Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2020 Second Quarter Earnings Results Conference Call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer; and JP Lapointe, Chief Financial Officer.
Earlier this morning, an investor presentation was uploaded to the bank's website, which we will reference in this morning's call. The presentation can be accessed at the Investor Relations section of northeastbank.com under Events and Presentations. You may find it helpful to download this investor presentation and follow along during the call.
Also, this call will be available for rebroadcast on the website for future use. The question-and-answer session for this call will be conducted electronically following the presentation. Please note that 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 and thank you all for joining us today. With me is JP Lapointe, our Chief Financial Officer. Before turning the call over to JP for a more detailed analysis, I would like to discuss highlights for the quarter ended December 31, which is the second quarter of our fiscal year.
For the second quarter, after the close of the market yesterday, we announced quarterly net income of $4.9 million, or $0.53 per diluted common share, a return on average equity of 12.1%, a return on average assets of 1.7%, and a net interest margin of 5.6%.
Earnings were positively affected by strong loan growth in the LASG portfolio of $75.4 million, or 10% over the linked quarter and transactional income of $2.4 million, as well as lower non-interest expense. Turning to slide 3.
During the second quarter, bank-wide we generated a record $175.4 million of loans, which brought the quarter end loan portfolio to slightly in excess of $1 billion. The quarter end loan balance represents a significant increase over the average loan balance of $946 million in the second quarter.
Loans closed in the second quarter included $163.4 million in LASG, of which $98.6 million were originated and $64.8 million were purchased. The weighted average yield of the LASG loans originated in the second quarter was 7.4% as of December 31, of which 82% were variable mostly tied to prime.
The total return on purchased loans for the quarter was 10.2%, which included $2.4 million of transactional income and as previously mentioned, net interest margin for the quarter was 5.6%. Moving on to slide 4. Of the $163.4 million invested by LASG for the quarter, $64.8 million were purchased loans and $98.6 million were originated loans.
Purchased loans for the quarter have unpaid principal balances of $66.8 million, representing a purchase price of 97.1%. Since the merger in 2010 LASG has invested an aggregate of $2.2 billion consisting of $957 million of purchased loans and $1.2 billion of originated loans. During the quarter, the market for purchase loans was quite robust.
We reviewed loans with $526 million of unpaid principal balances and bid on $100 million. We purchased loans with unpaid principal balances of $66.8 million as discussed above. The $64.8 million invested consisted of 138 loans acquired in 10 separate transactions. Moving on to slide 5.
At the end of the quarter, the discount on purchased loans was $33.8 million, unchanged from September 30. During the quarter there was acceleration accretion from purchased loan payoffs of $20.2 million, which generated $2 million of transactional interest income, offset by the quarter's purchases with the related $2 million of discount.
Approximately 86% of the $33.8 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 6. We provide detail on returns from the LASG portfolio.
For the quarter the purchased portfolio generated a total return of 10.2%, reflecting transactional income of $2.4 million. As we've discussed in the past, transactional income realized on the purchased loan 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 7.7% in the quarter. Turning to slide 7. We provide statistics on the LASG loan portfolio as of December 31, 2019. Of significance, as noted in the chart in the top right corner, the purchased loan portfolio has a net investment basis of 92%, an increase from 91% in the linked quarter.
On an invested basis, the average loan size for purchase loans was $414,000 and the average loan size for originated loans was $2.2 million. 77% of LASG loans had an investment size of less than $6 million. The loan portfolio has a diverse collateral type primarily focused on multifamily, retail, industrial, hospitality, office, and mixed use.
By geography, the largest concentrations are in New York and California with 26% and 21% of the portfolio, respectively. Our collateral is geographically diverse with collateral in 45 different states.
And now I would 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 8 to provide more information on our financial results. As announced in our earnings release that was made public after the close of business yesterday, net income for the quarter was $4.9 million or $0.53 per diluted common share.
Diluted net income per common share was up $0.01 from the quarter ended September 30, 2019, which I shall refer to as the linked quarter and down $0.03 from the quarter ended December 31, 2018, which I shall refer to as a comparable prior year quarter.
