot.
But the amount of payoffs and the <unk>.
And the ratio is not always consistent and I think the tended to be a little bit higher this quarter I think.
I would say that.
If we're able to.
Continue originating at the pace.
We have been for the first two quarters of.
This year.
I would expect that we would have reasonable growth on the net basis and.
And our originated loan book, it's kind of our of the measured on any and any given quarter.
And as to what the payoffs for a bit.
And we're on a pace for originating a lot of the loans.
Absolutely absolutely.
Last question.
Expenses ticked up a little bit due to corresponding to the expenses.
And you talked about what those are.
Yes, we were.
We have as I mentioned earlier, we have been probably since.
The middle of August end of August along with.
And camping and loan source.
Marketing sort of.
What we thought was going to be of new stimulus package and.
Sure.
And those of the marketing and advertising costs.
Primarily.
You can't go to <unk>.
And in a capital loan sourcing go the linked and Youll see that Youll see a lot of advertising there.
Doing a lot of that.
There were some other.
The costs associated with that as well, but that was that was the majority of it.
And I would point out of being up Jeff on that.
<unk>.
I mean, the real expenses so.
The number that we have there is the real one, but if you kind of back those out.
We're still running at roughly a $10 million.
Expense.
Noninterest expense of quarter of 40 million of year.
And a very reasonable I mean of.
Small range.
It's been pretty.
Flat for quite a while as our revenue has gone up quite a bit demonstrating the operating leverage available.
To our company, which we've talked about and previous calls a lot.
And we're very proud of.
Absolutely congrats on the strong quarter. Thanks for taking my question.
Thank you very much of.
And thank you as a reminder, please press star one on your Touchtone telephone to ask a question.
I see we have no further questions now I will turn the call over to Rick Wayne for closing remarks.
Thank you very much all of you for listening and for those of you that will dial and later when the presentation is on online chip. Thank you for the the.
Good conversation.
And we appreciate all of your support and look forward to talking to you again.
And April thank you very much stay safe.
And thank you ladies and gentlemen, this concludes our conference. Thank you for participating you may now disconnect.
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