Northeast Bancorp/ME (NBN) Q2 2021 Earnings Call Transcript

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Northeast Bancorp/ME (NASDAQ: NBN)
Q2 2021 Earnings Call
Jan 28, 2021, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


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 & 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.

Rick Wayne -- President and Chief Executive Officer

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 No. 3 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.

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This resulted in a $76 million increase over our September 30 balance in our national lending business or a 9.2% increase over that linked quarter. That's one point. We're looking down next on this 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, compared to other banks, that's not as well as other banks. For us, we dropped 17 basis points in our deposit cost.

When JP presents, he's 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's history, only behind the quarter ending June 30, when we had a fairly significant gain from the sale of the PPP loans that we had 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 a 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 correspondents for 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 less the servicing cost, we share in 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 both the discount and the accrued interest, we will pick up another $4.2 million we'll recognize 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 the share of -- the amortization of the correspondent fee, $600,000 of it 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 of whether they'll buy more or not. The Fed window is currently opened through March 31.

If they do buy more, then that number will increase, of course. Turning to Slide 5. Of great interest always to investors is the modification and deferral program. We provide detail on this showing month by month, the amount of deferrals we provided, what's currently in deferral, and then we compare them.

We look at the performance and compare that with the prior quarter when we report it. 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 $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 3 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 for $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 it with September, there was certainly move. Some borrowers that were on deferral came off, and then a few new ones came on.

But kind of the balance is more or less the same. Moving on to Slide No. 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 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 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 No. 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 the 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 that kind of the punchline here is that our weighted average loan to value is portfoliowide 51 basis points -- 51%, excuse me, quite low. And as I say, there's much more detail following in the deck. On Slide 8 is a slide that shows the asset quality metrics.

You can see that at the chart in the upper left, for the quarter, the ratio of nonperforming assets to total assets and nonperforming 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 have taken out of that calculation the nonperforming assets. The total assets would be 2.2%, and nonperforming loans to total loans will be 2.45%, only a slight increase over those numbers on September 30. And in our business, our nonperforming assets or nonperforming loans from time to time can go up.

They can go down. They're typically higher than other banks. The thing I always encourage you 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 JP is on the volume around our purchase 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, performing loans, typically in the size we would look at, secured by cash flow and collateral in the U.S. Out of those numbers we reviewed, which is a preliminary look at 24 pools for $363 million. And the reason we don't review them all 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 or 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 on Slide No. 9, 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 on our region, keeping in mind, I said we don't have much of reserve because of 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, and a ratio of 1.6% of the allowance of our total loans, which is quite an increase. Following on Slide 10, 11 through 15 were 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?

JP Lapointe -- Chief Financial Officer

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 nonmaturity 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 1.8% 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 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 corresponding fee income of $6.1 million, as Rick described in his earlier remarks. In contrast to increasing revenues, noninterest 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 on return and originated loan yield while also showing our net interest margin.

While the purchased loan return 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.

Questions & Answers:


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

Jeffrey Kitsis -- Piper Sandler -- Analyst

Good morning.

Rick Wayne -- President and Chief Executive Officer

Good morning, Jeff.

JP Lapointe -- Chief Financial Officer

Good morning, Jeff.

Jeffrey Kitsis -- Piper Sandler -- Analyst

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

Rick Wayne -- President and Chief Executive Officer

Happy to. The first big point is we split income. We get -- our correspondent -- 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, they buy loans at a discount and we get half of that discount.

So I'm going to reference the slide as we're going through this. I'm now on Slide 4, for everyone's benefit. So 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 million 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 $1.61 million, which is highlighted 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%. This is the PPP borrower.

And Loan Source borrowed from the Fed at 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. And 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 -- Piper Sandler -- Analyst

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 -- President and Chief Executive Officer

So 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, 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 just see in the American Banker or in other places where a lot of banks are not as interested in originating them, interacting as referral sources for PPP -- for ACAP and Loan Source and Northeast.

So our expectation is we will book 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 PPP LF window was open for them to be financeable. So it's certainly within the realm of possibility, we'll see a meaningful amount of origination activity this quarter and the sale of Loan Source this quarter as well.

Jeffrey Kitsis -- Piper Sandler -- Analyst

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

Rick Wayne -- President and Chief Executive Officer

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

Pat Dignan -- Executive Vice President, Chief Credit Officer

Well, we sold our loans to ACAP and the Loan Source, 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 forgiveness.

Rick Wayne -- President and Chief Executive Officer

I'm glad Pat pointed that -- Jeff, I'm glad that Pat pointed that out because it's worth highlighting that we're 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 refer and how they're doing, and they seem to have an excellent process for doing it. But as Pat mentioned, the borrowers have not -- most of them have not come forward and have started it yet.

Jeffrey Kitsis -- Piper Sandler -- Analyst

Got it. Let's switch gears to the national purchase 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 volume? Like, do other buyers come in and scoop them up? Or is competition dried up for purchased loans?

Rick Wayne -- President and Chief Executive Officer

No. No. I mean, the numbers that I went over, it's kind of typical almost of every quarter. We roughly -- well, I shouldn't say of every quarter because the business tends to be lumpy.

But I should say it differently, which it seems -- I'm not buying $98 million and I'm looking at nine or -- we thought it was excellent. But to answer your question, to provide a little bit more detail, so we see loan pools. They came across the proverbial desk. And we take a first look at them, and we go through and we say, out of nine, 12, which of these loans do we want to actually do work on.

And we will knock out loans, for example, where we don't like the collateral type. It could be land, could be construction, it could be something like that or it could be a certain kind of asset we wouldn't be interested in buying the loan. Then we look at what is the seller expectation around pricing, and what is their -- so when we make a determination. And from there, we get down to the $363 million I mentioned earlier.

And on those, then we go through, we do a desktop analysis thing, what do we think the collateral value was worth, what is the seller telling us it's worth? Again, what is the price expectation, and 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, where we thought it was worthwhile. And 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 or two things. Either somebody else comes in and buys it. Buyers are interested in all kinds of different loans where, occasionally, there's not a trade. Or maybe more than occasionally.

We saw that in the quarter ended -- I want to say June 30 or September, I can't recall which. We looked at a lot, but there were a lot of no trades then. That was when, early on, it was 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 the bid-ask spread was wide, etc. But these things generally get purchased by somebody at some price at some point.

Jeffrey Kitsis -- Piper Sandler -- Analyst

Got it. Talk about credit quality. I know some of the characteristics of your purchased loans can cause them to be reported as NPL upon purchase. Can you talk about some of the trends there? I know you mentioned that this is a $6 million paydown at the end of the quarter that reduced NPLs.

But just anything that we should know about loans on NPL at NBN?

Rick Wayne -- President and Chief Executive Officer

Yes. I want to just say one thing. I'm sorry if we don't want to -- well, first is the -- 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's either sometimes, in the transition from the prior lender to us or in getting the stage set up, or sometimes a borrower will have somebody whispering in his or her ear that, "Oh, that new Northeast, they must have bought it at a discount. You can stop paying them. You'll be able to get some of the discount." That doesn't work.

But generally, it's not a huge number of what we're purchasing that goes on nonperforming. When you back out the $6 million from this that I mentioned from the -- that was an originated loan into Delhi. Very unusual for us to have an originated loan to go nonperforming. The number was a little bit higher than prior quarters, but not much.

This is the nature of our business that our nonperforming loans tend to look higher than other banks. But as I said, ultimately, at the charge-offs, and we look at what the -- our LTVs are -- we don't expect any meaningful charge-offs at all above our reserve. In any given loan, it could happen, I guess. But we are of the habit and have the history and have demonstrated the ability could not be in the business losing principal on what we either originate or repurchase.

Jeffrey Kitsis -- Piper Sandler -- Analyst

OK. 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 stay level?

Rick Wayne -- President and Chief Executive Officer

Well, this quarter, we originated a lot, and we didn't grow it a lot. But the amount of payoffs in the -- and the risk 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, 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 in any given quarter as to what the payoffs would be. And we're on a pace for originating a lot of loans.

Jeffrey Kitsis -- Piper Sandler -- Analyst

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

Can you talk about what those are?

Rick Wayne -- President and Chief Executive Officer

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 sort of what we thought was going to be a new stimulus package. And those are the marketing and advertising costs, primarily. You can't go to -- if you put in ACAP or Loan Source and go to LinkedIn, you'll see a lot of advertising.

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, Jeff, on that point, I mean, they're really expensive. 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 a quarter or $40 million a year within a very reasonable -- I mean, a small range. That'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 in previous calls a lot, some we're very proud of.

Jeffrey Kitsis -- Piper Sandler -- Analyst

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

Rick Wayne -- President and Chief Executive Officer

Thank you very much, Jeff.


And thank you. [Operator instructions] I see we have no further questions. Now I will turn the call over to Rick Wayne for closing remarks.

Rick Wayne -- President and Chief Executive Officer

Thank you very much all of you for listening and for those of you that will 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 signoff]

Duration: 39 minutes

Call participants:

Rick Wayne -- President and Chief Executive Officer

JP Lapointe -- Chief Financial Officer

Jeffrey Kitsis -- Piper Sandler -- Analyst

Pat Dignan -- Executive Vice President, Chief Credit Officer

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