The increase of $0.01 per diluted common share from the linked quarter was due to a decrease in noninterest expense of $565,000 and an increase in noninterest income of $161,000, partially offset by a decrease in net interest income of $192,000 and an increase in the provision for loan losses of $379,000.
The decrease in noninterest expense was primarily related to a decrease in sales and employee benefits expense, mostly related to decreased payroll taxes and a reduction in stock compensation expense.
The increase in noninterest income was due to a gain on real estate owned on a property that was transferred in during the quarter and recorded at its fair value less expected cost to sell.
Net interest income was down, primarily due to a decrease in loan interest income of $214,000 due to lower average balances in the loan portfolio along with lower interest income earned in the SBA and community bank portfolios, partially offset by a decrease in interest expense.
Additionally, the provision for loan losses amounted to $243,000 in the current quarter, which increased from a credit of $136,000 in the linked quarter, primarily as a result of the growth in the loan portfolio. The effective tax rate for the current quarter was 28.9%, which increased slightly from 28.7% in the linked quarter.
The decrease from the comparable prior year quarter of $0.03 per diluted common share was primarily due to a decrease in non-interest income of $208,000 due to a $638,000 decrease in gains from the sale of SBA loans.
As the bank has shifted its focus away from SBA originations, partially offset by an increase of $338,000 in gain on real estate owned due to a property transferred in during the quarter; and $108,000 in gains on sales of residential loans due to higher volume and higher pricing of loans sold.
Additionally there was a decrease in net interest income primarily due to a decrease in other interest and dividend income as the bank now holds less cash with the Federal Reserve which resulted in a decrease of $644,000 in interest income due to lower average balances and lower rates earned.
This decrease was partially offset by a $556,000 increase in loan interest income due to increased average balances in the LASG portfolio.
Interest expense was flat from the comparable prior year period, while the provision for loan losses increased $142000 from the comparable prior year period due to the loan portfolio composition and management's evaluation of losses inherent in the portfolio.
Additionally there was a decrease in non-interest expense of $114,000 from the comparable prior year quarter due to a $211,000 decrease in professional fees partially related to legal expenses associated with the corporate reorganization recorded in the comparable prior year quarter along with the $108,000 decrease in occupancy and equipment expense from decreased repairs and maintenance costs and a $104,000 decrease in loan acquisition and collection expense due to expense reimbursements received during the current quarter.
These decreases were partially offset by an increase in salary and employee benefits of $227,000 mostly due to salary and incentive compensation increases and a $172,000 increase in data processing fees due to increased IT outsourcing costs.
The effective tax rate for the current quarter was 28.9% which increased slightly from 28.7% in the comparable prior year quarter. Turning to Slide 9, over the past year we have seen net growth in the LASG portfolio of $98.5 million or 13%.
While payoffs, paydowns and amortization were higher in the linked quarter net activity has decreased to normalized levels in the current quarter with current quarter LASG originations and purchases reaching record levels at $98.6 million and $64.8 million respectively.
These results are further detailed on Slide 10 which shows the composition of the loan portfolio over the most recent five quarters. The net loan growth over this time is driven by the strength of the LASG portfolio which had net loan growth of $98.5 million or 13% since December 31, 2018.
In the current quarter, LASG originated $98.6 million of loans and purchased loans with a recorded investment amounting to $64.8 million. 84% of the LASG originated loan portfolio have an interest rate floor which was a weighted average floor of 7.2% as of December 31, 2019.
Additionally 10% of the LASG originated loan portfolio is that -- is fixed at a weighted average rate of 8.2%. Turning to funding on Slide 11, our deposits have decreased by $47 million or 5% for the trailing 12-month period.
In connection with the corporate reorganization that was completed during the fourth quarter of fiscal 2019, we increased our loan to core deposit ratio from 100% to 125% which allowed us to reduce our excess deposits. However, deposits increased compared to the linked quarter in order to fund the loan growth in the LASG portfolio.
Over the past year time deposits have grown 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 from 53% as of December 31, 2018 to 48% as of December 31, 2019.
