Northeast Bank
Q1 2015 Earnings Call Transcript

Published: 4 May 2015

[Operator:]

Good day, everyone, and welcome to the Northeast Bancorp Fiscal Year 2015 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; Claire Bean, Chief Operating Officer; and Brian Shaughnessy, Chief Financial Officer. Earlier this morning an investor presentation was uploaded to the company's website, which we will reference in this morning's call. The presentation can be accessed at the Investor Relations section of northeastbank.com under Events & 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 information for Northeast Bancorp. Such information constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involves significant risks and uncertainties. Actual results may differ materially from these results discussed in the forward-looking statements. At this time, I would like to turn the call over to Rick Wayne. Please go ahead sir.

[Rick Wayne:]

Good morning and thank you all for joining us today. I am Rick Wayne, Chief Executive Officer of Northeast Bancorp and with me is Claire Bean, our Chief Operating Officer; and Brian Shaughnessy, our new Chief Financial Officer and Treasurer. Claire will discuss our financial results following my comments and following that we will be happy to answer your questions. Please turn to Slides 3 and 4. For the quarter, we closed $69.8 million of loans including 35.8 million of LASG commercial loan purchases and originations, 21.1 million of residential loan originations and 9.4 million from our new national SBA division. With $2.7 million of transactional income the purchase loan portfolio generated a return of 13.6% and bank wide net interest margin of 4.79%. During the quarter we repurchased 31,250 shares of stock at an average price of $9.30 and cumulatively through March 31 we have repurchased 771,136 shares at an average price of $9.36. As mentioned yesterday at our, as discussed yesterday in our press release, the Board voted to increase the stock repurchase program by an additional 500,000 shares. Turning to Slide 5. As we have discussed in the past, under a regulatory commitment made in connection with the 2010 merger, purchased loans are limited to 40% of total loans. Loan purchasing capacity was 19.7 million at December 31, 2014 and 62.9 million at March 31, 2015 reflecting loan purchases of $5.1 million, on balance sheet loan originations of 41.9 million and pay downs in our purchased and originated loan portfolios. Loan purchase capacity increases or decreases depending upon a relative amount of purchased and originated loans on our balance sheet at any point in time. Now on Slide 6. Under another regulatory commitment, commercial real estate loans are limited to 300% of total risk based capital. Capacity under this commitment was 133 million at December 31 and a 155 million at March 31 reflecting commercial real estate loan activity which includes non-owner occupied purchases, originations and pay downs of 17 million and a $5 million impact of an increase in our regulatory capital. Moving on to Slide 7. Of the 35.8 million invested by LASG for the quarter, 5.1 million were purchased loans and 30.7 million were originated loans. Purchased loans for the quarter had unpaid principal balances of $5.5 million representing a purchase price of 92.3%. Since June of 2011 when LASG purchased its first loan, it has invested an aggregate of $570 million consisting of 362 million of purchased loans and 208 million of originated loans. I would like to briefly comment on what we saw in the small balance performing commercial loan purchase market during the past quarter. As I noted we purchased loans at an invested amount of 5.1 million and an unpaid principal balance of 5.5 million. During the past quarter we reviewed loans with approximately 275 million of unpaid principal balance bidding on loans with [50] million of unpaid principal balance. While purchases were lower than in prior quarters of this year, I would point out its not uncommon for the first calendar quarter to be slower. Most of the product we saw came from non-bank sellers who at this point had differing views on both collateral value and yield expectations. As I had said before, we remain disciplined in our selection underwriting and bidding our loan pools and singularly focused on building a quality portfolio. Moving on to Slide 8. At the end of the quarter the discount on purchased loans was 39 million, a decrease of approximately 3 million from the previous quarter ending December 31. The decrease is due to 29.8 million of purchased loan payoffs, higher than usual coupled with the lower level of loan purchases. On the positive side, the purchase loan payoffs did generate 2.7 million of transactional income. I would point out that approximately 72% of the $39 million discount is expected to be realized over the remaining life of the purchased loans through scheduled accretion. The non accretable portion of the discount represents contractual cash flows that in our estimation may not collectible. Turning to Slide 9 which provides detail on the LASG portfolio. For the quarter the purchased portfolio generated a total return of 13.6% including transactional income of 2.7 million from unscheduled loan payoffs and asset sales. While the returns on our purchased portfolio are strong, it is important to emphasize that both the amount of loans purchased and the transactional income realized on the purchase portfolio may not be consistent from quarter-to-quarter. With respect to the LASG originated portfolio which does not benefit from a purchase discount, it generated returns of approximately 5.7% in the quarter. In addition, you will notice a yield of 0.46% -- that was 0.46% on loans to a broker dealers secured by securities. Turning to Slide 10 which provides some statistics on the LASG portfolio as of March 31, of significance. As noted in the chart in the top right, the purchased loan portfolio had a weighted average net investment basis of 83%. On an invested basis the average loan size is approximately 793,000 with the largest individual loan at 12 million and excluding loans to broker dealers was 16% of the portfolio consisting of loans of less than $4 million. Our loan portfolio has a diverse collateral type primarily focused on retail, industrial, office, hospitality and multi-family, and by geography with the largest concentration in California at 23%, New York at 16% of the portfolio, our collateral geographically diverse with collateral in 36 states. Turning to Slide 11. In our last call I discussed our new national SBA division which originates loans guaranteed by the small business administration. As you may recall, we hired Jeanne Hulit, the former Acting Administrator of the SBA in February 2014 and in September 2014 hired Jonathan Smith who is responsible for out of market SBA lending for TD Bank. In the beginning of November 2014 we hired seven business development officers in various cities around the United States. In our last call I indicated that production would build over time. Originations from this division have grown from 2.8 million in the second quarter to 9.4 million in the quarter ending March 31. 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 the most recent quarter, out of the $9.4 million of originations, we sold 3.1 million of the guaranteed portion of these loans generating $425,000 of gain on sale which also includes the servicing asset that is created or capitalized. Because some of the loans were closed late in March, we were unable to sell them in the quarter and held $3.9 million of guaranteed loans in portfolio at quarter end. Note that the reported gain on sale of SBA loans in the quarter ending December 31, 2014 includes transactions bank wide and Slide 11 reflects only SBA originations from our national SBA division. Thank you. And now I would like to turn this over to Claire who will discuss in more detail our financial report.

[Claire Bean:]

Thanks Rick and good morning everyone. I am picking it up on Slide 12 to provide a little more color on our financial results. As Rick noted it was a solid quarter with net income of 1.75 million or $0.18, that's up $0.02 from last quarter and up significantly from the $0.04 we earned in the comparable '14 period. Results were driven impart by transactional income which at 2.7 million was similar to last quarter's total but also by some early results from our national SBA initiative which produced gains of 425,000 for the quarter. Turning to Slide 13. While we had strong loan growth over the past 12 months, up 65 million or 13%, as Rick noted earlier, we were essentially flat this past quarter as 36 million of new LASG originations and purchases were mostly offset by a high level of pay downs in the purchased portfolio. To put that in some perspective, purchase pay downs were 29 million over the past three months while for the two previous quarters they averaged about 17 million and if one were to look back over say the last six quarters, they averaged about 12 million per quarter. These results are further detailed on Slide 14 which shows the composition of net loan growth over the past year and this is mainly on the strength of reduction by the LASG which grew to 74 million or 27%. In our Community Banking Division the residential portfolio continue to decline as we’ve been selling nearly all production in the secondary market. Our community bank lending team has had success growing commercial loans which are up by 9 million or 11% over the past 12 months. Turning to funding on Slide 15, we have grown core deposits 92 million or 16% over the past year and were up 23 million or 3.7% over the quarter. In each of those periods, most of the increase has come in our ableBanking division's money market product. This growth has strengthened our overall deposit mix, secure transaction, money market and savings accounts now represent 48% of total deposits and that's up from 40% at June 30, '14. Slide 16 shows trends in the main components of our core earnings and highlights the effective transactional income where appropriate. Transactional income which you've heard us say over and over can bounce around from quarter-to-quarter, was this time fairly consistent with a linked quarter. Base net interest income was barely flat this quarter to last due to the significant amounts of pay downs in the purchase book, while non-interest income increased by 13% compared to the linked quarter. Due to an increase in transactional non-interest income from the LASG group and due to an increase in SBA gains from the new national SBA division, this was offset in part by a seasonal dip in residential gains. Lastly, as can be seen here in the lower right and on Slide 17, operating expenses have been hovering in the range of 8 million to 8.2 million in each of the last two quarters with the efficiency ratio running in the mid-70s. And as we’ve noted before, while expenses will rise some as we continue to lever up, we believe there is an opportunity to drive that efficiency ratio down meaningfully from here. Slide 18 provides additional information on trends and yields, average balances and our interest margin. The latter at 4.79% which was a bit lower than the linked quarter and significantly above the result in the comparable fiscal '14 quarter. Our baseline NIM with all transactional interest income stripped out of it came in at 3.59% which was up slightly from last quarter. Turning to Slide 19, the decrease in the residential loan volume and associated gains in the fiscal third quarter reflect typical seasonality exacerbated somewhat this year by the unusually harsh weather in May. Lastly, Slide 20 provides a snapshot of our asset quality metric. Compared to June, '14 NPLs and NPAs are up by 40 and 50 bps respectively, but down from the linked quarter end. As we noted before the nature of the purchased loan business tends to bring with it fluctuations in loan performance metrics. This can be seen this quarter in the 2.3 million uptick in classified loans. But over the past several years, net charge offs out of that portfolio and all of our portfolios have remained at low levels. That concludes our prepared remarks and I will turn it back to our moderator.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Alex Twerdahl with Sandler O'Neill. Your line is open.

[Alex Twerdahl:]

First I wanted to talk a little bit more about the transactional revenue piece from the LASG portfolio. Over the past couple of quarters you've seen that you know it's not perfectly consistent but it's certainly a higher level than in previous quarters. Would you say that the portfolio in total, the whole LASG portfolio has reached a level of seasoning where there is now enough churn that that transactional income piece might be a little bit more consistent going forward?

[Rick Wayne:]

I wouldn’t describe it that way exactly. You know the very basics of the transactional income is when you buy a loan and it has discount associated with it and it pays off, it generates the transactional income, that's most of it. As you know some of it may come from occasionally selling a loan or occasionally taking back an asset and selling it, and it's not always predictable. We have some loans that we have on a percentage basis a lot of discount baked in and then we have others, for example this quarter we indicated we brought at $0.92. So it depends on what pays off but I do agree with your characterization that at least for the last few quarters, three to four, it's been in that range, but I, and we like that of course and I know you and other investors do. But it's possible in any given quarter, that number could be lower depending upon what pays off. When we're looking at our portfolio in terms of managing it, you know we're making economic decisions based on you know what we think we can ultimately collect and it's better to get out of a loan earlier or later depending upon a whole host of factors. And so as you hope that it stays consistent and at that level, but it's within the realm of possibility that in a given quarter the number could be lower and I suspect you will ask about the SBA but that's program and you know that's an area where we would expect that you know we will grow and that more consistent -- consistently predictable levels of gains of sales as we grow it. But with respect to the purchase, we always say it's lumpy and that character hasn’t changed.

[Alex Twerdahl:]

Okay, thanks. And yeah, I was going to have about the SBA, but just a follow up on that. The purchased or the servicing asset, is that realized when you book the loan or is that realized when you sell the loan?

[Rick Wayne:]

Brian?

[Brian Shaughnessy:]

Yes, when you actually sell the loan to a third party, you capitalize the servicing asset and it's built into the basis of calculating the gain, so that's at the time of sale.

[Alex Twerdahl:]

Okay. So I mean we see going into the second quarter that you have three points or whatever is on Slide, I think 11, $3.9 million of guaranteed loans that have not sold this quarter. So you know based on 3.1 million that were sold, we would expect that gain to be, you know just kind of start at the level that we saw this quarter, the 425,000 potentially go up from there depending on their success in the June quarter, is that a fair assessment?

[Rick Wayne:]

It's almost, I know it's intended to be fair but there's piece of this that you don’t have which is, most of the loans that we originate, this is what we're seeking, our variable loans you know with higher spread, the SBA allows you to charge as much as prime plus two and three quarters, which adjustable quarterly. And when you -- and if it's for example a real estate loan that has a 25 year life the premium on those, at least in today's market and it could change, with interest rates can be one -- the premium can be 17%, 18%, 19% and we get 10% plus half of the difference. So on any of those that are variable and we sell we get those kinds of premiums and that's correct. Every once in a while for competitive reasons we'll do a fix rate loan and it may be a loan that it's let's say it’s at six and its fixed for five years and then it adjusts and you know those kinds of loans we may very well hold on our balance sheet. Again it's by far the minority of what we're trying to do, but if we originate those and there is a piece of those that are fixed we probably won't sell those because we make more by holding them and therefore I wouldn’t assume that all 3.9 million will necessarily be sold. But I would assume that most of it would be.

[Alex Twerdahl:]

Okay, great. And then just a final question here, you broke out the loans to broker dealers this quarter, I know that's something that you've been doing for at least a couple of quarters, if not years. But there has been some developments in some other banks we've heard on their conference calls talking about the risk weighting on loans which I think are similar to that, basically being zero and therefore you could essentially originate these to your heart’s content without affecting your capital ratios. Is that -- does that hold true for these particular type of loan? And if so is that something that can be expanded upon you know meaningfully?

[Claire Bean:]

You know Alex in our case -- our specific case, we first and foremost look when we make these loans to the actual borrower and the collateral is of course very important, but these are first and foremost loans to the broker dealers. And there may be other loans that are structured differently or reverse [repos] obviously are structure differently. But our understanding is that the way we do these that they are subject to a 100% risk weighting.

[Alex Twerdahl:]

Okay.

[Rick Wayne:]

Alex, I would just add to that, that these of course -- and the reason we break them out is because the yields on these are so low we want to provide some visibility into the yields in other parts of our portfolio, it's our longer term goal is to not have these kinds of loans on our balance sheet and replace these with higher yielding either purchased or originated loans. Our loan capacity at the end of the quarter as I mentioned was north of 60 million and with a real focus on both trying to originate loans and as I pointed out, we originated our of LASG 30 million and keeping the non-guaranteed portion of the SBA loans you know it's our reasonable expectation between that and the cushion that we have, that we'll have enough capacity to take advantage of opportunities to purchase loans as they become available.

[Operator:]

[Operator Instructions]. There are no further questions now. I will turn the call over to Rick Wayne for closing remarks.

[Rick Wayne:]

Thank you. And thank you everyone for calling in and listening and following and supporting us. And I hope you all have a nice weekend, the weather is supposed to be better at least in Boston. Thank you.

[Operator:]

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.