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Edited Transcript of NBN earnings conference call or presentation 26-Apr-17 2:00pm GMT

Northeast Bancorp Earnings Call

Lewiston Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Northeast Bancorp earnings conference call or presentation Wednesday, April 26, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Shaughnessy

* Richard N. Wayne

Northeast Bank - President, CEO & Director

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Conference Call Participants

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* David Minkoff

* Jeffrey Scott Kitsis

Sandler O'Neill + Partners, L.P., Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome everyone to the Northeast Bancorp Fiscal Year 2017 Third Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is Rick Wayne President and Chief Executive Officer; and Brian Shaughnessy, Chief Financial Officer.

Earlier this morning, an investor presentation was uploaded to the company's website, which we will reference in this morning's call. The presentation can be accessed at the Investor Relations section of the northeastbank.com under Events and Presentations. You may find it helpful to download the investors presentation and follow along during the call. Also, this call will be available for rebroadcast on our website for future use. The question-and-answer session for this call would conduct electronically following the presentation. Please note that this presentation contains forward-looking information for Northeast Bancorp. Such information constitutes forward-looking statements within the meaning of the Private Security Situation Reform Act of 1995 (sic) [Private Securities Litigation Reform Act of 1995], which involves significant risk and uncertainty. Actual results may differ materially from the results discussed on the forward-looking statements.

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

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Richard N. Wayne, Northeast Bank - President, CEO & Director [2]

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Good morning, and thank you all for joining us today. With me is Brian Shaughnessy, our Chief Financial Officer and Treasurer.

Our strong growth in fiscal 2017 continued in the third quarter. After the close of the market yesterday, we announced record earnings with quarterly net income of $3.5 million or $0.39 per diluted common share. Earnings for the quarter were positively affected by strong originations, transactional income from LASG purchased loans and gains on the sale of SBA loans originated by our SBA division. The purchased loan portfolio yielded 11.9% and the SBA gain on sale was $951,000.

In addition, in the third quarter, we strategically repositioned our balance sheet with the payoff of $48 million of secured loans to broker-dealers and the sale of a commercial loan portfolio of $18.3 million with a combined weighted yield of 1.92%. The payoff of these lower-yielding assets will provide capacity for higher-yielding loan growth opportunities for the company. This quarterly activity helped drive our return on equity to 12%, our return on assets to 1.4% and our efficiency ratio to 59.9%.

Turning to Slide 3. Bankwide for the quarter, we generated $125.4 million of loans, including $81.8 million of LASG-originated loans and $7.9 million of LASG purchased loans, $22.6 million in our SBA division and $13.1 million in our community banking division, while generating a net gain of $951,000 on the sale of $9.9 million of SBA loans.

Our purchased loan yield for the quarter was 11.9%, which included $2.3 million of transactional interest income. Year to date, the company has generated $364.4 million of loans, which includes $67.8 million of purchased loans, $169.8 million of originated loans by LASG, $63.8 million of community bank originations and $63 million of SBA originations. Year-to-date, the company has sold $34.7 million of SBA loans, and the purchased loan portfolio has a yield of 11.8%. Earnings year-to-date was $8.3 million with earnings per share of $0.93.

Turning to Slide 4. As we have discussed in the past, under a regulatory commitment made in connection with the 2010 merger, purchased loans are limited to 40% of total loans. Loan purchasing capacity was $101 million at March 31.

As I've noted before, loan purchasing capacity increases or decreases depending upon the relative amount of purchased and originated loans on our balance sheet at any given point in time.

Now under Slide 5. Under another regulatory commitment, nonowner-occupied commercial real estate loans are limited to 300% of total capital. At March 31, capacity under this condition was $172.3 million. It is important to note that owner-occupied commercial real estate is not subject to this regulatory condition. Owner-occupied commercial real estate is, generally speaking, real estate collateral used in the business of the borrower. SBA loan secured by commercial real estate are typically considered owner occupied for purposes of this regulatory condition. We have been focused on loans to borrowers with owner-occupied real estate collateral with a $217 million portfolio at March 31, an increase of 44% over the prior 12 months.

Moving on to Slide 6. Of the $89.7 million invested by LASG for the quarter, $7.9 million were purchased loans and $81.8 million were originated loans. Purchased loans for the quarter have unpaid principal balances of $8.6 million, representing a purchase price of 91.3%. Since the merger in 2010, LASG has invested an aggregate of $1.1 billion consisting of $556 million of purchased loans and $518 million of originated loans.

I would like to briefly comment on what we saw in the small balance performing commercial loan purchase market during the past quarter. As I noted, we purchased loans at an invested amount of $7.9 million and an unpaid principal balance of $8.6 million. During the quarter, we reviewed loans with approximately $104 million of unpaid principal balances and bid on loans with approximately $17.4 million of unpaid principal balance.

While the $7.0 million invested in this quarter is lower than usual, as I mentioned frequently, the purchased loan business is by its nature lumpy, as evidenced by the $46 million of loan purchases for the linked quarter ending December 31.

Moving on to Slide 7. At the end of the quarter, the discount on purchased loans was $31.1 million as compared to $33.5 million at December 31. The change is primarily due to the quarter's purchases offset by approximately $21 million of purchased loan payoffs and paydowns in the quarter. Purchased loan payoffs generated $2.3 million of transactional income. Approximately 84% of the $31.1 million of discount is expected to be realized over the remaining life of the purchased loans through scheduled accretion. The nonaccretable portion of the discount represents contractual cash flows that in our estimation may not be collectible.

Turning to Slide 8. We provide detail on returns from the LASG portfolio. Through the quarter, the purchased portfolio generated a total return of 11.95%, reflecting transactional income of $2.3 million from unscheduled loan payoffs, which was above the average of $1.7 million of transactional income for the prior 4 quarters. As we've discussed in the past, transactional income realized on the purchase portfolio as well as the amount of loans purchased may not be consistent from quarter-to-quarter.

The LASG-originated portfolio generated returns of 6.4% in the quarter. In addition, you will know the yield of 1.1% unsecured loans to broker-dealers, which as noted above, paid off in the quarter.

Turning to Slide 9. We provide some statistics on the LASG portfolio as of March 31 of significance. As noted in the chart in the top right corner, the purchased loan portfolio has a net investment basis of 88%, consistent with the link quarter. On an invested basis, the average loan size is approximately $752,000 with the largest individual loan at $11 million. 81% of the portfolio consisted of loans with an investment size less than $4 million.

The loan portfolio has a diverse collateral type primarily focused on industrial, retail, hospitality multifamily and office. By geography, the largest concentrations are in California and New York, each with 20% of the portfolio. And our collateral's geographically diverse with collateral in 37 different states.

Turning to Slide 10. One of the benefits of the SBA program is the ability to sell the guaranteed portion of a loan and often at a substantial premium. For a variety of reasons, SBA loans closed in one quarter are sometimes sold in a subsequent quarter. In the current quarter, we closed $22.6 million of SBA loans, of which $16.5 million were fully funded in the quarter. The company sold $9.9 million of the guaranteed portion of the loans in the secondary market, of which $2.6 million were originated in the current quarter and $7.3 million were originated or purchased in prior quarters.

For the quarter ending -- ended March 31, the net gain on sale, including the capitalized servicing asset, was $951,000.

On Slide 11, we show detail of the SBA sale pipeline as it stands at March 31. I'd like to point out that these figures are a function of the timing of our SBA originations, their funding and subsequent sale. The bank holds $3.2 million in SBA loans held for sale, which represents the guaranteed portion of the SBA loans which have closed and are fully funded as of quarter-end. Next, you will note an additional $13.2 million in the guaranteed portion of SBA loans that have closed as of March 31 but were not fully funded. The $13.2 million consists of 13 loans with an average balance of approximately $1 million. These 13 loans have a combined amount of approximately $1.4 million that has yet to be dispersed, at which time the loan -- guaranteed portion of the loan could be sold. In total, this represents an additional $16.4 million in future SBA loan sales before considering any loan production in the fourth quarter.

And now I'd like to turn it over to Brian, who will discuss in more detail our financial results. After which, we will be happy to answer your questions. Brian?

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Brian Shaughnessy, [3]

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Thanks, Rick, and good morning, everyone. I'm picking it up on Slide 12 to provide a little more color on our financial results. As Rick noted, it was a record quarter for earnings with net income of approximately $3.5 million or $0.39 per share. Earnings per share were up $0.04 from the linked quarter and up $0.20 from the comparable fiscal year 2016 quarter. The solid results were largely driven by purchased loan transactional interest income of $2.3 million, the gain on the sale of SBA loans into the secondary market of $951,000 and the benefit of a larger average balance sheet, partially offset by an increase in noninterest expense compared to the quarter ended March 31, 2016.

Turning to Slide 13. Over the past year, we have seen net loan portfolio growth of approximately $43 million. The majority of the growth comes from our LASG portfolio with approximately $288 million of purchases and originations. As shown on the chart, in the trailing 12-month period since March 31, 2016, we have closed approximately $80.4 million of SBA loans, and we have sold approximately $49 million of the guaranteed portion of these loans into the secondary market. These loans sales have contributed approximately $5 million to revenue in the same 12-month period.

While bankwide loan production has been strong, increases have been significantly offset by the following: a high level of paydowns and amortization in the LASG purchased and originated portfolios, which average approximately $39 million per quarter over the past year, and the paydown of 5 secured loans to broker-dealers to $60 million in the same period.

As Rick mentioned also, in an effort to reposition our balance sheet, we sold $18.3 million of commercial loans from our community banking division in the current quarter. Excluding the broker-dealer loan payoffs and the sale of the community bank commercial portfolio, the loan portfolio had net growth of approximately $121 million or 17% over the trailing 12-month period. These results are further detailed on Slide 14, which shows the composition of net loan growth over the past 5 quarters.

The net loan growth is primarily driven by the strength of purchases and originations by LASG, which had net growth of approximately $132 million or 33% since March 31, 2016.

In the first 9 months of the current fiscal year, loans generated by LASG totaled $237.6 million, which consisted of $68 million of purchased loans at an average price of 88.5% of the unpaid principal balance and approximately $170 million of originated loans. As noted on the previous slide, offsetting this growth was the paydown of the broker-dealer loans and the sale of the community bank commercial loans. Although the payoff of these loans contributed significantly to the decrease in our loan portfolio in the current quarter, these loans had a combined weighted average yield of 1.92%. This balance sheet repositioning will help provide capacity for higher-yielding loan growth in the future.

Turning to funding on Slide 15. We've had net deposit growth of approximately $96 million or 13% over the trailing 12-month period. Over the past year, all of the growth is due to an increase in our nonmaturity accounts, which consist of our money market, savings and demand deposit products. The growth in these products have strengthened our overall deposit mix, where nonmaturity accounts represent approximately 62% of total deposits as of March 31, 2017, compared to approximately 53% of total deposits in the same period -- in the same prior year period ended March 31, 2016.

Slide 16 shows trends in the main components of our income. Compared to the linked quarter, the increase in base net interesting income before loan loss provision is largely attributable to higher average balances in the LASG originated portfolio and a prepayment penalty of $203,000 on certain community bank loan payoffs. This increase in total net interest income was partially offset by a decrease in transactional interest income from the purchased portfolio. The purchased portfolio had a yield of 11.9% in the current quarter compared to 13% in the linked quarter. These results are further detailed on Slide 17, which shows trends and total revenue and noninterest expense over the past 5 quarters.

Compared to the linked quarter ended December 31, total revenue has increased by approximately $250,000, while noninterest expense has decreased by approximately $110,000. As noted previously, the main components of the increase in revenue is primarily due to the following: an increase in base net interest income of approximately $1.3 million due to the benefit of a larger average balance sheet; a $365,000 gain on sale from the commercial loan portfolio sold in the current quarter, offset by a decrease in purchased loan transactional interest income of $673,000; and a decrease in the gain on sale of loans from SBA division of approximately $780,000.

The decrease in expenses as compared to the linked quarter was largely attributable to the decrease in other noninterest expense of $446,000. This decrease is largely due to the $220,000 of impairment on SBA servicing rights in the previous quarter ended December 31 with no impairment in the current quarter, and a mortgage insurance recovery of $167,000 in the current quarter, which was received from a legacy mortgage insurance premium plan. These decreases were offset by an increase of $181,000 in loan expense, largely driven by the expense related to loan acquisition and refinance activity in the current quarter as well as a small increase in salary expense. This activity helped the company achieve an efficiency ratio of 59.9% in the current quarter compared to 61.7% in the linked quarter.

Slide 18 shows originations and the associated gains in the residential portfolio over the past 5 quarters. The winter quarter is seasonally slower. However, the gains continue to be a positive contribution to noninterest income. We sell substantially all residential loan production into the secondary market.

Slide 19 provides additional information on trends and yields, average balances in our net interest margin, which was 5.11% as compared to 4.94% in the linked quarter and 4.25% in the comparable prior year quarter. As noted earlier, the increase in margin as compared to the linked quarter is largely attributable to a larger average loan portfolio, prepayment penalties on the paydown of certain community bank commercial loans, which contributed approximately 8 basis points to the net interest margin and 17 basis points to the originated loan yield, offset by a decrease in purchased loan transactional interest income.

Slide 20 provides a snapshot of our asset quality metrics. Compared to the linked quarter, nonperforming loans to total loans has increased to 2% from 1.3%, and nonperforming assets to total assets has increased to 1.8% from 1.3%. The increase compared to the linked quarter is primarily due to 3 loans being placed on nonaccrual in the current quarter. In addition, as of March 31, 2017, past due loans totaled $24.1 million or 3.25% of total loans compared to $21.9 million in the linked quarter. The increase of $2.2 million from December 31, 2016, includes 2 loans totaling $2.1 million, which were 30 to 59 days past due as of March 31 and have been paid current in April.

In the top right hand corner of the slide, classified commercial loans were $8.2 million as of March 31, which increased primarily due to the 3 nonaccrual loans discussed previously. Finally, as noted on the chart on the bottom right-hand corner of the slide, net charge-offs to average loan balances have remained at low levels over the past several years and were 5 basis points in the trailing 12 months.

That concludes our prepared remarks. We'd like at this time to open up the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Alex Twerdahl from Sandler O'Neill.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [2]

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This is Jeff Kitsis filling in for Alex. I was hoping you could please give us some color on the dynamics that drove such a large quarter for the LASG origination business.

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Richard N. Wayne, Northeast Bank - President, CEO & Director [3]

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The -- that business, we started originating loans maybe 3 or 4 years ago, and it's been growing every quarter. We've had a big focus on lending to other nonbank lenders that are in the business of making loans secured generally by commercial real estate. And the way we like to describe that is we're doing transactions, generally speaking, that are too small for big banks kind of $12 million or $15 million or less secured by a pool of commercial loans, and I don't want to say too complicated in a patronizing way at all, but now what a typical community bank would do. And so we have found a niche for ourselves. There's been a lot of demand. It's something we know how to do well since we've been purchasing and lending nationally for quite a while. And generally, we get pricing on this which is 250, 300 basis points higher than we could get making a loan in footprint. So this -- that's the niche that we've carved out. It's a fairly big chunk of our LASG originations are those kind of loans, not that exclusively, but that, I think is, a big portion of it.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [4]

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Got it. And do you think this level of production is repeatable in future quarters?

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Richard N. Wayne, Northeast Bank - President, CEO & Director [5]

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Yes, this is an awfully big quarter. I think this -- yes, we have a lot in the pipeline, but $81 million is a lot of originations. I wouldn't want to put a prediction out there. I think you can take a look at what we have done for the year for there are 3 quarters, and divide by 3 would probably give you a more reasonable idea as to what's a reasonable expectation, again, with that gigantic forward-looking statement in front of the book.

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Operator [6]

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The next question comes from David Minkoff from DCM Asset Management.

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David Minkoff, [7]

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I'm starting to believe guys know what you're doing over there. I don't want to seem hasty, but that's what it seems like.

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Richard N. Wayne, Northeast Bank - President, CEO & Director [8]

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We keep our egos in check. Don't worry.

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David Minkoff, [9]

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On the loans purchased of $7.9 million of the $89 million that you purchased at 91.3% of face value. What's the average duration of that book if not $7.9 million, would you say?

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Richard N. Wayne, Northeast Bank - President, CEO & Director [10]

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That is knowable, obviously. I don't have that in front of me, David, but I think I can make a point that will be helpful. If you take a look -- and this is directional. I don't have this number in front of me, so we need some room on what I'm going to say. But if you take a look at our purchased loan book, probably on the -- with the weighted average, WAM, on that is, could be 7 or 8 years. Brian, if you know another number, think that's close enough?

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Brian Shaughnessy, [11]

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Close enough, yes.

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Richard N. Wayne, Northeast Bank - President, CEO & Director [12]

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But what's -- but that doesn't really mean much because our loans pay off so rapidly, that the actual duration of the loan is more like they turn 25% or 30% a year, which I think is a better way to think about it. And again, I don't have the -- that for the $7.9 million. But yes, if you think about the whole portfolio, which is probably a more meaningful way to understand our balance sheet, it's as I've described in terms of both WAM and actual duration.

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David Minkoff, [13]

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Right. Well, I was trying to see what your yield is on this. I know you -- I think you said or Alex said 11% -- not Alex. I think Brian said 11% on the -- was the yield on the purchased loans. But if you make 1% in a month, that's 12%. What I was trying to do, I guess, was there's another -- at 91.3%, there's approximately 9% to be made if you held it for a year, plus the average coupon. What is the average coupon on that $7.9 million?

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Richard N. Wayne, Northeast Bank - President, CEO & Director [14]

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I don't have that either. But -- and I would -- we're happy to provide and we will at the next call, some more detail about the whole portfolio around that. But I think the slide that we do provide that shows the base yield -- do you have that, Brian?

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Brian Shaughnessy, [15]

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Yes, it's on Slide 8.

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Richard N. Wayne, Northeast Bank - President, CEO & Director [16]

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Slide 8, David, I think, gives you a pretty good idea. Now this is on the whole portfolio. The regularly scheduled interest in accretion is 8%. So that includes the cash payment and then the amount of the discount that we accrete just in the normal course, and then we pick up almost 4% from early payoffs. And I think that number, 12%, was a very good number in the quarter. We've had a range kind of 10.5% to 13% over the years, but I think that probably is -- which should provide you with some helpful information.

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David Minkoff, [17]

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Right. Well, it does, actually. I mean, so maybe let me beat a dead horse one more time on this. What would you guess, and it changes all the time, day to day, month to month, loan to loan, but on the -- as long as I'm talking about that $7.9 million, how long would you guess you would keep it? And if you don't know the answer for sure, but 3 months, 6 months, 9 months, 1 year or more? You said you turn over 20% a year, did you say?

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Richard N. Wayne, Northeast Bank - President, CEO & Director [18]

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I said kind of 25% to 30%. But it's very specific. So you buy a pool of loans, let's say, to mean -- to make the point. There's -- and that's -- let's say in the $7.9 million, it's 12 loans, pick a number. Those loans are -- each of those are a separate loan that has -- they have an interest rate. They have a maturity date. They have a payment history. And the way we generate that 4%, if a loan has a maturity 9 years from now, then in very round numbers, you're going to accrete 1% a year. So if the borrowers bring 5.5%, that 1 loan would generally be 6.5% or 7%. But if they pay off early, obviously, the yield gets enhanced. And we don't have control over when borrowers that are making payments on their loan are current, they have a contractual right to keep making those payments on their current. But a lot of times, they pay off early because they want to get junior financing, which we may or may not provide, or there's a local bank that's trying to get their business, or they want to sell real -- it's a whole bunch of life factors that affect it. And so it's hard to say anything meaningful about a particular loan, but in the aggregate, which is the data we provide, when you look at all of the loans we have, the returns are as we describe them each quarter.

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David Minkoff, [19]

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Right. Well, you said they may pay off early or you may decide, the loans you bought at 91.3%, if they got to 95% in 6 months, you may sell it that way. You may sell it, right? Now that they pay out early, you just sell the book...

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Richard N. Wayne, Northeast Bank - President, CEO & Director [20]

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We don't normally sell loans. It's -- when we take a look at a loan that we buy, we've figure all that pricing when we're making the bid for it. We're not really buying loans to trade them. The rare instance is when we will sell a loan as we did this quarter is in our community banking division, where we had $18 million or $19 million of loans that were yielding about 4% or so. We thought -- and we could sell those at a slight premium with -- and the reason we did is because we can reinvest that at much higher yields. But for a purchased loan, normally, we're not -- we wouldn't be selling it. The only reason we might sell it is that loan went into default, and when we considered all the exit strategies, that one made the most sense.

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David Minkoff, [21]

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Right. So when you buy it, you're planning to hold it to term or sooner if they pay off earlier, right?

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Richard N. Wayne, Northeast Bank - President, CEO & Director [22]

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Usually. There's obviously exceptions to it but usually.

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David Minkoff, [23]

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Very good. And the past 2 loans, which if you -- does that present any problem to you? I realized they went up a little bit. But it was taken care of in April, you said, the $2.3 million, or whatever that number was, righted itself, if you will. So the nonperformers stayed relatively flat, is that right?

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Richard N. Wayne, Northeast Bank - President, CEO & Director [24]

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Yes, [it looks like] relatively -- they stayed relatively -- as Brian pointed out, they were -- they brought themselves current in April. But -- and I would point out, in the purchased loan business, you're going to see levels of nonaccruals, and delinquency is higher than most because, every once in a while, borrowers think it's a good strategy to stop paying us to try and get -- resolve their credit at a discount. It's usually not -- it's not generally -- it's not a smart strategy because they get subject to late fees and charges and legal fees. But nevertheless, every once in a while, borrowers try that, and a lot of that's what you see when you see things going purchased loans going nonperforming.

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David Minkoff, [25]

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Very good. And I guess, finally, a question I never let up on with you. You had a good quarter. You had 3 good quarters so far back to back. Anymore consideration on the dividend increase perhaps?

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Richard N. Wayne, Northeast Bank - President, CEO & Director [26]

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I don't want to sound like a broken record. But the board does what you would expect, which is to take a look in under its dividend policy, take a look at our capital, what is our -- what are our opportunities and what is the best way to deal with that capital. As you can see from -- as we described, we've been originating and buying a lot of loans. Balance sheet's growing. It seems this is good use of our capital to be able to grow our business. But the board evaluates that continually. I know that's not a helpful answer, but [that would normally be the case].

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David Minkoff, [27]

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No, I understand. I thought -- you've got some pretty good movement on the stock lately and then again today because of the good quarter. I thought to myself maybe you're saving that for another time when you need it. But that's fair enough. Congratulations again on a great quarter. I'm happy to see it.

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Richard N. Wayne, Northeast Bank - President, CEO & Director [28]

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Thank you, David. Thanks for your good question.

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Brian Shaughnessy, [29]

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Thank you.

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Operator [30]

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(Operator Instructions)

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Richard N. Wayne, Northeast Bank - President, CEO & Director [31]

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Operator, I think we're good. I want to thank everybody for listening to the call, thank those of you, Alex's stand-in and David, for asking excellent questions. We appreciate your support and look forward to talking to you at the end of our current quarter, one we're in now. Thank you very much, everyone.

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Brian Shaughnessy, [32]

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Thank you.

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Operator [33]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.