Compared to the linked quarter interest expense decreased $45,000, $135,000 of which was interest expense savings on deposits; partially offset by a $93,000 increase in interest expense from FHLB advances due to the increase in average balance resulting from FHLB advances taken during the quarter.
Our cost of deposits only decreased 4 basis points from the linked quarter.
However, we had $40 million of bulletin board time deposits that matured in December 2019, which were at a weighted average rate of 2.99% and bulletin board time deposits retained or put on during December, where the rollovers or new deposits were at a weighted average rate of 1.86%, which will allow us to see additional cost savings going forward.
Operating results are further detailed on Slide 12, which shows trends in total revenue and operating non-interest expense over the past five quarters.
Compared to the linked quarter, total revenue has decreased by $31,000, due to the decrease in net interest income primarily caused by lower interest income in the SBA and community banking divisions, partially offset by an increase in interest income from the LASG portfolio and an increase in non-interest income from a gain on real estate owned.
Additionally, non-interest expense decreased by $565000 from the linked quarter, primarily due to decreases in salary and employee benefits expense and loan acquisition and collection expense.
Total revenue has helped us achieve an annualized return on average equity of 12.1%, a return on average assets of 1.7% and an efficiency ratio of 58% in the current quarter. Compared to the comparable prior year quarter, total revenue has decreased by $306,000, while non-interest expense decreased by $114,000.
The decrease in revenue is primarily due to the $208,000 decrease in non-interest income, due to a $638,000 decrease in gain on sale of SBA loans, which was partially offset by a $338,000 increase in gain on real estate owned and a $108,000 increase in gain on sale of residential loans.
Additionally, there was a decrease in net interest income, due to decreased average balance and rates earned on short-term investments, as the bank has held less cash with the Federal Reserve, which was partially offset by an increase in interest income on LASG loans due to higher average balances.
The decrease in non-interest expense compared to the comparable prior year quarter is primarily due to a $211,000 decrease in professional fees, partially related to legal expenses associated with the corporate reorganization recorded in the comparable prior year quarter, along with a $108,000 decrease in occupancy and equipment expense from decreased repairs and maintenance costs and a $104,000 decrease in loan acquisition and collection expense, due to expense reimbursements received during the current quarter.
These decreases were partially offset by an increase in salary and employee benefits of $227,000 mostly due to salary and incentive compensation increases and a $172,000 increase in data processing fees due to increased IT outsourcing costs. Slide 13 shows trends in the key components of our income.
Compared to the linked quarter, base net interest income decreased $161,000, due to a $466,000 decrease in interest income from the SBA division loan portfolio, which was due to fee recognition from payoffs in the linked quarter.
This was partially offset by a $357,000 increase in base net interest income in the LASG portfolio compared to the linked quarter due to higher average balances and rates earned in this portfolio. Transactional interest income from the purchased loan portfolio decreased by $31,000 compared to the linked quarter.
The purchased loan portfolio had a yield of 9.8% in the current quarter compared to 9.7% in the linked quarter. Interest expense also decreased by $45,000 from the linked quarter.
The decrease in net interest income from the comparable prior year quarter is largely attributable to a decrease in interest income from short-term investments given the lower average balance and rates earned on these investments, which was mostly offset by an increase in interest income from the LASG portfolio, as a result of increased average balances which was then partially offset by a decrease in rates earned from the comparable prior year period.
The 9.8% yield on the purchase portfolio in the current quarter is down from 10.3% in the comparable prior year quarter.
Due to less transactional interest income along with loans purchased at lower rates and senior discounts over the past year paired with a higher average balance, which requires higher interest in transactional amounts to be recognized to maintain higher returns.
Non-interest income increased by $161,000 over the linked quarter, while non-interest income decreased by $208,000 from the comparable prior year quarter.
The increase from the linked quarter is primarily a result of an increase of $316,000 in gain on real estate owned, partially offset by $133,000 decrease in bank-owned life insurance income, resulting from a death benefit gain recognized in the linked quarter.
The decrease from the comparable prior year quarter is due to a $638,000 decrease in gain on sale of SBA loans, partially offset by a $338,000 increase in gain on real estate owned and $108,000 increase in gain on residential loans.
