Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2019 Fourth Quarter Earnings Results Conference Call. This call is being recorded. With us today from the Bank is Rick Wayne, President and Chief Executive Officer; and JP Lapointe, Chief Financial Officer.

Earlier this morning, an investor presentation was uploaded to the Bank’s Web site, 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 Web site 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 statements.

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

Good morning. This is our first investor call since our corporate reorganization of Northeast Bancorp into Northeast Bank on May 15th of this year. As a result, I am now speaking to you in your capacity as a shareholder or other constituent of Northeast Bank rather than Northeast Bancorp. 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 is JP Lapointe, our Chief Financial Officer. Before turning the call over to JP, for a much more detailed analysis, I would like to discuss highlights for both the quarter and our fiscal year, which ended June 30, 2019.

For our fourth quarter of the fiscal year, after the close of the market yesterday, we announced a quarterly net loss of $603,000 or a $0.07 per loss per diluted common share, as a result of the expenses associated with the corporate reorganization.

Operating results were significantly better than the headline would suggest, given the headline number included after tax expenses of $6 million related to the corporate reorganization which we consider non-recurring.

For purposes of our comments, we shall, unless otherwise indicated, discuss results exclusive of the reorganization expenses and refer to such as operating earnings. For the quarter, we had record operating earnings of $5.4 million or $0.59 per diluted common share.

Operating expenses were positively affected by strong originations and purchases, with $98.9 million of loans generated by our Loan Acquisition and Servicing Group, which I will refer to as LASG, and strong quarterly transactional income of $3.6 million.

This quarterly activity helped us achieve an operating return on average equity of 14.2%, operating return on average assets of 1.8%, operating efficiency ratio of 55.2% and a net interest margin of 5.95%.

For the fiscal year, we had net income of $13.9 million or $1.52 per diluted common share and after excluding tax expenses – after tax reorganization expenses of $6.4 million, we had record annual net operating earnings of $20.3 million or $2.20 per diluted common share.

Excluding the effect of the corporate reorganization, we had annual operating return on average assets of 13.74% and annual operating return on average assets of 1.69%. Turning to Slide 3.

During the fourth quarter, bank-wide we generated $122.8 million of loans, including $98.9 million in our LASG of which $51.8 million were originated loans and $47.1 million were purchased. Of the $51.8 million of originated loans, 95% were variable rate, primarily tied to prime, with a weighted average yield of 7.48% as of June 30th.

In our SBA division, we generated $8.1 million of loans and sold 3.7 million of guarantees, recognizing a net gain of 227,000. As indicated earlier, net interest margin for the quarter was solid at 5.95% and our total return on purchase loans for the quarter was 12.3%, including $3.6 million of transactional income. Moving on to Slide 4.

Of the 98.9 million invested by LASG for the quarter, 47.1 million were purchased loans and 51.8 million were originated loans. Purchased loans for the quarter have unpaid principal balances of 49.9 million, representing a purchase price of 94.3%.

Since the merger in 2010, LASG has invested an aggregate of $1.9 billion consisting of 863 million of purchase loans and 1.1 billion of originated loans. This strong quarterly activity, coupled with the activity in the previous three quarters, resulted in a total of 271 million in loans originated and 136 million of loans purchased by LASG.

At June 30, 2019, the LASG originated portfolio totaled $493 million, reflecting an increase of 24% over the prior year ending balance, and the LASG purchase portfolio totaled $327 million, representing an increase of 12% over the prior year ending balance.

During the past quarter, we reviewed loans with 528 million of unpaid principal balances and bid on loans with 135 million of unpaid principal balances. We purchased loans with unpaid principal balances of $49.9 million, with $47.1 million invested. The $47.1 million invested consisted of 63 loans acquired in six transactions.

As I’ve said before, we remain disciplined in our selection, underwriting and bidding on loan portfolio – loan pools and singularly focused on building a quality loan portfolio. We continue to demonstrate our ability to grow our loan book through our purchase business and through our originated business. Moving on to Slide 5.

At the end of the quarter, the discount on purchase loans was $33.9 million as compared to $34.4 million as of March 31.

The decrease is primarily due to accelerated accretion from purchased loan payoffs of 36.1 million in the quarter, which generated 3.6 million of transactional income, partially offset by the quarter’s purchases with a related discount of $2.8 million.

Approximately 87% of the $33.9 million discount is expected to be realized over the remaining life of the purchase loans through scheduled accretion. The non-accretable portion of the discount represents contractual cash flows that in our estimation may not be collectible. Turning to Slide 6. We provide detail on returns from the LASG portfolio.

For the quarter, the purchase portfolio generated a return of 12.3%, including the previously mentioned transactional interest income of $3.6 million. As we 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 a strong return of 7.8% in the quarter. Turning to Slide 7. We provide statistics on the LASG loan portfolio as of June 30th. Of significance, as noted in the chart in the top right corner, the purchase loan portfolio has a net investment basis of 91%, which is consistent with the linked quarter.

On an invested basis, the average loan size for purchase loans was $401,000 and the average loan size for originated loans was $2.1 million. 81% of the 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 New York and California with 21% and 18% of the portfolio, respectively. Our collateral is geographically diverse with collateral in 42 states.

In light of the recent and widely publicized New York Rent Control Legislation, we thought it would be helpful to provide on Slide 8, an analysis of our exposure to New York City multifamily real estate.

As the slide indicates, as of June 30th, we have $55 million of loans secured by multifamily real estate in New York City, which represents 6% of our total $975 million loan portfolio.

Of the $55 million multifamily loan portfolio in New York City, we have 10 multifamily loans with an aggregate principal balance of $11 million or approximately 1% of our total loan portfolio that is subject to this new legislation. These 10 loans were conservatively underwritten with a weighted average loan-to-value of 41%.

Before turning the call over to JP, I would like to briefly highlight some of the benefits we have already seen and anticipate seeing from the reorganization on May 15th. As you may recall, the reorganization was done to improve our efficiency and to provide more flexibility on both building our loan portfolio and funding our balance sheet.

In this short six weeks from May 15th to the end of the quarter, we have already realized some of the benefits. We paid off our trust preferred securities and will eliminate approximately 1.1 million of annual interest expense as a result.

By increasing the limit on purchase loans to total loans from 40% to 60% and thereby increasing our purchase loan capacity without sacrificing credit quality, we were able to bid more competitively and invest 47.1 million in purchase loans this quarter.

Finally, as a result of increasing our ratio of loans to core deposits from 100% to 125%, we’re allowed to – we were able to allow access deposits to run off and we’ll see a benefit in interest expense 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?.

Thank you, Rick, and good morning, everyone. I’m picking up on Slide 9 to provide more information on our financial results.

As announced in our earnings release that was made public after the close of business yesterday, for the quarter and year-ended June 30, 2019, we incurred non-recurring expenses in the amount of $6 million and $6.4 million, respectively, related to the corporate reorganization that was completed during the quarter.

Slide 9 shows a reconciliation of net income or loss to net operating earnings and the detail that makes up the after tax corporate reorganization expenses, which we consider to be non-recurring.

After adjusting for these expenses, the Bank reported net operating earnings of $5.4 million or $0.59 per diluted common share and an operating return on average equity of 14.2% for the current quarter.

For the year ended June 30, 2019, the Bank reported net operating earnings of $20.3 million or $2.20 per diluted common share and an operating return on average equity of 13.7%. Moving on to Slide 10. Net operating earnings for the quarter were $5.4 million or $0.59 per diluted common share.

Diluted earnings per common share were up $0.07 from the quarter ended March 31, 2019, which I shall refer to as the linked quarter and up $0.11 from the quarter ended June 30, 2018, which I shall refer to as a comparable prior year quarter.

The increase of $0.07 per diluted common share from the linked quarter was due to increased loan interest income, which amounted to $21.4 million in the current quarter compared to $18.8 million in the linked quarter as a result of higher transactional interest income, which increased $1.6 million along with higher average balances in the LASG originated portfolio.

The increase in interest income was partially offset by higher interest expense, $5.3 million in the current quarter compared to $5.1 million in the linked quarter, as a result of higher funding costs.

The provision for loan losses amounted to $262,000 in the current quarter compared to $414,000 in the linked quarter due to changes in the composition of the loan portfolio. Gains on sale of other loans decreased $582,000 compared to the linked quarter as there were no other loan sales during the current quarter.

Additionally, gains on sale of SBA loans amounted to $227,000 during the third quarter compared to $568,000 in the linked quarter due to fewer sales of SBA loans. Additionally, non-interest expenses amounted to $18.5 million during the current quarter.

However, when you exclude the reorganization expense, non-interest expense was $10.2 million compared to $9.8 million in the linked quarter primarily due to an increase in salary and employee benefits related to year-end incentive compensation.

Excluding the reorganization expenses related tax effect, the effective tax rate for the current quarter was 32.5% compared to 28.3% in the linked quarter.

The increase from the comparable prior year quarter of $0.11 in net operating earnings per diluted common shares was due to an increase in loan interest income of $4.5 million due to an increase in transactional interest income along with higher average balances in the LASG portfolio and higher research.

This increase was partially offset by higher deposit funding costs, which increased by $1.8 million due to higher average balances and increased rates offered, a decrease in non-interest income due to lower gains from the sale of SBA and other loans in the amount of $1.2 million and an increase in operating non-interest expense of $692,000, primarily due to increased salary and employee benefit costs along with increased data processing costs incurred.

Turning to Slide 11. Over the past year, we have seen net loan portfolio growth of $103.3 million or 12%. The majority of the growth over the last 12 months comes from our LASG portfolio with $407 million of purchases and originations.

As shown in the chart, in the trailing 12-month period, we have closed $47.2 million of SBA loans and sold $39 million of loans, of which $35.5 million was a guaranteed portion of SBA loans.

While Bank-wide loan production has been strong over the trailing 12 months, increases have been significantly offset by paydowns and amortization in the purchased and originated portfolios, which amounted to $315.6 million over the trailing 12 months.

These results are further detailed on Slide 12, which shows the composition of the loan portfolio over the most recent five quarters. The net loan growth over this time is primarily driven by the strength of the LASG portfolio, which had net loan growth of $132 million or 19% since June 30, 2018.

In the current quarter, LASG originated $51.8 million of loans and purchased loans with a recorded investment amounting to $47.1 million. Turning to funding on Slide 13. Our deposits have decreased by $13 million or 1% over the trailing 12-month period.

In connection with the corporate reorganization that was completed during the quarter, we were able to increase our loan to core deposit ratio from 100% to 125%, which allowed us to reduce our excess deposits. Over the past year, time deposits have seen significant growth while money markets have decreased.

Our non-maturity accounts, which include money market savings and demand deposit products, as a percent of total deposits has decreased from 63% as of June 30, 2018, but remains high at 47% as of June 30, 2019.

Of note, majority of the run up in our time deposits occurred in June and thus did not have a significant impact on current quarter average balances. We expect the benefit of lower average balances to be seen in future quarters.

Operating results are further detailed on Slide 14, which shows trends in total revenue and operating non-interest expense, which excludes the corporate reorganization expenses over the past five quarters.

Compared to the linked quarter, total revenue has increased by $1.5 million due to the increase in net interest income caused by higher transactional income and base net interest income, partially offset by a decrease in non-interest income.

Additionally, operating non-interest expense increased by $418,000 from the linked quarter, primarily due to increased salary and employee benefits related to year-end incentive compensation.

Total revenue has helped us achieve an annualized operating return on average equity of 14.2% and operating return on average assets of 1.8%, along with an operating efficiency ratio of 55.2% in the current quarter.

Compared to the comparable prior year quarter, total revenue has increased by $2 million while operating non-interest expenses has increased by $692,000.

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 portfolio, partially offset by an $808,000 decrease in non-interest income due to decreases in gains on sales of SBA and other loans.

The increase in operating non-interest expense compared to the comparable prior year quarter is primarily due to a $524,000 increase in salary and employee benefits and a $403,000 increase in data processing costs. Slide 15 shows trends in the key components of our income.

Compared to the linked quarter, base net interest income increased $30,000 due to higher average balances in the LASG originated portfolio, offset by slightly lower rates earned on our loans and higher rates paid on our deposits.

Base interest income increased $151,000 due to the increase in the average balance of the LASG originated portfolio which was offset by increased funding costs, which increased $121,000 from the linked quarter. Transactional interest income from the purchase loan portfolio increased by $2.2 million compared to linked quarter.

