Northeast Bank

Welcome to the Northeast Bank Fiscal Year 2020 First 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 J.P. 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 will 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. 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 more detailed analysis, I would like to discuss highlights for the quarter ended September 30, 2019, which is the first quarter of our fiscal year. For our first quarter of fiscal year 2020, after the close of the market yesterday, we announced quarterly net income of $4.8 million, or 52 cents per diluted common share, a return of equity of 12.2%, a return on average assets of 1.7%, and a net interest margin of 5.7%. Additionally, as announced last week, the bank adopted a share repurchase program to purchase up to 900,000 shares of our common stock, representing approximately 10% of our outstanding common stock. The repurchase program has the potential to enhance shareholder value while returning capital to our shareholders and gives us the opportunity to repurchase our stock at a price to the extent we feel it is undervalued. The repurchase program does not obligate the bank to purchase any particular number of shares. Turning to slide three, during the first quarter, bank-wide we generated $79.5 million of loans, including $69.2 million in our LASG, of which $40.6 million were originated and 28.6 million were purchased. Offsetting the origination and purchase activity was an unusually high number of payoffs and paydowns in the LASG portfolios, which totaled approximately $100 million for the quarter. The weighted average yield of the LASG loans originated in the first quarter was 7.5% of September 30th, all of which were variable tied to prime with a weighted average floor of 7.5% as of September 30th. The total return on purchase loans for the quarter was 9.7%, which included $2 million of transactional income. And as previously mentioned, the net interest margin for the quarter was 5.7%. Moving on to slide four, of the 69.2 million invested by LASG for the quarter, 28.6 million were purchase loans, and 40.6 million were originated loans. Purchase loans for the quarter have unpaid principal balances of $30.3 million, representing a purchase price of 94.4%. Since 2010, LASG has invested an aggregate of $2 billion, consisting of approximately $900 million of purchase loans and $1.1 billion of originated loans. During the past quarter, we reviewed loans with $389 million of unpaid principal balances and bid on loans with $117 million of unpaid principal balances. As indicated, we purchased loans with a UPV of $30.3 million at 94.4%. The $28.6 million invested consisted of 24 loans acquired in seven transactions. Moving on to slide five, at the end of the quarter, the discount on purchased loans was $33.8 million as compared to $33.9 million as of June 30th. The decrease is primarily due to accelerated accretion from purchase loan payoffs of $21.4 million in the quarter, which generated $2 million of transactional income, partially offset by the quarter's purchases with a related $1.7 million discount. Approximately 88% of the $33.8 million discount is expected to be realized over the remaining life of the purchase loans through accretion. The non-accredible portion of the discount represents cash flows, contractual cash flows, that in our estimation may not be collectible. Turning to slide six, we provide detail on returns of the LASG portfolio. For the quarter, the purchase portfolio generated a total return of 9.7%. including transactional income of $2 million. Now, as we've discussed in the past, transactional income on the purchase 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 7.6% in the quarter. Turning to slide seven, we provide statistics on the LASG loan portfolio as of September 30th, of significance. As noted in the chart in the top right, the purchase loan portfolio has a net investment basis of 91%, which is consistent with the link quarter. On an invested basis, the average loan size for purchase loans was $418,000, and the average loan size for the originated loans was $2 million. 81% 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 23% and 22% of the portfolio, respectfully. Collateral is geographically diverse with collateral in 41 states. Before turning it over to JP, I'd like to discuss our SBA business. Over the past year, it has become increasingly difficult for us to book loans in the hotel vertical with originations that have declined from $19 million in Q1 to $7.7 million in Q4 of fiscal 19, and Zero and the quarter that just ended. While we have seen many loan opportunities in the hotel vertical, it has become increasingly more challenging for us to book loans that meet our credit appetite. And we don't see this changing anytime in the near future. While we will certainly continue to originate SBA loans where they meet our credit and other criteria, We will now do so as part of our LASG and not through a separate SBA division. As part of this, Fred Schwartz, who headed up our SBA hotel vertical, left the bank at the end of September. 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 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 $4.8 million, or 52 cents per diluted common share. Diluted net operating earnings per common share were down 7 cents from the quarter ended June 30, 2019, which I shall refer to as the linked quarter, and up 3 cents from the quarter ended September 30th, 2018, which I shall refer to as the comparable prior year quarter. The decrease of 7 cents per diluted common share from the linked quarter was due to decreased loan interest income, which amounted to $19.7 million in the current quarter compared to $21.4 million in the linked quarter as a result of less transactional interest income compared to the linked quarter. which decreased by $1.6 million. Additionally, interest income on other short-term investments and dividends decreased by $389,000 compared to the linked quarter. These decreases in interest income were partially offset by lower interest expense totaling $4.8 million in the current quarter compared to $5.3 million in the linked quarter as a result of lower funding costs from the decrease in deposits and the redemption of Trust Preferred Securities as a result of the corporate reorganization completed in the linked quarter. The provision for loan losses amounted to a credit of $136,000 in the current quarter compared to a provision of $262,000 in the linked quarter due to changes in the composition of the loan portfolio due to higher payoffs during the current quarter. The income decreased $116,000 Thank you for joining us today. compared to $10.2 million in the linked quarter, primarily due to an increase in loan acquisition and collection expense from increased expenses incurred on loan workouts in the LASG portfolios, which can vary due to the timing of recruitment of these expenses, which positively impacted the linked quarter offset by a decrease in FDIC insurance premiums due to a small business assessment credit received in the current quarter. Excluding the reorganization expenses in the linked quarter and related tax effects, the effective tax rate for the current quarter was 28.7% compared to 32.5% in the linked quarter. The increase from the comparable prior year quarter of $0.03 in earnings per diluted common share was due to an increase in loan interest income of $2.2 million due to an increase in transactional income along with higher average balances and the LASG portfolios and higher rates earned. This increase was partially offset by a decrease in interest income on short-term investments of $540,000 from the comparable prior year quarter due to lower cash balances held, an increase in deposit funding costs of $634,000 due to higher rates offered, a decrease in non-interest income due to $599,000 of lower gains from the sale of SBA loans, and an increase in non-interest expense of $999,000, primarily due to increased salary and employee benefit costs incurred. Turning to slide 9, over the past year, we have seen net loan portfolio growth of $46.8 million, or 5%. The majority of growth over the last 12 months comes from our LASG portfolio, with $370.2 million of purchases and originations. 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 $326.6 million over the trailing 12 months. 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 primarily driven by the strength of the LASG portfolio, which had net loan growth of $80 million, or 11%, since September 30, 2018. In the current quarter, LASG originated $40.6 million of loans and purchased loans with a recorded investment amounting to $28.6 million. 82% of the LASG originated loans have an interest rate floor, which was a weighted average floor of 7.23% as of September 30th, 2019. Additionally, 8% of the total LASG originated loan portfolio is fixed at a weighted average rate of 7.9%. Turning to funding on slide 11, our deposits have decreased by $108 million or 11% over the over the trailing 12-month period. In connection with the corporate reorganization that was completed during the linked quarter, we increased our loan to core deposit ratio from 100% to 125%, which allowed us to reduce our excess deposits along with a reduced need for funding due to higher loan payoffs than expected during the current quarter. 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 57% as of September 30, 2018, but remains high at 48% as of September 30, 2019. Compared to the linked quarter, we experienced $509,000 of interest expense savings, $340,000 of which was associated with interest-bearing deposits. However, the weighted average rates of deposits remain constant from the linked quarter. We have $113 million of time deposits maturing between October and January at a current weighted average rate of 2.81%, which we expect to reprice at much lower rates. Operating results are further detailed on slide 12, which shows trends in total revenue and operating non-interest expense, which excludes the corporate reorganization expenses incurred in the linked quarter. Compared to the linked quarter, total revenue has decreased by $1.5 million due to the decrease in net interest income primarily caused by lower transactional income. Additionally, operating non-interest expense increased by $184,000 from the linked quarter, primarily due to increased loan acquisition and collection expense. Total revenue has helped us achieve an annualized return on average equity of 12.2%, a return on average assets of 1.7%, and an efficiency ratio of 61.2% in the current quarter. Compared to the comparable prior year quarter, total revenue has increased by $1 million, while non-interest expense also increased by $1 million. 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 portfolios along with an increase in transactional interest income partially offset by a $378,000 decrease in non-interest income due to lower gains on sale of SBA loans. The increase in non-interest expense compared to the comparable prior year quarter is primarily due to an $878,000 increase in salary and employee benefits due to increased stock-based compensation Employee salaries and incentive compensation. Slide 13 shows trends in the key components of our income. Compared to the linked quarter, base net interest income increased $52,000 due to lower average deposit balances along with lower interest expense on subordinated debt due to the redemption of trust preferred securities during the linked quarter. Base interest income decreased $457,000 primarily due to the decrease in the average balance of short-term investments from the linked quarter. Transactional interest income from the purchase loan portfolio decreased by $1.6 million compared to the linked quarter. The purchase loan portfolio had a total return of 9.7% in the current quarter compared to 12.3% in the linked quarter. Interest expense also decreased by $509,000 from 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 $885,000 due to higher average balances in the LASG portfolio and higher rates earned on the loans in the portfolio, along with an increase of $493,000 in transactional interest income from the purchase portfolio. The 9.7% return on the purchase portfolio in the current quarter is up from 9.5% in the comparable prior year quarter due to higher transactional interest income along with an increase in regularly scheduled interest and accretion due to higher average balances in the purchase loan portfolio compared to the comparable prior year quarter. Non-interest income increased by $25,000 over the linked quarter While non-interest income decreased $378,000 from the comparable prior year quarter, primarily due to a $599,000 decrease in the gain on sale of SBA loans due to lower volume sold in the current quarter, partially offset by a $182,000 increase in other non-interest income, mostly related to a life insurance death benefit gain recognized during the current quarter. Slide 14 provides additional information on trends and yields, average balances, and our net interest margin, which was 5.72% in the current quarter as compared to 5.95% in the linked quarter and 4.93% 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 transactional interest income from the purchase loan portfolio. The average balance of loans for the current quarter was $951 million as compared to $961 million in the linked quarter and $894 million in the comparable prior year quarter, primarily due to net growth in the LASG portfolio originated in purchase portfolios from the comparable prior year quarter and net paydowns and payoffs in the portfolios from the linked quarter. Slide 15 provides a snapshot of our asset quality metrics. Compared to the linked quarter, non-performing loans to total loans has remained consistent at 1.51% and non-performing assets to total assets has decreased to 1.43% from 1.45%. The decrease in non-performing loans is primarily due to one loan that paid off during the quarter. In the top right hand corner, Classified commercial loans were $11.1 million as of September 30, 2019, a decrease from $11.6 million in the linked quarter. As noted in the chart on the bottom right-hand corner of the 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, a slight increase over the three previous fiscal years. Our allowance coverage appears appropriate to address the risk inherent in our loan portfolio with consistent adjusted allowance coverage and a slight decrease in the coverage ratio, which is primarily due to the change in the composition of the loan portfolio and 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.