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.

At this time, I would like to turn the call over to Mr. Rick Wayne. Please go ahead, sir..

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.

One point is that for the quarter, as you can see on the bottom graph, they purchased an additional $1.3 billion of PPP loans, which over time, our share of the -- both the discount and the accrued interest, we will pick up another $4.2 million or recognized over the next roughly, couple of years.

And for the quarter, we recognized $6 million of correspondent fee income. As you can see in the top chart, $1 million of that represented a share of the amortization of the correspondent fee, $600,000 of that represented the amortization of the accrued interest and $4.4 million represented our share of the servicing income.

So we were obviously quite pleased with that without making any predictions or whether they'll buy more or not. The Fed window is currently opened through March 31. I mean, if they do buy more than that number will increase, of course. Turning to Slide 5. Of great interest always to investors is the modification in deferral program.

We provide detail on this showing month-by-month. The amount of deferrals we provided was currently in deferral, and then we compare them, we look at the performance, compare that with the prior quarter when we reported.

So you can see if you look at the -- and now the first slide on five, I should mention the slide that refers to principal and interest forbearance as opposed to borrowers just going on interest only, which I'll talk about in a minute.

But for principal and interest deferrals between the period March and December, we provided a $142.7 million, at the end of December, only $26.4 million of those remained on deferral. And then if you look at the last three columns, you can see that between 30 and 89 days, 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. I'm pleased to report that one of the loans were $2 million has been brought current post quarter. So that number if you back that out would be only $300,000.

So you can see that the performance of those loans that have come off of deferment is excellent and the numbers on deferment have come down relative to the amount we originally put on, significantly.

When you compare with September, there was -- there were certainly moved some borrowers who run, deferral came off and then a two new ones came on, but kind of the balance is more or less the same. Moving onto Slide number 6.

This is a slide that shows the deferrals for borrowers that elected to go on six-months interest only and these are really terrific results. You can see that from March through November, there were $46.6 million that went on six-month interest only.

At the end of the December, there was only $6.7 million remaining and of the ones that came off the $46.3 million, only $200,000 were more than 30 days and less than 59 days left delinquent, and only 100,000 were between 60 and 89 days delinquent, and nothing was more than 90 days delinquent.

On Slide number 7, 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 in the different categories. We do provide in the slide deck a lot of information on this that I've done over -- at last quarter and the two quarters before that.

I'm not going to go over that in detail today. Obviously, it's in the deck for anyone to look at. I would point out the kind of the punch line here is our weighted average loan to values portfolio was [ph] 51 basis points -- 51%, excuse me, quite low. And as I say, there is much more detail following in the deck.

On Slide 8, is the slide that shows the asset quality metrics. You can see that at the chart in the upper left, for the quarter, the ratio of non-performing assets to total assets and non-performing loans to total loans was higher, compared to the linked quarter and previous quarters.

I would point out that at the end of -- after the quarter, a $6 million loan that contributed to those numbers was paid in full, which we have taken out of that calculation. The non-performing assets to total assets would be 2.2% and non-performing loans to total loans would be 2.45%, only a slight increase over those numbers on September 30th.

And in our business, our non-performing assets, or non-performing loans from time-to-time can go up, they can go down. They are typically higher than other banks. The thing [ph] I always encourage you to think about is the level of charge-offs over time, which I have been remarkably low.

The final point I would make before turning this over to JP is on the volume around our purchased loan activity in the quarter. We saw 26 pools for $912 million of the kind of assets that we could bid, the kind of assets we would bid, they're [ph] performing loans typically in the size, we would look at secured by cash flow and collateral in the US.

Out of those numbers we reviewed which is a preliminary look at 24 pools for $363 million. And the reason we don't reveal more in detail is sometimes it's clear from what we see that we're just not going to be a competitive bidder or it's not the right kind of fit.

We wound up bidding on 11 pools for $132 million and we purchased nine pools for $98 million that is the unpaid principal balance, the customer balance. So we did buy those as a discount as we mentioned earlier and indicated on one of the earlier slides.

I do also want to mention before I actually do turn it over to JP is that on slide number nine, our allowance slide and I want to first make the point that, on our $1 billion portfolio under GAAP, you don't have a general reserve against the purchased loan. So you can see that's a smaller number. But we are buying those at a discount.

And then, you can see that the detail with respect to 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 $9.9 million, and our -- keeping in mind, I said we don't have much of reserve, because that's the way the accounting works on the purchased 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, it was $9.3 million in a ratio of 1.6% of the allowance over total loans, which is quite an increase.

And following on Slide 10 and 11 through 15, more of the detailed slides on loan to value, which you may find interesting to look forward at your leisure. And of course, if you have any questions, we would be happy to answer those. And with that, I would ask JP to start his presentation on Slide 16.

JP?.

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.

On Page 28, the chart on the left shows our purchase loan return and originated loan yield, while also showing our net interest margin. While the purchase loan returned and originated loan yields have remained flat from the linked quarter, the net interest margin expanded by 23 basis points to 5.23% excluding the effects of PPP in the linked quarter.

That concludes our prepared remarks. At this time, we would like to open up the line to Q&A..

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

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?.

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 [ph] 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..

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?.

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..

Thank you.

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

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?.

Well, we sold our loans to [indiscernible] 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..

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..

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?.

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 [ph] it seems, I'm not buying $98 million here, I'm not looking at nine here [ph] 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 [ph] 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..

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?.

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 [ph] 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 [indiscernible] happen and have the history and have demonstrated an ability to not be in the business losing principal on either originate or repurchase..

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?.

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 [ph] a pace for originating a lot of loans..

Absolutely, absolutely. Last question, expenses ticked up a little bit due to correspondent expenses.

Can you talk 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 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..

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

Thank you very much, Jeff..

Thank you. [Operator Instructions] 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'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..

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