The purchase portfolio had a total return of 12.3% in the current quarter compared to 10.2% 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 $1.3 million due to higher average balances in the LASG portfolio and higher rates earned on the loans in the portfolio, along with an increase of $1.6 million in transactional interest income from the purchase portfolio.

The 12.3% return on the purchase portfolio in the current quarter is up from 11.5% in the comparable prior year quarter due to higher transactional interest income, along with an increase in regularly scheduled and accretion due to higher average balances in the purchase loan portfolio compared to the comparable prior year quarter.

Compared to the comparable prior year quarter, base interest income increased $3 million while funding costs increased $1.7 million.

Non-interest income decreased by $715,000 over the linked quarter, primarily due to the $582,000 decrease in the gain on sale of other loans related to LASG purchase loans that were sold in the linked quarter from the $343,000 decrease in the gain on sales SBA loans.

Non-interest income is down $808,000 from the comparable prior year quarter, primarily due to an $806,000 decrease in the gain on sales of SBA loans due to lower volumes sold in the current quarter and the $402,000 decrease in gain on sale of other loans as there were no LASG loans sold during the current quarter, partially offset by higher amounts of other non-interest income.

Slide 16 provides further color on the decrease in the gain on sale of SBA loans. It shows a decrease in the gain on sale of loans as the guaranteed sales have decreased over the past three quarters as a result of increased compensation and lower premiums received.

Slide 17 provides additional information on trends in yields, average balances and their net interest margin, which was 5.95% in the current quarter that’s compared to 5.20% in the linked quarter and 5.28% in the comparable prior year quarter.

As previously discussed, the net interest margin which increased from the linked quarter is largely due to an increase in net interest income from higher transactional interest income and the purchase on portfolio.

The average balance of loans for the current quarter was $961 million as compared to $934 million in the linked quarter and $825 million in the comparable prior year quarter, primarily due to growth in the LASG originated and purchased portfolios. Slide 18 provides a snapshot of our asset quality metrics.

Compared to the linked quarter, non-performing loans to total loans has increased to 1.51% from 1.33% and non-performing assets total assets has increased to 1.45% from 1.20%. The increase in non-performing loans is primarily due to one loan that is well secured and in the process of collection.

In the top right-hand corner, classified commercial loans were $11.6 million as of June 30, 2019, an increase from $10.7 million in the linked quarter.

As noted in the chart on the bottom right-hand corner of the slide, annual 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 a linked quarter in two previous fiscal years.

Our allowance coverage appears appropriate to address the risk inherent in our loan portfolio with a slight increase in the adjusted allowance coverage, which is primarily due to the change in the composition in the loan portfolio and management’s analysis of qualitative loss factors inherent in the loan portfolio.

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

[Operator Instructions]. Your first question comes from the line of Alex Twerdahl. Sir, you line is open..

Hi. Good morning, guys..

Good morning, Alex..

Good morning..

First, I just wanted to ask a little bit more, maybe Rick you can expand a little bit more on one of the comments you made on your prepared remarks about the LASG purchased trends that you saw this quarter and being a little bit more aggressive with pricing now that you have some relaxation and some of the constraints that you had following the corporate reorganization.

So maybe you can just comment a little bit on sort of your expectations for that portfolio, if you’re able to be a little bit more aggressive in bidding if we should see it grow a little bit faster than maybe we would have previously?.

Sure. Before we got the regulatory relief in round numbers, we had capacity to purchase loans before that of $80 million or $90 million. And so, therefore, when we were looking at loan opportunities, we were always mindful that we could run close to the cap and thinking about opportunity cost, we wouldn’t bid – let me make one point on this.

It’s nothing to do with credit. We're never bidding at a level to be more aggressive at the expense of credit.

But within our comptable credit zone, previously we would be always looking for higher yields and as a result we lost a fair number of pools that we bid on, or more frequently I should say we didn't bid on pools because based on the guidance provided by the loan sale advisor, we didn't think we would be competitive.

But now with the increase from 40% to 60%, it freed up on our existing balance sheet, increased our capacity by $200 million. And as we get more fully leveraged, it could be another $250 million or $300 million.

