Good day, everyone, and welcome to the Northeast Bancorp Fiscal Year 2019 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 JP Lapointe, 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 northeastbank.com.com under Events and Presentation. You may find it helpful to download this investor presentation and follow along during the call.
Also, the 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 this presentation contains forward-looking statements about Northeast Bancorp.
Forward-looking statements are based upon the current expectations of Northeast Bancorp's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bancorp does not undertake any obligation to update any forward-looking statements.
At this time, I would like to turn the call over to Rick Wayne. Please go ahead, sir..
Good morning, and thank you all for joining us today. I am Rick Wayne, the Chief Executive Officer of Northeast Bancorp. And with me on the call is JP Lapointe, our Chief Financial Officer. Before we discuss our financial results, I would like to provide an update on the proposed reorganization announced in January 2019.
As previously discussed under the proposed reorganization, Northeast Bancorp would merge into Northeast Bank, with the bank continuing as the surviving entity.
Shares of Northeast Bank's common stock would be owned directly by Northeast Bancorp shareholders in the same proportion as their ownership of Northeast Bancorp stock immediately prior to the reorganization. The Board and the executive officers of Northeast Bancorp will hold the same position in Northeast Bank following the reorganization.
The FDIC approved the reorganization on March 11, and shareholders will vote on the reorganization at our shareholder meeting on May 9.
Once completed, the reorganization will improve our efficiency by eliminating redundant corporate infrastructure and activities and by removing a second level of supervision and oversight that comes with our holding company.
Accordingly, our commitments to the Federal Reserve will no longer be applicable and will be replaced with internal standards to ensure the bank continues to operate in a safe and sound manner.
Commitments made to the Maine Bureau of Financial Institutions in 2010 as the Tier 1 leverage in total capital ratios are consistent with our internal standards and will remain in place. For the third quarter of fiscal 2019, after the close of the market yesterday, we announced quarterly net income of $4.8 million or $0.52 per diluted common share.
Earnings were positively affected by strong net loan growth in the LASG originated portfolio of $42.2 million or 10% over the linked quarter. This quarterly activity helped us achieve a return on average equity of 13%, a return on average assets of 1.6% and an efficiency ratio of 57.7%. Turning to Slide 3.
During the third quarter, bank-wide, we generated $104.7 million of loans, including $89.1 million in our Loan Acquisition and Servicing Group, or LASG, $84.5 million of which were originated loans and $4.6 million were purchased loans.
Of the $84.5 million of originated loans, 88% were variable rate with a weighted average yield of 7.54% as of March 31. As we discussed previously, purchased loan volume can be lumpy, and this quarter's purchases of $4.6 million were lower than usual.
At the same time however, loan purchases of $88.7 million for the first 3 quarters of fiscal 2019 compares favorably with purchases of $71.5 million for the first 3 quarters of fiscal 2018. We generated $6.4 million of loans in our SBA division, of which $5 million were loans secured by hotels.
We recognized a net gain of $568,000 on the sale of $6.7 million of SBA loans. Net interest margin for the quarter was 5.2%, and our total return on purchased loans for the quarter was 10.2%, which included $1.9 million of transactional income. Turning to Slide 4.
As we had discussed in the past, under a regulatory commitment in connection with the 2010 merger, purchased loans are limited to 40% of total loans. Loan purchasing capacity increased to $108.1 million as of March 31 as a result of the growth in the LASG originated portfolio during the quarter.
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. If the reorganization is completed as contemplated, purchased loans could constitute 60% of total loans rather than the current limit of 40%.
Additionally, on Slide 5, under another regulatory commitment, nonowner-occupied commercial real estate loans are limited to 300% of total capital. As of March 31, capacity under this condition was $90.1 million. If the reorganization is completed as contemplated, the limit would be 500% of total capital rather than the current limit of 300%.
Moving on to Slide 6. Of the $89.1 million invested by LASG for the quarter, $4.6 million were purchased loans and $84.5 million were originated loans. Purchased loans for the quarter have unpaid principal balances of $4.7 million, representing a purchase price of $98.5 million.
As frequently mentioned in these investor calls, loan purchasing is transactional and can vary, sometimes significantly, from quarter-to-quarter. Since 2010, LASG has invested in aggregate of $1.8 billion, consisting of approximately $816 million of purchased loans and $1 billion of originated loans.
During the past quarter, we reviewed loans with approximately $141 million of unpaid principal balances and bid on loans with $27 million of unpaid principal balances. Subsequently, we purchased loans with unpaid principal balances of $4.7 million at 98.5% or $4.6 million invested.
The $4.6 million invested consisted of 8 loans acquired in 3 separate transactions. Moving on to Slide 7. At the end of the quarter, the discount on purchased loans was $34.4 million as compared to $37.7 million on December 31.
The decrease is primarily due to regularly scheduled accretion - accelerated accretion from purchased loan payoffs in the quarter and gains from purchases - from purchased loan sales, all of which generated $1.9 million of transactional income, partially offset by $4.6 million of purchases with a related $71,000.
Approximately 88% of the $34.4 million 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 details on returns from the LASG portfolio.
For the quarter, the purchased portfolio generated a total return of 10.2%, reflecting transactional interest income of $1.4 million from unscheduled loan payoffs and a $582,000 gain on a purchased loan sale.
As we've discussed in the past, transactional income realized on the purchased portfolio, as well as the amounts of loans purchased, may not be consistent from quarter to quarter. The originated portfolio generated a strong return of 7.9% in the quarter. Turning to Slide 9, we provide statistics on the LASG portfolio as of March 31 of significance.
As noted in the chart in the top right, the purchased loan portfolio has a net investment balance of 90%, which is consistent with the linked quarter. On an invested basis, the average loan size for purchased loans was $400,000, and the average loan size for originated loans was $2.1 million.
80% of LASG loans had an investment size of less than $6 million. The loan portfolio has a diverse collateral type, primarily focused on retail, industrial, hospitality, multifamily, office and mixed use. By geography, the largest concentrations are in California and New York, with 18% and 12% of the portfolio, respectively.
Our collateral is geographically diverse, with collateral in 41 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 1 quarter are sometimes sold in a subsequent quarter.
In the current quarter, we closed and funded $6.4 million of SBA loans. Additionally, the company sold $6.7 million of the guaranteed portion of SBA loans in the secondary market, of which $4.8 million were originated in the current quarter and $1.9 million were originated in prior quarters.
On Slide 11, we show the detail of the SBA pipeline as it stands on March 31. There was $9.7 million of guaranteed portion of SBA loans that have closed and will be fully funded in subsequent quarters, representing potential future SBA guarantee loan sales, before considering any loan production in future quarters.
And now I'd like to turn it over to JP who will discuss in more detail our financial results, after which we will be happy to answer your questions.
JP?.
Thanks Rick, and good morning, everyone. I'm picking up on Slide 12 to provide more information on our financial results. Net income for the quarter was $4.8 million or $0.52 per diluted common share.
Diluted earnings per share were down $0.04 from the quarter ended December 31, 2018, which I shall refer to as the linked quarter, and up $0.09 from the quarter ended March 31, 2018, which I shall refer to as the comparable prior year quarter.
The decrease of $0.04 per diluted common share from the linked quarter was due to lower interest income, which amounted to $20.2 million in the current quarter, compared to $20.3 million in the linked quarter as a result of lower transactional interest income, which is partially offset by higher average balances in the LASG portfolio.
This was further impacted by higher interest expense of $5.1 million in the current quarter, compared to $4.7 million in the linked quarter as a result of higher funding cost. The provision for loan losses amounted to $414,000 in the current quarter, compared to $101,000 in the linked quarter due to changes in the composition of the loan portfolio.
Gains on sale of SBA loans amounted to $568,000 during the current quarter, compared to $942,000 in the linked quarter due to fewer sales of SBA loans. Partially offsetting these decreases was an increase in the gain on sale of other loans, which amounted to $582,000 during the current quarter, compared to 0 in the linked quarter.
Additionally, noninterest expense amounted to $9.8 million during the current quarter, compared to $9.9 million in the linked quarter, primarily due to decreases in professional fees and impairment charges on servicing assets. Effective tax rate for the current quarter was 28.3%, compared to 28.7% in the linked quarter.
The increase from the comparable prior year quarter of $0.09 per diluted common share was due to an increase in interest income of $3.7 million, due to an increase in average balances on loans and higher rates earned, partially offset by a decrease in transactional income.
This increase was offset by higher deposit funding costs, which increased by $1.8 million due to higher average balances and increased rates offered, and an increase in noninterest expense of $777,000, primarily due to increased salary and employee benefit cost and increased loan acquisition and collection expenses incurred. Turning to Slide 13.
Over the past year, we have seen net loan portfolio growth of $145.3 million or 18%. The majority of the loan growth over the last 12 months comes from our LASG portfolio, with $427.3 million of purchases and originations.
As shown in the chart, in the trailing 12-month period, we have closed $63 million of SBA loans and sold $47.5 million of loans, of which $42.7 million were the guaranteed portion of SBA loans.
While bank-wide loan production has been strong over the trailing 12 months, increases have been significantly offset by pay-downs and amortization in the purchased and originated portfolios, which amounted to $300.3 million over the trailing 12 months.
These results are further detailed on Slide 14, which shows the composition of the loan portfolio over the most recent 5 quarters. The net loan growth over this time is primarily driven by the strength of the LASG portfolio, which had net loan growth of $161 million or 25% since March 31, 2018.
In the current quarter, LASG originated $84.5 million of loans and purchased loans with a recorded investment amounting to $4.6 million. Turning to funding on Slide 15. In order to fund loan growth, we have had net deposit growth of $41 million or 4% over the trailing 12-month period.
Over the past year, time deposits have seen significant growth, while money market accounts have decreased. Our non-maturity accounts, which include money market, savings and demand deposit products, as a percent of total deposits has decreased but remains high at 47% as of March 31, 2019, as compared to 68% as of March 31, 2018.
Slide 16 shows trends in the main components of our income. Compared to the linked quarter, base net interest income increased $135,000 due to higher average balances in the LASG portfolio, along with higher rates earned on our loans as majority of our LASG originated portfolio is tied to prime rate.
Base interest income increased $595,000 due to the increase in the average balance of the LASG portfolio and the increase in prime rate, which was then offset by decreased transactional income and increased funding costs, which increased $460,000 from the linked quarter.
Transactional interest income from the purchased loan portfolio decreased by $745,000 compared to the linked quarter. The purchased portfolio had a total return of 10.2% in the current quarter compared to 10.3% in the linked quarter.
The increase in net interest income from the comparable prior year quarter is largely attributable to an increase in base net interest income of $2.6 million due to higher average balances in the LASG and SBA portfolios and higher rates earned on the loans in these portfolios, with a decrease of $738,000 in transactional interest income from the purchased portfolio.
The 10.2% return on the purchased portfolio in the current quarter is down from 12.2% in the comparable prior year quarter due to lower transactional income, offset by an increase in regularly scheduled interest and accretion.
The lower purchased loan yield was more than offset by the higher average balances in the current quarter, as compared to the comparable prior year quarter. Compared to the comparable prior year quarter, base interest income increased $4.4 million, while funding cost increased $1.8 million.
Noninterest income increased by $321,000 over the linked quarter, primarily due to the $582,000 increase in the gain on sale of other loans related to LASG purchased loans that were sold during the quarter.
An increase in fees for other services to customers related to charges taken during the linked quarter and commercial loan servicing fees, as a result of the write-off of servicing assets for SBA loans have paid off, offset by a $374,000 decrease in the gain on sale of SBA loans.
Noninterest income is down $16,000 from the comparable prior year quarter, primarily due to a $119,000 decrease in the gain on sale of residential loans, due to lower volumes sold in the current quarter and a $27,000 decrease in fees for other services to customers, due to lower deposit fees and commercial loan servicing fees, partially offset by a $66,000 increase in the gain on sale of other loans and a $65,000 increase in unrealized gains on equity securities.
These results are further detailed on Slide 17, which shows trends in total revenue and noninterest expense over the past 5 quarters.
Compared to the linked quarter, total revenue has decreased by $289,000, due to the decrease in net interest income caused by lower transactional income and higher funding cost, partially offset by an increase in base interest income and noninterest income.
Additionally, noninterest expense decreased by $151,000 from the linked quarter, primarily due to decreased professional fees and an impairment charge on the servicing asset recognized in the linked quarter that was not incurred during the current quarter.
Total revenue has helped us achieve an annualized return on average equity of 13%, a return on average assets of 1.6%, along with an efficiency ratio of 57.7% in the current quarter. Compared to the comparable prior year quarter, total revenue has increased by $1.9 million, while noninterest expenses increased by $777,000.
The increase in revenue is primarily due to an increase in base net interest income due to higher average balances and rates earned in the LASG and SBA portfolios.
The increase in noninterest expense, compared to the comparable prior year quarter, is primarily due to a $453,000 increase in compensation expense due to increased base salaries and benefits, stock-based compensation expense and employee incentive compensation and the $345,000 increase in loan acquisition and collection expenses incurred as a result of increased efforts related to collections on purchased loan payoffs and real estate owned and an increase in data processing of $208,000 related to the outsourcing of data processing services.
These increases were partially offset by a decrease in occupancy and equipment expense of $202,000. Slide 18 provides additional information on trends and yields, average balances and our net interest margin, which was 5.2% in the current quarter, as compared to 5.33% in the linked quarter and 4.94% in the comparable prior year quarter.
As previously discussed, the net interest margin, which decreased from the linked quarter, is largely driven by a decrease in net interest income from less transactional interest income from the loan portfolio and higher funding cost.
The average balance of loans from the current quarter was $934 million, as compared to $910 million in the linked quarter, and $783 million in the comparable prior year quarter, primarily due to growth in the LASG originated and purchased portfolios. Slide 19 provides a snapshot of our asset quality metrics.
Compared to the linked quarter, nonperforming loans to total loans has increased to 1.33% from 1.32%, and nonperforming assets to total assets has increased to 1.2% from 1.16%. These metrics have also both decreased compared to June 30, 2018 and 2017.
In the top right-hand corner, classified commercial loans were $10.7 million as of March 31, 2019, an increase from $9.9 million in the linked quarter.
Finally, as noted in the chart on the bottom right-hand corner on the slide, annualized net charge-offs to average loan balances remained at very low levels over the past several years and were 4 basis points in the current quarter, consistent with the linked quarter.
Our allowance coverage appears appropriate to address the risk inherent in our loan portfolio, with a slight increase in the allowance coverage, which is primarily due to the change in the composition of the loan portfolio, along with management's analysis of qualitative loss factors inherent in the portfolio. That concludes our prepared remarks.
At this time, we would like to open up the call to Q&A..
[Operator Instructions] And our first question comes from Alex Twerdahl with Sandler O'Neill..
This is Jeff Kitsis on for Alex today.
After another very strong quarter for LASG originations, can you update us on how that pipeline looks heading into the second calendar quarter?.
On the origination piece - line, Jeff?.
Yes..
Continues to be strong..
And second, looking at the overall rate sensitivity of the portfolio, NII has benefited as the LASG originated portfolio has grown.
But can you talk about how that - the balance sheet's positioned in case the next rate move brings rates lower?.
Well, we're generally slightly asset sensitive, so if rates were adjusted lower, there would be some slight decrease in net interest income. Most of our originated loans, most of our loans are tied to prime. I would point out that most of our loans are structured with floors as well at the time that we originate them.
So if we, for example, originate a loan today at prime plus 2, that rate would be 7.5. And if prime went down to - by 0.25 point, the rate on that loan would stay the same, so I would say it will be fairly negligible..
And then last question. A light quarter for SBA originations.
Was that driven by demand or the government shutdown? And should we expect a rebound of income in this line of business?.
asking for too much debt, buying a property for too much money, inexperienced operator, insufficient resources by the owner-borrower post financing.
And I would say the markets - this may be an overgeneralization, but you could kind of bifurcate it between really, really high-quality loans that are getting done at prime plus 1/2 or prime, and in which case, the premium on sale is very low, and those that get done at higher prices where the credit quality is poor.
We're not willing to sacrifice on the credit quality and so, therefore, the volume hasn't been great. We're seeing a lot of them. I remain hopeful that the number will get better. But well, we closed the $6.4 million, of which $5 million was on the hotel space. That's what we were able to accomplish last quarter.
I'd point out also that we - as you know and others know on the call, going back a couple of years ago, we had a lot more human resources allocated to this business line, which we have since repositioned in - more in our origination business.
So it's not as if we have a lot of cost in this business, but we choose not to close loans where the pricing is prime plus 1/2 or prime, and the sale premium is small, and the piece that we hold is of lower quality and lower rate, significantly lower than we can get on our originated book. So that is how I would describe the situation with that.
I wouldn't - it would be unrealistic to expect that, that volume was going to go from $5 million or $6.4 million this quarter to $25 million next quarter. I'm hopeful that'll be higher than it was this quarter, but not by a factor of 4..
And our next question comes from Bruce Baughman with Franklin..
I was puzzled by a paragraph in the release that talks about past due loans. And part of it says the increase in past due loans from June 30, 2018, is largely attributed to the 31-day month in March, as past due loans totaled $18.3 million or 1.95% of total loans as of December 31, 2018. I can't quite understand what that's saying..
if you have a loan that's due on the first day of the month - so let's compare a loan that's due on March 1 with a loan that is due on June 30, same loan. On March - for a 31-day month, if that loan payment is not made on March 1, for the quarter ending March 31, it's 30 days past due and, therefore, counted as delinquent.
In the month of - that's 30 days. On June 30, it's 29 days past due and, therefore, not delinquent - or not 30 days past due as of the end of the month. So we have 2 quarters that have 30-day months and 2 quarters that have 31-day months. And a big part of our loans are due on the first day of the month, so it tends to have a weird effect.
One of the things that we're doing to provide more consistency around that is when we can - when we originate loans now and when we have a chance - when there's an opportunity to modify them, we move the payment date off the first day of the month, so that we can have better comparisons quarter-to-quarter.
It's weird, I admit, but it's the way the days work..
[Operator Instructions] Our next question comes from David Minkoff with DCM Asset Management..
Congratulations on a pretty good quarter on most metrics that I can see here. One question that kind of stuck out of me is on the lesser important area of the loan portfolio. But on the loan balances in community banking, I noticed you were down roughly 5% in 3 months and 19.18% in the 9 months.
Is that due to the fact that rates have been up for the 9 months vis-a-vis prior years or the economy is slowing down that much? Or are we charging a noncompetitive rate vis-a-vis the other banks in your area? Why did we drop 19%, let's say, in the 9 months for community banking?.
residential lending and small business lending, both to support our CRA requirement as - it's in our material, but perhaps you and others haven't focused on this, that to get a satisfactory grade in CRA, you need to do half of your lending in your footprint.
Now, obviously, for us as a national real estate lender, that would be impossible for us, so we have a CRA strategic plan, where we have agreed with the FDIC in how we can get a satisfactory CRA grade.
And we focus a lot on community service, community development investments, lending in our residential area to low and moderate borrowers, in low and moderate census tracts, all of which we sell those loans, so that part of our balance sheet doesn't grow and, to a much lesser extent, small business lending.
And so I say that to provide some context for the following point, which is when we have a choice of lending money nationally at prime plus 2 or an alternative financing in market in Maine at 5% fixed for 5 or 10 years, we think it's a better allocation of our capital to be doing the national lending.
So it's not really an area where we're trying to grow our balance sheet, but we are trying to focus on those areas that are helpful in our CRA strategic plan..
Well, that point's well taken. And so this was really done by design, you might say.
Is that right?.
Absolutely..
What were the average rates on those numbers? You hit 99 - $99 million roughly versus $123 million in 12/31/18.
What was the average rate, just so I could put it in perspective? What was the average rate that you charge on those community banking loans?.
JP, do you have that?.
Sure. The yield on the community bank loans for the 9 months ended March 31, David, was 5.2%..
And that competes favorably or in the right market with your competing banks up there, is that right? In other words, the drop certainly wasn't due to the fact that you're charging 5.2% and the other banks are charging 4.9%, let's say..
It's - I'm sure it's competitive. First of all, the 5.2%, these are loans that we originated quite a while ago. We're not actively trying to grow our Maine commercial loan portfolio. As I said, we're focused more on the residential which we sell and, to a much lesser extent, small business loans that count for CRA purposes..
So then - so we're not really too concerned that it's down 19%. It's basically as you explained, right? I mean that's okay.
We're okay with that, right?.
We are..
I noticed that - is your symbol going to change when - after the May 9 vote, assuming it goes through? I know you're going to trade on NASDAQ.
You trade on NASDAQ now, right, with NBN?.
It'll be the same symbol. As I mentioned in my comments, you'll own the same number of shares in Northeast Bank as you own in Bancorp. All of the directors will stay the same, all of the employees will stay the same, with the same titles and the management team will stay the same..
And the symbol is going to stay the same, is that right?.
Yes. Correct..
[Operator Instructions] And with that, that concludes our Q&A session for today. I'd like to turn the call over to Rick Wayne for closing remarks..
Thank you. Thank you, everyone, for listening, support, your good questions and look forward to talking again in July after we complete our June 30 quarter and the end of our fiscal year. It's my assumption by then we will be talking as the public company, Northeast Bank, as opposed to Northeast Bancorp. Thank you all..
Thank you. And with that, this concludes our presentation for today. Ladies and gentlemen, you may disconnect. Everyone, have a great day..