Slide 14 provides additional information on trends and yields, average balances and our net interest margin which was 5.6% in the current quarter as compared to 5.7% in the linked quarter and 5.3% 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 lower SBA interest income resulting from the recognition of fee income related to payoffs during the linked quarter.
The average balance of loans for the current quarter was $946 million, as compared to $951 million in the linked quarter due to lower average balances in the SBA, Community Banking and LASG originated divisions partially offset by growth in the LASG purchase portfolio and compared to $910 million in the comparable prior year quarter, due to growth in the LASG portfolio, partially offset by decreases in the SBA and Community Banking divisions from the comparable prior year quarter.
Slide 15 provides a snapshot of our asset quality metrics. Compared to the linked quarter, non-performing loans to total loans has increased to 1.88% from 1.51% and non-performing assets to total assets has increased to 1.76% from 1.43%.
The increase in non-performing loans is primarily due to one LASG originated loan, totaling $2.7 million and three LASG purchased loans totaling $2.1 million that were placed on non-accrual during the quarter. These loans are well secured and in the process of collection.
In the top right-hand corner, classified commercial loans were $12.4 million, as of December 31, 2019, an increase from $11.1 million in the linked quarter.
As noted in the chart on the bottom right-hand corner of this slide, annualized net charge-offs to average loan balances have remained at very low levels over the past several years and were seven basis points in the current quarter compared to the linked quarter.
Our allowance coverage appears to be appropriate to address the risk inherent in our loan portfolio with slight decreases in both adjusted allowance coverage and the coverage ratio, which is primarily due to the change in the composition of 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] Our first question comes from David Minkoff with DCM Asset Management. Your line is now open..
Good morning, Rick and JP.
How are you today?.
Good morning, David..
Good morning, David..
So JP addressed the non-performers that went up a little bit to $21 million from $16.7 million, and I think you said it was one loan of $12 million that caused that. But I noticed that was pass-through loans of $28 million versus – or 2.84% versus $14.6 million, or 1.5%.
Would you – is that indicative of the economy overheating or getting a little dicey? That's – and is it concerning in any way?.
First of all David, thank you for asking that question because it's a topic that I'd like to address. And so I'm going to answer it a little bit broader for the others on the call, and of course respond to your question about the reason for that. One to put in context LASG between purchased and originated has 1,100 loans. So it's a fair number.
And I want to address both NPLs and delinquencies. So NPLs went up a little bit less than $5 million from September 30 to December 31. And there were really two loans that accounted for 75% of that increase both of which one has an LTV of around 60% and one 50%.
And I'm going to come back to it at sort of at the end as why the numbers in our MVLs and delinquencies can change from quarter-to-quarter. With respect to delinquencies, they went up about $14 million from September 30th quarter, half of them are three loans. One of the loans which is $2.7 million of that is already paid off.
Another one of the loans that is $2.7 million -- again $2.7 million of it is in the process of foreclosure we would expect -- I won't bore everyone by reading the forward-looking statement, but I will make one.
We anticipate that by the end of our fiscal year that we will get out of this with all principal accrued interest, late fees, legal fees, et cetera. And then there was another one for $2.2 million which was recently purchased in August. Our delinquency levels, there is some variability from -- in different quarters.
I went to look back this morning at quarter that was two years ago 12/31/17, delinquencies were $30 million; last year 12/31/18 they were $18 million and now $28 million. So, the reason our numbers are probably -- that's more tentative are higher than banks with more traditional lending programs is we buy loans at a discount.
Occasionally, borrowers try and game us, somebody whispers them if they stop paying. They make an assumption how much discount we bought it for if we -- if they stop paying, they'll cut a deal. I mean that -- they never get a deal because of that factor. We always look at how to maximize the return.
And so we see levels -- we see loans coming in and out of delinquency and non-accrual, et cetera. And so I encourage investors and other constituents who look at this number to really look at charge-offs rather than the level of either delinquencies or NPLs at any point in time.
When you look at charge-offs, it's really where the rubber meets the road. Since we started this in 2011, on a cumulative basis, LASG's originated $1.2 billion of loans and the charge-offs on that $1.2 billion are zero, none.
And on the purchased loans which we've done cumulatively $950 million on a weighted average basis charge-offs have been seven basis points on as you know very high yields in that portfolio. Your question now was is there anything in that -- and so that's the broad answer to your question.
You asked whether we see anything in the economy that's affecting that. And one of the things we do in terms of managing our portfolio risk is we take a look in every market in which we have collateral -- bi-collateral type. And our real estate group determines whether the market is stable or it's getting better or it's getting worse.
And based on that we stress at different levels of the portfolio to see the impact of what that might do to our portfolio. And what we see in our portfolio is things are pretty good. We do see when we buy loans; we have concern that's not the right word.
We take into account for example in New York now the recent changes in rent control and in of the calls a couple of quarters ago we talked about that and it influences how much we would loan or how much we would buy a loan for. But we don't see the economy as we sit here today adversely affecting our portfolio..
Okay. Understood on that. In the past due section though they went to $28 million from $14 million. And the absolute number is not that terrible when you consider you had a higher volume of loans. But what did jump out to me a little bit was the percentage went from 1.46% -- I'm sorry 1.50% to 2.84%. The percentage of past due doubled.
Is that -- that's I guess what was more concerning on the absolute number going from $14 million to $28 million.
Am I reading this wrong or?.
Your arithmetic is right. But now let me take that long comment I gave earlier and kind of narrow it down to its basics. One in our portfolio, we can have a higher level of non-accruals or delinquent loans.
We can -- for the reasons I described, which I won't bore everyone by repeating, but they resolve themselves and the level of charge-offs are very small. So, I would not be concerned.
And furthermore, that increase, as I described, three of those or a half of that increase is attributable to three loans, which I will say with great confidence, there's going to be no loss on those..
Okay. Understood. That's kind of clear. One other thing was, last quarter you announced a significant share buyback, or you authorized one, let's say, I think, it was not for 900,000 shares. And at that time, I think, the stock was in the $22 range.
I'm just wondering -- and stocks are little lower now, but most of the lower part came in after the second quarter. So, I think -- but year-end was only $21.5.
Should I assume that no shares were bought back in the last quarter? Or, I guess, you would -- would you have announced it, if you did?.
We would have announced it and you are correct. There were no shares purchased in the last quarter..
Very good..
I know you have, and others do, a question of stock repurchases. And you've mentioned in the past, we have desire for more dividends. We're not in the business of holding capital. It's our -- if we can't use it.
But if you take a look at the last quarter, we earned around $5 million, a little bit less, which -- using this simple math, it could be a little more complicated. But if you said, you can leverage that by 10 as $50 million, if you're 80% loans to that number, that will be $40 million of loans and we grew our loan book by $75 million.
And so, what we're paying close attention to is our ability to leverage our balance sheet and use that capital.
Of course, if we got to the point where we determined that we have more capital than we could use, then it would be appropriate, as both management and the board does, is to think about utilization of capital, whether through a stock repurchase or a dividend, which, as you know, David, from our conversations in the past is, in part, a function of stock price and all those kinds of factors..
Rights. That’s good..
Where we sit today, based on what we're seeing, the best thing we can do is leverage the capital we have. And if we have to go back to the market and raise more capital, I suspect it would be fairly expensive. So we want to make sure we believe we can use the capital. And if that changes, then we'd have a different plan..
Obviously..
Which you will see..
Right. Very good. I'll get back into the queue. Nice talking to you guys and we'll talk again soon..
Delightful. Thank you, David..
Okay..
Thank you. [Operator Instructions] So there are no questions in the queue, I will now turn the call over to Rick Wayne for closing remarks..
Well, thank you, for those of you who have called in and for those of you that are going to listen after the call. Thank you for following and paying attention to our stock. I think, you can tell from both the press release and the enthusiastic discussion of the past quarter.
And we thought it was a very, very strong one with the record level of loan volume out of LASG, good control of expenses and good level of earnings. And with that, I thank you again and look forward to talking to you when we report our earnings in three months in April. Thank you very much..
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect..