Northeast Bank
Q2 2021 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good day, everyone and welcome to the Northeast Bank Fiscal Year 2021 Second Quarter Earnings Results Conference Call. This call is being recorded. With us today from the Bank is Rick Wayne, President and Chief Executive Officer; 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 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 statement.

[Rick Wayne:]

Thank you, Vanessa. Good morning, and thank you all for joining us today. I am Rick Wayne, the Chief Executive Officer of Northeast Bank. And with me on the call are JP Lapointe, our Chief Financial Officer; and Pat Dignan, our Chief Credit Officer and the Executive Vice President. After my comments, JP, Pat and I will be happy to answer your questions. I'd like to start with looking at slide number three in the deck, which is a slide of financial highlights for the quarter. First thing to note is we had a record amount of volume in our national lending business with $91 million invested on purchased loans and $84.6 million with our originated loans. This was resulted in a $76 million increase over our September 30 balance in our national lending business or 9.2% increase over that linked quarter. That's one point. We -- looking down next on the slide, with respect to PPP loans, of course, the program was not really open in the December 31 quarter. So we didn't have any volume. I would point out that we are actively engaged in originating PPP loans, and when we report in April, we'll have much more to say on that. Of interest, our cost of funds, which were on our deposits were 1.03% for the quarter acknowledging that for compared to other banks, that's not -- as well as other banks, for us, we dropped 17 basis points in our deposit costs. When JP presents he is going to provide a more detailed analysis of the CDs running off in the calendar year, so you can get an idea of what might happen to our funding costs as we proceed through the year. Net interest margin for the quarter was 5.23%. Of course, very strong. The return on our purchased loans was 9.06% and we earned $8.2 million, which is the second highest quarter ever in the Bank history, only behind the quarter ending June 30th, when we had a fairly significant gain from the sale of the PPP loans that we have originated. And return on asset -- excuse me, return on equity was 18.37%, EPS was $0.98 a share, and return on assets was 2.66%. You can see looking year-to-date those numbers are comparable implying quarter again December 31, which was solid, just as it was for the September 30 quarter. On Slide 4, we provide some detail on our correspondent fee income. As a reminder, we act as correspondent who are the Group ACAP and Loan Source, and their purchasing of PPP loans, we split the economics with them and we earn money, both when they buy PPP loans at a discount, and then when they service loans, the difference between the spread that is the borrowers pay 1%, the borrowing from the Fed is at 35 basis points plus the servicing costs, we share an half of that.

[JP Lapointe:]

Thank you, Rick, and good morning, everyone. I'll jump to Slide 23, which shows the mix of the deposit portfolio for the past five quarters. This slide shows the results of our efforts to raise non-maturity deposits over the past year. At December 31, 2020, time deposits represent 37% of total deposits, compared to 52% in the comparable prior-year quarter, while all other deposit types have increased as a percentage of total deposits over the same period. Turning to Slide 24, we show the declining cost of deposits over the trailing five-quarter period. The average cost of deposits has decreased from 1.80% in the comparable prior-year quarter to 1.03% during the current quarter. Additionally, the cost of deposits at December 31, 2020 was only 87 basis points. On Slide 25, we show that we have $277 million of CDs at a weighted average rate of 1.84% maturing over the next four quarters, which includes $125.3 million at 2.09% maturing in the quarter ending March 31, 2021. The annual interest expense for the CDs maturing over the next four quarters is $5.1 million. This shows our ability to continue to reduce our cost of funds over the next 12 months. Moving to Slide 26. As you can see here, total revenue excluding PPP gains has continuously increased over the past five quarters from $16.9 million in the prior year comparable quarter to $21.9 million in the current quarter, a 30% increase year-over-year. The significant increase during the current quarter is primarily due to the correspondent fee income of $6.1 million, as Rick described in his earlier remarks. In contrast to increasing revenues, non-interest expense has remained primarily flat, increasing slightly over this five-quarter period, demonstrating the Bank's ability to control operating expenses as we continue to grow our revenue streams.

[Operator:]

And I see, we have our first question from Jeffrey Kitsis with Piper Sandler. Please go ahead, sir.

[Jeffrey Kitsis:]

Good morning. Let's start off on PPP and your correspondent banking agreement. Can you please give a high-level overview of all of the different ways in which NBN earns fee income from its relationship? And how do you expect the relationship to continue to drive earnings going forward?

[Rick Wayne:]

Happy to. The first big point is we split income, we get -- our correspondent fee we get, we split the income that's made in this PPP activity. The first way is when and as we started with ACAP and Loan Source, if they buy loans at a discount and we get half of that discount. So if I'm going to reference the slide as we're going through this, so I'm now on Slide 4 for everyone's benefit. So well, if they buy loans at a discount, we share in that. And then I'm going to come back to how the accounting works in a second. And secondly, 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 the slide on Page 4, you can see that over time, they have purchased, now I'm on the bottom chart, they have purchased $4.7 billion 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 there were 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 fee, the amortization in the quarter that just ended in December was $1.061 million, which is highlighted above -- on the above chart. The amortization of the accrued interest of that $7.2 million, total was $613,000 and so that got picked up as well. And then finally, when they hold the loan, these loans generate servicing income, because they have a $4.7 billion portfolio that has a net interest income of 65 basis points. The borrower pays 1 percentage to the PPP borrower and Loan Source borrowers from the Fed is 35 basis points. So the difference is 65 basis points on $4.7 billion, less the cost of servicing those loans, and that amount we get -- we are paid half of it for us in the quarter that was $4.4 million. So those three components add up to $6 million of income for the quarter from us, from the correspondent relationship.

[Jeffrey Kitsis:]

Thank you. That was very helpful. I know you mentioned you guys are actively originating PPP loans in round two. Can you give us an update on what you're seeing so far? And is the plan still to sell all the production to the Loan Source?

[Rick Wayne:]

We're -- let me just give a little context to this. Obviously, I don't have any numbers that provide, but it was -- 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, Northeast has been working closely with ACAP and Loan Source to build a platform to be able to process a lot of PPP loans, as well as entering into referral agreements with parties that had originated PPP loans last time and have decided this time, they didn't want to see in the American Bank or in other places where a lot of banks are not as interested in originating them, interacting as referral sources for ACAP and Loan Source on Northeast. So our expectation is, we will book a PPP loans. Again, I'm not providing a number and that we will most likely sell those loans to Loan Source as long as the Fed's PPPLF window is open for them to be financeable. So -- but certainly, within the realm of possibility, we'll see meaningful amount of origination activity this quarter and the sale of Loan Source this quarter as well.

[Jeffrey Kitsis:]

Thank you. What are you seeing so far in terms of forgiveness from first round PPP?

[Rick Wayne:]

Some -- slowly. Pat's on the phone, who is very involved in this. Pat Dignan, do you want to comment on the forgiveness of what we've seen so far?

[Pat Dignan:]

Well, we sold our loans to and they have been processing forgiveness applications. And I think of all the loans that they have something like a third have started applying for forgiveness. At the end of the program in the summer, they extended the period of time where people could apply for it. So as you would expect, most folks are waiting until the no-interest period comes to an end before they apply for the forgiveness.

[Rick Wayne:]

Jeff, I'm great that Pat pointed that out because it's worth highlighting that we are not the owner of the loans and all of the forgiveness work is being done by ACAP or Loan Source. We do have some visibility into how they're 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. We're doing it, but as Pat mentioned, the borrowers have not -- most of them have not come forward and have started it yet.

[Jeffrey Kitsis:]

Got it. Thank you. Let's switch gears to the national purchased loan market. Can you talk about some of the trends you're seeing there? I know you guys only purchased $91 million of what you saw. So what happens to the rest of the volumes? Like, do other buyers come in and swoop them up or has competition dried up for purchased loan?

[Rick Wayne:]

No, I mean, the numbers that we -- that I went over, it's kind of typical almost of every quarter, we roughly -- well, I should say of every quarter, because the business tends to be lumpy. But I should say it's definitely which it seems, I'm not buying $98 million here, I'm not looking at nine here as well, we thought it was excellent. But to answer your question, to provide a little bit more detail. So when we see loans, pools, they come across the proverbial desk. And we take, of course, look at them and we go through, when we say out of the $912 million, which of these loans do we want to actually do work on and we will knock out loans, for example, where we didn't like the collateral type. It could be land, it could be construction, it could be something like that, or it could be certain kind of assets we wouldn't be interested in buying the loan. Then, we look at what is the seller expectation around pricing and what is there -- so when we make a determination -- from there we get down to the $363 million I mentioned earlier and on those, when we go through, we do a desktop analysis thing, what is the -- what do we think of collateral value was worth, what's the seller telling us it's worth. Again, what is the price expectation, when is it worth 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 bidding on the 11 pools for the $132 million, what we thought it was worthwhile. I'll remind you that when we do the underwriting, we know as much about the loan as anybody. It's just what we would do, if we were to originate it. On your question, what happens to it, typically, I guess one of two things, either somebody else comes in and buys it, there's still buyers are interested in all kinds of different loans or occasionally, there is not a trade or maybe more than occasion. And we saw that in the quarter ended, I want to say June 30th or September, I can't recall which. Well, we looked at a lot but there was a lot of no trades and that was when we're early on, it's probably June 30, when there were sellers coming in with loans that were not desirable, it could have been hotels or restaurants. So the pricing was -- the bid-ask spread was wide, et cetera. So these things generally get purchased by somebody at some price at some point.

[Jeffrey Kitsis:]

Got it, thank you. So I was at credit quality. I know some of the characteristics of your purchased loans can cause them to be recorded as NPL upon purchase. Can you talk about some of the trends there? I know you mentioned that there is a $6 million pay down at the end of the quarter that reduced NPLs. But is there anything that we should know about loans and NPL at NBN?

[Rick Wayne:]

Yes. I wanted to just say one thing. I'm sorry, we don't want to -- but first, just generally, it happens occasionally. But we're not in the business of buying NPLs. We're generally in the business of buying performing loans, although sometimes and this I think is what you may be alluding to, Jeff. Sometimes when we buy a loan, it takes a little while. There is either sometimes in the transition from the prior lender to us or getting set up or sometimes a borrower will have somebody whispering in his or her ear that, all of that new things they must have bought it at a discount, if you stop paying them, you will be able to get some of the discounts that doesn't work. But generally, it's not a huge number, what we're purchasing that goes on non-performing. When you back out the $6 million from this, that I mentioned from the -- that was an originated loan and that was very unusual for us to have an originated loan to go non-performing. The number was a little bit higher than prior quarters, but not much. This is the nature of our business that our non-performing loans tend to look higher than other banks. But as I said, ultimately, we have the charge-offs and when we look at what the -- our LTVs are, we don't expect any meaningful charge-offs at all above our reserves. At any given loan, it could happen, I guess. But we happen and have the history and have demonstrated an ability to not be in the business losing principal on either originate or repurchase.

[Jeffrey Kitsis:]

Okay, thanks. And then LASG originations, I should say national origination. Those were very strong this quarter. How should we think about the churn in the national originated book? And how much do you have to originate in a given quarter, just to state level?

[Rick Wayne:]

This quarter we originated a lot and we didn't grow at a lot. But the amount of payoffs in the ratio is not always consistent. I think it 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, and I would expect that we would have reasonable growth on a net basis in our originated loan book. It's kind of hard to measure it on any given quarter as to what the payoffs would be. And we were in a pace for originating a lot of loans.

[Jeffrey Kitsis:]

Absolutely, absolutely. Last question, expenses ticked up a little bit due to correspondent expenses. Can you talk about what those are?

[Rick Wayne:]

Yes, we were -- we have -- as I mentioned earlier, we have been probably since the middle of August, end of August, along with ACAP and Loan Source marketing for what we thought was going to be the new stimulus package, and those are the marketing and advertising costs, primarily. You can go to -- you put an ACAP or Loan Source and go to linked and you'll see a lot of advertising there. They're doing a lot of that. There were some other costs associated with that as well. But that was the majority of it. I would point out, picking up, Jeff, on that point. 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 are still running at roughly a $10 million expense, non-interest expense a quarter, $40 million a year within a very reasonable, I mean, small range. And that's been pretty flat for quite a while, as our revenue has gone up quite a bit, demonstrating the operating leverage available through our company, which we've talked about in previous calls a lot. Some we're very proud of.

[Jeffrey Kitsis:]

Absolutely. Congrats on a strong quarter. Thanks for taking my questions.

[Rick Wayne:]

Thank you very much, Jeff.

[Operator:]

Thank you. I see we have no further questions. Now, I will turn the call over to Rick Wayne for closing remarks.

[Rick Wayne:]

Thank you very much all of you for listening and for those of you that'll dial in later and the presentation is online, Jeff. Thank you for the good conversation and we appreciate all of your support, and look forward to talking to you again in April. Thank you very much. Stay safe.

[Operator:]

And thank you, ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.