Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2021 First Quarter Earnings Results Conference Call. This call is being recorded. And with us today from the bank is Rick Wayne, President and Chief Executive Officer JP Lapointe, Chief Financial Officer and Pat Dignam, 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 the 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 statements. At this time, I'd like to turn the call over to Rick Wayne. Please go ahead, sir.
Thank you, Ellen. 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 Tigmann, our Chief Credit Officer and Executive Vice President. After my comments, JP, Pat and I will be happy to answer your questions.
First, let me just make a general comment about how we're doing at the bank. We get calls somewhat regularly from different investors and others And asking like the many businesses were still working at home, except for the 9 branches that we have open. Everyone is healthy. And our business is doing remarkably well, while we're working at home. This is now going on since the beginning of March.
Now let me proceed with some of the conversation around our quarterly results. And I'm going to reference the slides that were loaded up yesterday, which you have. Starting first on the financial highlights slide on Page 3, I think that kind of the headline is with really great earnings, dollars 7,800,000 or $0.94 per diluted earnings per share, a return on equity of 18.5 percent and a return on assets of 2.49%. Let me just say that again, return on equity of 18.5%, quite a number. During the quarter, our loan volume was a little bit under $76,000,000 which includes 23,000,000 dollars of Triple P loans, which will be originated.
We also originated $40,900,000 of loans in our National Lending Group, And we purchased $4,600,000 or invested $4,600,000 on $5,800,000 of UPB. I'm going to talk about both of those in more detail in a little bit. Our net interest margin was 4.95%, and excluding PPP, was 5%. If we turn to Page 4, I want to comment and provide some detail on our corresponding fee income. And so there's a slide on Page 4 that the first part of the slide on the top, a designated corresponding fee summary, takes a look at what has happened on the purchase side by loan source through September 30 initially.
You can see that in the quarter that ended June 30, our 4th fiscal quarter, Mooresource purchased, and I'll do some rounding for this, the numbers are there, dollars 1.3 1,000,000,000 And then in the our 1st fiscal quarter ending September 30, they purchased $2,100,000,000 for a total of 3,400,000,000 We derive from on the purchase side income in a few different ways. First, when they purchase, we get a share of the discount when they buy the loans and they're buying them at a discount. And our share on that aggregate of $3,400,000,000 was $8,200,000 Secondly, when they buy the loans, similar to buying any security, they have to pay for accrued interest. And our share of that was $3,500,000,000 roughly. So the total of all of that is $11,700,000 I would add, and this was after the quarter end, but you can see it on the slide, that they purchased in October another $614,000,000 The corresponding fee on that was 353,000 dollars and the purchase to accrued interest was $1,500,000 our share for a total of $1,900,000 You may wonder why the corresponding fee was so low and that's because at the time they buy the loans, they need to refinance with the Federal Reserve, which provides financing to pay up all the interest.
So that tends to reduce the corresponding fee, but ultimately comes out to be the same because they owe less money to less because they paid the interest expense, let's say, accurately. If you look at the bottom of that slide, we break out the components of the $4,700,000 of corresponding fee that we recorded in the quarter, it was $822,000 of a corresponding fee, which represents the amortization of the $8,200,000 correspondency in the above table. It's roughly over 2 years. There's also the amortization of the purchased accrued interest. You recall, I just said that when they buy the PPP loans, they have to pay accrued interest.
And that $279,000 is the amortization of the $3,400,000,000 above. And then we also get a share of the servicing income, which is the spread between the rate the borrower pays, which is 1%, that's a BBP borrower, and the cost of borrowing from the Fed, which is 35 basis points. So there's roughly 65 not roughly, there's 65 basis points and $3,400,000,000 through September, now $4,000,000,000 starting in October, less the cost of servicing that. So you can see that it's been quite a profitable transaction for us. And I hope this level of detail makes it easier for you to understand the components.
Moving on to the next slide. We wanted to provide some detail on the on our deferment program, which I know is of great interest to all of you. And so the slide on Page 5 is a slide that shows for every month, March through August, in which we provided a full deferments for 3 months. And you can see that we did, over that current period, a total of $136,200,000 of deferments to borrowers. And we're, of course, pleased to do it to help them out.
These were total and not forgiveness, but just forbearance of loans for loans for 3 months. And at the end of September, we only had $26,800,000 of those that were still being deferred. And the biggest chunk of those are some of the ones we granted in April for 3 months. We provided them with an additional 3 months. But so it's $26,800,000 that's still on deferment, 100 and $9,100,000 off deferment.
And of those, only $300,000 were more than 30 days delinquent as of September 30. Very, very pleased with that result. On the next slide on Page 6 is a breakout of deferments in which we gave interest only, and this ran from March through July, same kind of analysis. We gave out 44.7 percent. Some of those have come off.
There were only 35,900,000 at the end of September, and none of those are more than 30 days past due, which we're very pleased with, of course. Moving on to Slide 7 is a slide that shows our lending activity, both originated loans and purchased loans for the 5 trailing quarters. And you can see in here that on the originated basis, looking at even pre COVID, of course, originated going back to Q1 of 'twenty was $40,600,000 a very large quarter in Q2 of 'twenty. That was the end of our I mean, that was not the end, that was the 2nd quarter in fiscal 'twenty, dollars $145,400,000 and then $33,600,000 June 30, and this quarter $40,900,000 So we saw a fair amount of activity. I think as we mentioned on the other call, we're being we're always careful, always conservative, even more so now.
Just a little color on the originated loans. Roughly half of that $40,900,000 were portfolio finance loans where and we've talked about this in the past where we lend money to non bank lenders to leverage their lending activities. But if you look at on that on roughly half of that, the portfolio finance, if you look at our loan amount to the underlying value of the real estate that secures the loan of our lender of our borrower rather, it's sub 40%, sometimes less than that. And the other half of it were loans directly to borrowers where the LTVs were sub-sixty percent. Virtually all of those set up with interest reserves giving us protection for all or most of our loan.
That was the story on the originated portfolio. On the purchased portfolio, there was only $4,600,000 invested for the quarter. A few comments on that. One is we looked at a lot in the quarter, but we couldn't find even though we looked at a lot, we couldn't find a lot that we were able to buy. A lot of it were asset classes that we weren't interested in taking now, hotels, restaurants, big box retail, land, etcetera.
And then there's a whole big chunk of that that was we just couldn't get there on the pricing. As we say almost on every call, if not on every call, purchase business is lumpy. We have great expectations that over the next couple of years, we're going to see our fair share of loans to purchase, and we will. We want to be careful. And with all of those caveats, it's an important point you want to listen up.
In October, we have already put 80,000,000 dollars of purchase loans under contract. I'll repeat that number. It's a big one. About $80,000,000 of loans under contract, which will close in November. So we're obviously quite happy with that.
This is a great transaction for us and subject to remind you as a forward looking statement, we think we're going to have meaningful opportunities to do that. Moving on to Slide 8. On Slide 8, you can see the roll forward of our loan portfolio, it did go down by about this is now our national lending portfolio, which is the way we refer to that now rather than LASG, same group. But you can see that the portfolio from June to September went down by about $33,000,000 Interestingly, if you look at the originated part of that, it's mostly flat. We originated, as I mentioned earlier, about $41,000,000 and we had $45,000,000 of paydowns.
The reason that the portfolio went down by about $30,000,000 mostly was that on the purchase side, we purchased $4,600,000 and we had $33,000,000 of pay downs. You can imagine what the borrower will look like at least this portion of the purchase price next quarter, if not $4,600,000 but at least $80,000,000 In our mind, we're only in the end of October. Now we have a couple more months at that. Going on to Slide 9. The next group of slides, we thought it would be helpful to continue to put in here, although I'm not going to go through them line by line.
You may recall that the quarter ending March 31, we provided a lot of detail on our loan book. And some investors had suggested to us that we continue to keep this data in there. So we put it back. You can see that, as I mentioned, our loan book balance loan portfolio has gone down a little bit. Some of the headlines of this, you can see that on a weighted average basis, the LTV is 53%.
And as you recall, for the purposes of this calculation, we're using the appraisal at the time that the loan was originated. This hasn't been reappraised other than in the ordinary course, we look at loans and get new valuations from. But generally speaking, these are the values at the time of origination. On Slide 10 is a pie chart. You've seen these before.
You take a look at our national lending business. Looking starting at the pie chart on the upper right hand corner that shows purchase loans that our net investment basis is 91% of purchase loans. Below that in terms of geography, our largest is in New York and then California and then spread out among a lot of states. Moving to the upper left hand quarter, you can see that the average investment size is $692,000 It's a lot of loans. A lot of that is purchased.
And below the breakdown, you can see the breakdown of the collateral types. On Page 12, you can see we again, by different collateral types, we break out the national lending LTVs on a weighted average basis. It's 50%. It was a little bit higher on the first slide I showed you because of some of our loan balance. It was 53% for the whole portfolio because of the lending in our community banking division, but national lending is 50%.
Of course, averages can be misleading because you need to take a look at them. They're not all 50%. But the slide on Page 12, I think, is really helpful, which makes the point only 2% of the book is more than 80% and only 10% is more than 70%. So, 88% of it is under 70% and only 20% between 60% 90%. So good LTVs.
On Slide number 13, we have some further analysis of the purchase portfolio. In terms of when were the loans originated and what's happened to them, I think it's really interesting. We've broken up the purchase book between the loans that were originated before 2,009 and after 2,009. You can see that 62% of it is after it was before 2009. So it was a lot, a lot of seasoning and a lot of pay down on those slides.
And then you can see on Slide 14, we take a look at loans that we have where we have interest reserves. You can see that in our portfolio finance. 83% of those loans have interest reserves with a weighted average duration of 6.2%. And then on the direct originated loans, 40% of it, of the portfolio with a weighted average duration of 7.2%. There's some more breakout of the portfolio in the Community Banking division on Page 15.
And then on Page 16 is a breakdown of the weighted average portfolio of LTVs in our SBA portfolio. And you can see that of the $50,000,000 on our books, just under $7,000,000 is guaranteed, dollars 43,000,000 is unguaranteed. And you can see the breakout by the different collateral types. I'll just remind you that our loans that are unguaranteed to the extent that we split the we share that any loss with the SBA pro rata. So we share in 25% of the the collateral value.
And as JP will talk about in a second, so we have a large allowance associated with that. And on that note, I'd ask JP to take over. Thank you, JP.
Thank you, Rick, and good morning, everyone. Continuing on Slide 17, we provide a breakout of our allowance for loan losses by loan segment. As you can see, our allowances increased from $5,300,000 or 57 basis points of total loans as of September 30, 2019 to $9,500,000 or 1.02 percent of total loans as of September 30, 2020. Excluding purchase loans and the related allowance, our allowance to covered loans is 1.55 percent at September 30, 2020, an increase from 80 basis points at September 30, 2019. As you may recall from our Q3 fiscal 2020 earnings call, we significantly increased our allowance for loan losses as of March 31, 2020, as a result of the COVID-nineteen pandemic and its effects on our loan portfolio.
The increase was largely concentrated in the SBA and USDA loan segment, whose inherent risk of loss is significantly higher given the nature of the borrowers and their typically higher LTVs as Rick indicated. Through September 30, 2020, the allowance for SBA and USDA loans has increased $3,000,000 since September 30, 2019, despite loan balances in this segment declining approximately $9,500,000 over the past year, which we feel appropriately addresses the risk inherent in the portfolio as the pandemic continues. Moving to Slide 18. Our asset quality metrics for our non performing assets and non performing loans have remained fairly consistent over the past 3 quarters, even with the declining loan portfolio. Classified assets have also remained consistent and have not increased significantly over the past 3 quarters.
Net charge offs were very low during the quarter ended September 30, 2020, with one basis point of average loans being charged off, which is lower than the previous periods shown. Moving to Slide 24. You can see the decline in cost of our deposits over the trailing 5 quarter period. The average cost of deposits has decreased from 1.84% in the September 30, 2019 quarter to 1.19% during the current quarter. Additionally, the cost of deposits as September 30, 2020 was only 1.05%.
We also have $188,000,000 of Able and Bulletin Board CDs at a weighted average rate of 2.21% returned over the next two quarters, which includes $84,000,000 at 2.22% maturing in the quarter ending December 30, 2020. The annual interest expense for the Able and Bulletin Board CDs running off over the next 6 months is $4,200,000 which if we were to replace all of the maturing CDs with the same products, the annual interest expense on those CDs would only cost us $900,000 Given our current funding position, we have let maturing CDs run off and have not been bringing new CDs on. As a result, the cost of funds as a percentage of deposits may remain elevated until we bring lower cost funds on the balance sheet to fund loan growth as needed. However, interest expense by dollars is expected to continue to decrease as the higher cost funds and excess deposits continue to roll out. Switching to Slide 25.
As you can see here, total revenue excluding PPP gains has continuously increased over the past 5 quarters from $16,900,000 in the prior comparable quarter to $20,300,000 in the current quarter, a 20% increase year over year. This significant increase during the current quarter is primarily due to the corresponding fee income of $4,700,000 as Rick mentioned in his earlier remarks. In contrast to increasing revenues, noninterest expense has remained flat, even declining slightly over this 5 quarter period, demonstrating the bank's ability to control operating expenses as we continue to grow our revenue streams. That concludes our prepared remarks. At this time, we would like to open up the line to Q and
And you do have a question in from Jeffrey Kitsis with Piper Sandler. Your line is open.
Good morning. Good morning, Jeff.
Congrats on a strong quarter. I was hoping you could please give some more clarification around the accounting on loan source fees. Appreciate the color that you did give. But I was hoping you could help us understand some of the drivers for forward looking modeling purposes. So it seems like there are different things that will cause these items to fluctuate.
For example, gain on sale PPP loans might would depend on you guys selling more PPP loans, but other items like the correspondent fees and amortization of purchase accrued interest are going to depend on other factors. So I was hoping you could work through that, please. Thank you.
Shnicki, do you want to do that?
Sure.
So we have the 3 different aspects that we broke out in the table on Slide 4, Jeff. We have the corresponding fee of $8,200,000 and the purchase accrued interest of about $3,500,000 Right now, that's being recognized over an approximate life of 2 years. However, we have to monitor the underlying loans that are associated with that. So if the loans pay off quicker, then the recognition of that deferred income would speed up. If all the loans stay off for 2 years, then we would take that straight line over the 2 year period.
So it kind of depends on when the loan gets forgiven and how all of that reacts to how we recognize that over that period. The other aspect is the earned net servicing interest, which is it fluctuates based on the average balance of the loans that LoanSource has. As Rick indicated, whether or not they repay the PPP loans that they borrow from the Federal Reserve at any given period. And then what we earn in each month on that those loan balances. So if loan service continues to purchase loans and the balance of their portfolio that they're servicing gets bigger and those loans stay out there for a longer period of time, then that number could grow and continue to stay large for a period of time.
Whereas if the loans are forgiven in a shorter period of time, then that number will run down a little quicker. Tough to estimate not knowing exactly how many borrowers are going to apply for forgiveness and when they're going to apply and receive forgiveness if they do. So I hope that answers your question on how you can model it and if you want to build into assumptions on known forgiveness in the upcoming quarters. Rick, do you want to provide any more color on that? Yes.
Jeff has another question around the accounting part.
Thanks. That was very helpful. I appreciate it. So it sounds like the corresponding purchase accrued interest does kind of depend on, one, forgiveness speeds and the earned net servicing interest that's going to fluctuate more based on just the balanced loans that the loan source has, so their volume of purchase. Okay.
And then on deferrals, It looks like deferrals have ended sooner for full payment deferrals. Those are almost done now, but the interest only deferrals are sticking around a little longer. I was wondering if you could please talk about the factors that caused the interest only deferrals to last longer. Is that by design? Are those typically
No, that well, it's a simple hit because they were for 6 months. They haven't come out yet. They mostly yes, I think when we no doubt that when we talk again after the end of the next quarter, those will all be up deferral. They're coming up deferral mostly in October, if not in September. It's just that they were longer.
The other ones are 3 months, these are 6 months.
Got
it. And then last question,
I was hoping you could give an update on the purchased loan market. I appreciate the color that you guys have already put $80,000,000 of purchased loans under contract so far in October. Just wondering where you see that trending over time and if you're seeing any more competition for these loans or if competition remains low with buyers exiting the market?
No, we're starting to there's been a lot that's come to market. I mentioned that in my comments. But what we saw in the quarter that ended September 30, we didn't see a lot that we wanted to be not even though there's a
lot of value. I think there's going
to be a lot coming from I might be wrong on this, just to be clear. But my view is that there's going to be a lot of loans coming to market. And yes, there will be competition. But the AB million I referred to, there were a lot of bidders. But for the right kind of assets, we can be very competitive.
So I expect that I can't say quarter to quarter, but I would say that over the next couple of years, we will see the percentage of purchase loans on our balance sheet increase from where it is now. That $80,000,000 The $80,000,000 is obviously significant. That's a big month of October 1.
Yes, definitely.
That's a road strong production. Thanks for taking my questions.
Thank you, Jeff.
And your next question in queue comes from David Meakoff with DCM Asset Management. Your line is
open. Congratulations on another nice quarter.
Thank you.
I have also a question on those PPP loan chart. You may have actually answered it, but I guess I wasn't clear on it. So you show the Q4 fiscal year 2000 and the Q1 fiscal year 2021 and you have the correspondent fees accrued interest in total and I think you said it's going to be realized over 2 years.
Is it does it end at the end of the
Q1 2021 or next quarter might we see a line that says second quarter fiscal 2021 Q3 or is the program over?
No, the the program is under current rules to buy loans. We've run through December 31 because that's how long the Fed has made available financing to banks and non banks at 35 basis points. So excuse me, that's already been extended. That was supposed to end September 30, I think. And then they extended it to December 31.
So if they don't extend that, the Fed does not extend the borrowing window, then there won't be any more loans, 1% loans to purchase. If they extend that and the regulators still say that you don't count that in your capital calculations, then the PPP purchasing could extend beyond December 31.
Okay.
I'm not seeing you can see on the chart that there's already some activity in the quarter right now because LoanSource has purchased $614,000,000 in October.
Right, right, right.
And it's possible we can purchase more in November December.
Okay. In the prior question that the gentleman asked, I think you said, it's not necessarily realized over the next 2 years, right, I believe, it depends on how there are payoffs. I would assume, correct me if I'm wrong, that it will be recognized largely in the earlier quarters waning down as you get to the latter part of the 2 years. Is that your anticipation at this time?
Yes. We would think that a lot of the loans will be forgiven and therefore the balances will come down. So I think what you're saying is generally correct. There's a small number of loans in the portfolio that are 5 year loans. And so to the extent that they're not forgiven, some of them are either longer.
So we think as a starting point, thinking about 2 years for amortization seems to make sense, but I would agree with your point.
Okay. And the second thing, I didn't see a comment as to the buyback. So I assume that you completed the 900,000 share buyback. Also, the number of shares outstanding last December was roughly $9,000,000 and now it's a little over $8,000,000 So that almost shows that you bought back the $900,000 Am I correct in that assumption?
No, you're mostly correct. At the end of June, we had out of the $900,000 we had $46,000 remaining. And then we did not buy any stock back in the quarter that ended it just ended September 30. So our capacity to buy back stock is $646,000 which consists of $46,000 remaining from the $900,000 plan, plus the $600,000 that we recently, in the last 3 or 4 months announced. You're mostly correct.
I must have missed that. I didn't
see that. Did you announce another $600,000 add on buyback of shares? When was that look at this trend? What month
was that? JP, when did you say that?
July, I think it was July 21 was the announcement. So that would have been in our we did a press release when that was approved.
Very good. I would have suggested you your original 900,000 share buyback was what I would call a standby buyback. You didn't really plan to act on that at the price the stock was selling when you announced it unless there was some kind of dislocation, which you have an amazing crystal ball because that disastrous events with the coronavirus took place a few months after you announced that standby buyback. And I was going to suggest that you authorize another standby because we're in crazy times still. Of course, we have an election coming up next week and that could be, of course, the volatility plus in many states, the coronavirus has taken back up again.
And we're going to get another lockdown or go back. We can have the same situation we had early this year in March. I mean, there's just no way of telling. We're in crazy times, but I'm glad to see you have another standby buyback. Hopefully, we don't have to use it, but you never know.
Yes, exactly.
Okay. I'm going to sign off and congratulations for another great quarter.
Thank you, David. Nice to talk to you. Thank you.
Okay. And I see no questions at this time. I would like to turn the call back over to Rick Wayne for closing remarks.
Thank you, Erinnia. Thank you all for listening, participating, supporting us. I hope that you all stay safe and stay healthy. I look forward to talking to you at the end of next quarter. Thank you all.
Bye.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.