So we now have an opportunity to bid on loans that will provide us with a yield that is either comparable or higher than what we're getting on originated loans, but less than what we always required on purchase loans.

So one of the ways we're thinking about the purchase loan activity, and I would add we're starting to see lot of opportunities out there, is to take some portion of our purchase loans and as I say, bid, it's something that's going to earn more like 7.5 or 8 and not shoot for something that's 11, and that allows us to be more competitive and buy more.

And overall, I will spare you line by line arithmetic, but if we can take that capacity that was more than there was before the commitment was released and use that to purchase loans at yields that are equal to or higher than what we can originate in the aggregate, that will be a positive for our returns..

Great. That’s good color. And then I want to drill in a little bit to how the margin kind of the core excluding the accelerating accretion part of the margin would react if we get a rate cut later today, and maybe another one later this year? So obviously we’re seeing some good benefit on the way up, but just drilling into the different pieces.

Just correct me if I'm wrong, but some – a good portion of the LASG originated loans which you noted in the release are tied to prime but a good portion of those actually have floors on them, correct, even if the loans themselves maybe are shorter in duration?.

Yes, I have some detail on that, which I think would be helpful and then I want to caveat it a little so I don't set expectations too high. So at the end of the year, our originated portfolio was 493 million.

About 80% of those loans have floors on them, and just for the benefit – I know you have it, Alex, but for the benefit of others listening on the call, the way the floor would work we would make a loan that would be priced, say, at prime plus 2 and the rate would flow, but if prime went down, it wouldn't go below 750.

So floors are – up until recently when they started talking about rates going down, floors seemed academic. But now they're helpful of course. And we took a look at this and of course our originated book was built over time while prime was increasing. And so the weighted average floor is about 7.1, so prime’s at 5.5.

We're generally pricing at prime plus 2. So if there was a 50 basis cut, we would be earning more with the floor than we would if it just floated. And the weighted average term of those loans is about three years. Now is the but. So all I've described is terrific. I assume you and others would agree with that.

One of the things that happens always that the where we structure most loans is that they have minimum interest periods. Think of it in terms of something that came to a prepayment penalty because a lot of the lending that we're doing, particularly in the portfolio, finances shorter term.

So people can pay us off and we structure the loan and we say, we’ll lend you the money but no matter what happens, you know, we have to earn nine months of interest or a year of interest.

So I wouldn't assume for purposes of your or anyone else's modeling that for the next three years, we're guaranteed to get 7.1 on that portfolio because it tends to turn pretty quickly.

But if there were, for example, which I don't think is the likely prediction that they lowered – the Fed lowered rates by 50 basis points today, our floors would kick in. But I suspect over some time period, our portfolio would – because it turns pretty quickly, we wouldn't see the benefit. I don't want to overstate the benefit of that..

Understood. That’s some good color. And then, JP, you mentioned that there's some CDs that rolled off during the quarter that you haven't quite gotten the benefit of.

I did notice that the cash balances came down or at least the short-term investment balances came down and you're now running with the loan to deposit ratio that's a little bit above 100%.

Can you guys maybe just talk about sort of one, how high you're comfortable with that ratio going? And then two, among your different deposit strategies, what kind of beta we can expect? Should we see a rate cut and potentially some remixing of the deposits?.

Sure. That's accurate. A lot of our CDs maturities were in June, so the ending balance was almost $50 million lower than what the average balance was for the quarter. So we expect to see some benefit there. As far as the loans to deposit ratio and where we're comfortable with that, we monitor ongoing and see where rates are.

And if our strategy is best suited in deposits or taking out some FHLB advances or looking at other funding sources. So, we obviously don't want to get to 125% limit, but you know we don't want to live where we were either carrying $50 million to $100 million in excess deposits.

So we monitor that on an ongoing basis to figure out what’s a comfortable level. I think somewhere around where we ended the year is probably a good place where we expect to see it going forward. And then as far as the betas with rate cuts, we've already seen some cuts in some deposit rates on some of our funding sources.

So the online rates are dropping and the bulletin board rates seem to have been dropping since year end. So we've seen rates drop on the bulletin boards about 25 to 40 basis points since June 30th. So that's building in a 25 basis point rate cut. So it's probably around exactly there.

So it's all kind of a reflection of the market and other institutions that we compete with for deposits, their funding needs also. But we expect to see hopefully some meaningful cut in our funding costs over the next quarter..

Alex, I just want to add a little arithmetic to what JP described. We mentioned that at June 30, deposit balance was $50 million less than our average balance for the quarter. And mostly on the margins, we get that money through the bulletin boards and we leave it with the Fed and there's about a 50 basis point negative spread in doing that.

During the course of the last year, that $50 million had been higher from time to time. It's in part a function of what we anticipate our needs are going to be prospectively and sometimes we expects to buy a loan pool and we don't win it.

But just looking at the 50 million, that's $250,000 of interest expense savings a year if we don't carry excess deposits. And secondly, as I have mentioned in my comments, we have about a $1.1 million or $1.2 million of savings from repurchasing the trust preferred.

It really didn't show up in any meaningful way either of those two items in the fourth quarter for the reason JP described relative to the funding reduction because it happened very late in the quarter and with respect to the trust preferred, when we redeem them, we had to pay as part of the contractual deal when they were issued interest mostly through the end of the quarter.

So going forward, we’re going to see interest expense savings in those two areas. And not having the inventory excess cash is really one of the great benefits of the relief from the commitments with the Fed..

Great. That's extremely good color. And then just a final question for me as it relates to credit. So a little bit of an uptick in NPLs and I know you kind of talked about it a little bit in your prepared remarks. And then also the past dues ticked a little bit higher. Yet the reserve and the provision came in under expectations.

So, is it fair to assume that all these loans that maybe there's some issues with the payment or the timing of the payments, but they're well collateralized, et cetera, and the risk of loss is fairly contained?.

Well, with respect to your point that our reserve is sufficient for our portfolio, wholeheartedly agree. We go through, as all banks do; I’m not saying we’re the only ones, a very extensive review of our portfolio to make sure that we have appropriate reserve.

As you know, the way the accounting works, you don't have a reserve against your purchase loans. And so our purchase loan balance is $325 million, $340 million. So just the way the accounting works, you don't have a reserve against that. And so that means that the ones where you do have a reserve is around $650 million.

But with respect to taking a look at the level of non-performing assets, it ticked up $200 million from the linked quarter. And just to provide a little bit of color on that, there were a whole bunch of small loans that go into non-performing status and then come out. So we had some ins and outs.

But the major difference was really isolated to two groups. One, we had a loan for about 1.1 million that went into non-performing status. It's our expectation that that loan is going to pay off today or tomorrow in full.

And then in our purchase book, we had some – that increased over the linked quarter, about a 1.4 million and that's not uncommon where there's changes in that. And I'll just underscore your point that we look at all this and we're carrying these loans, particularly – I mean the purchase loans at a discount to the face.

And we feel as if we are well reserved against all of this.

And we're running at around 4 basis points of charge offs a year, which is – I know this is complicated and different than most banks when you look at our level of reserve and our level of non-performing assets and our very low level of charge offs, it's related to the kind of business that we're in, particularly around the purchase loans.

Long-winded way of saying not to worry..

Great. And I know I said that the last one was my last but one final question just as it relates to expenses. It looked like in this quarter both professional fees came in a bit below where they've been running and also occupancy and equipment has kind of been coming down now for a couple of quarters.

But maybe just – is there anything that we should be thinking about with respect to those lines or is there anything that's kind of maybe abnormally different in this quarter that we should be thinking about?.

Nothing abnormal in the quarter. Professional fees, we do our year-end true-ups, look at our accruals and make sure that everything that we have on the books at year end is accrued for, like we do every quarter. But that was just really looking at what we had accrued for over the year and what we expect to incur going forward.

And then the occupancy and equipment, that's just looking at what some of the accounts that go into those line items.

And I think on the occupancy and equipment, we’ve been moving some of that stuff to data processing fees just trying to be a little more accurate with our reporting there as we've been moving kind of our data processing to more of a hosted network and a lot of our licensing with some of our software providers.

So you've probably seen data processing ticking up and occupancy going down. The net effect should pretty much be everything moving out occupancy into data..

Alex, I would just add one point and one of the things that we focus on a lot are managing operating expenses and trying to improve our efficiency ratio. We believe we have a lot of operating leverage in the company, i.e. we could increase our loan book a fair amount with relatively small increases in our operating expenses.

And I know as you're aware, if you go back a whole bunch of years, you can see while operating expenses have increased relatively small relative to the increases in revenue in the bank. And so that's a number we're quite pleased with..

Thanks for taking all my questions this morning..

Thank you very much, Alex..

[Operator Instructions]. We have a question from the line of Mr. Robert Tinnick [ph]. Sir, your line is open..

Good morning, Rick and JP. Congratulations on a really good quarter..

Thank you and good morning..

Good morning, Robert..

I have a question for you guys. We have spectacular ROI, ROE and net interest margin metrics. I'm wondering why your dividend is so low and remains so low? Some of your metrics are the best in New England by far and yet your dividend is probably the weakest on a payout ratio by far.

So in the future, is there any prospects of having kind of what I would regard more normal dividend distribution going forward?.

It's an excellent question and the Board takes seriously and thoughtfully the use of capital, i.e., should we return and if so how much to investors by way of either dividends or stock repurchases or are we better off keeping the money in the Bank to grow our balance sheet? Those are kind of, you would imagine, the kind of standard ways to look at it.

The reason that we – and the current thinking has been that we are better off keeping the capital in the company to reinvest, leverage our loan book. I have mentioned in my comments about how much growth we have had in our LASG portfolio, which is the bulk of our loan book.

I broke it up by both purchase and originated, but blended we grew at 19% over the last year. And so we're mindful of giving up capital that we may need to grow our balance sheet. The arithmetic would tell you that if you're able to leverage up the balance sheet, that will be more profitable than returning money to shareholders.

That sounds in a bad way. We respect obviously and appreciate all of our shareholders. And that is our current thinking. I would point out just historically when we didn't have the same ability to grow our balance sheet and our stock price was trading at 80% or 85% of tangible book, we bought back 20% of our stock at an average price of $10.

And so I think to make that decision we'll need to take a look at how much capital we have, how much loan capacity – how much capacity to grow our loan book we have and how much we need and then make that decision.

As we sit here today, we think that with our existing capital growing – having room to grow our loan book $250 million or so before counting on increased capital through earnings seems like a comfortable place to be in the loan purchasing business. I'm not at all predicting this will happen and I won't read the forward-looking statement.

But with the increase in the purchase loan limit, it's within the realm of possibility that we could see a large pool of loans to buy $50 million, $75 million, $100 million.

And if we did – well, we see it and if we were successful in buying it, I think we would all be glad that we had the capital instead of forgoing that opportunity because we return capital through dividends. But your question is, as I say, is good when we've heard it before. Sometimes in a much more aggressive manner than you apposed it.

When we started this in 2010, the Bank made less than $2 million a year and this year we made $20 million. And so we never would have gotten there without having capital to do it..

You folks are doing great. Your team is excelling at what they do best. So I appreciate all the work. I'm just – Richard, I thought that would be your answer.

But I'm just wondering to see what the thinking might be going forward, but your answer was – it was very reasonable and I understand the trade-offs you have to face every day when you're looking at acquiring larger loan pools, you want to preserve your capital so you can do that. So I understand.

But at the same token, it's awfully nice to get a nice dividend.

Maybe eventually in the future, you folks will consider that?.

Well, at some point, as I said and without going into any inside modeling, if we got to the point where we had a lot of excess capital, the rational thing would be to return it to shareholders either --.

In a form of a special dividend or something or --.

If our stock price – if the world has still not yet recognize our genius through a stock repurchase or one of those various ways to do it. But where we are today, it seems having our capital available to grow our loan book is where we should be..

Sure. Good. Thanks, Richard..

Thank you very much..

[Operator Instructions]. No further questions at this time. Now, I will turn the call over to Rick Wayne for closing remarks..

Thank you for that and for all of you on the call today. Thank you for listening and following us and supporting us. We don't take it for granted. We appreciate your input. We try in every quarter provide more information so you have more understanding about our Bank.

An example was this quarter given a lot of conversation in the New York area about the newly enacted legislation, we wanted to provide some visibility into that. To the extent you have thoughts along the way of things we should include, let us know. If we can, we will. And again, thank you very much and have a terrific day..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect..