Northeast Bancorp's (NBN) CEO Rick Wayne on F4Q 2014 Results - Earnings Call Transcript

Jul.25.14 | About: Northeast Bancorp (NBN)

Northeast Bancorp. (NASDAQ:NBN)

F4Q 2014 Earnings Conference Call

July 25, 2014 09:30 AM ET

Executives

Rick Wayne - President and CEO

Claire Bean - CFO and COO

Analysts

Alex Twerdahl - Sandler O'Neill

Marc Heilweil - Spectrum Advisory

Operator

Good day everyone and welcome to the Northeast Bancorp Fiscal Year 2014 Fourth Quarter Earnings Results Conference Call. This call is being recorded. With us today the Company is Rick Wayne, President and Chief Executive Officer; and Claire Bean, Chief Financial Officer and COO. Earlier this morning an investor presentation was uploaded to the Company’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 presentation. 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 statement information for Northeast Bancorp. Such information constitutes 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 the results discussed on the forward-looking statements.

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

Rick Wayne

Good morning and thank you all for joining us today. I'm Rick Wayne, the Chief Executive Officer of Northeast Bancorp and with me is Claire Bean, our Chief Financial Officer and Chief Operating Officer. She will discuss our financial results following my comments. Following our presentation, we will be happy to answer your questions.

Please turn to Slide 3. For the quarter we closed $75 million of loans, including $45 million of commercial loan purchases and originations by LASG and residential originations of $30 million. With $1.7 million of transactional income, the purchased loan portfolio generated a return of 12.2% and bank wide net interest margin of 4.75%. As discussed in last quarter’s investor call we have begun to focus on SBA lending and this quarter we originated $4.6 million of SBA loans and generated gains of $403,000 on the sales of the guaranteed portion of such loans.

With respect to the stock repurchase plan announced last quarter we purchased 291,200 shares at a weighted average per share price of $9.69. This had the effect of increasing tangible book value per share by approximately $0.03 at June 30, 2014. While due to loan pay-offs the loan portfolio remained relatively flat for the quarter, it did increase by $81 million or 19% for our fiscal year.

Moving on to Slides 4 and 5, of the $45 million invested by LASG for the quarter, $34 million consisted of purchased loans representing the largest volume of purchased loans in fiscal year ‘14. Since June of 2011 when LASG purchased its first loan, it has invested in aggregate of $413 million, consisting of $304 million of purchased loans and $109 million of originated loans. As of June 30th, the LASG originated and purchased portfolio outstanding total $281 million.

LASG also originated $11.5 million of loans in the quarter including $4.6 million of SBA loans discussed earlier. I would like to briefly comment on what we saw in the small balance performing commercial loan purchase market during the past quarter. During the quarter we purchased loans at an invested amount of $34 million and unpaid principle balance of $38 million. During the past quarter we reviewed loans with approximately $400 million of unpaid principle balances, bidding on loans with approximately $74 million of unpaid principal balance. We remain disciplined in our selection, underwriting and bidding and singularly focused on building a quality portfolio. While we bid on a relatively low percentage of loans reviewed, principally due to differences in perceptions of collateral value from that of the sellers, we continue to remain optimistic about the purchase loan business and expect to continue to grow our purchased loan book.

Turning to Slide 6. 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 $41 million at March 31 and $13 million at June 30, reflecting loan purchases of $34 million on balance sheet loan originations of $13 million and pay downs in our purchase and originated loan books. Loan purchase capacity increases or decreases depending upon the relative amount of purchase and originated loans on our balance sheet at any point in time. For example, loan capacity was $18 million at June 30, 2013, and increased to $30 million at September 30, 2013.

Now on Slide 7. Under another regulatory commitment, commercial real-estate loans are limited to 300% of total risk based capital. Availability under this commitment was 154 million at March 31 and 149 million at June 30th, reflecting non-owner occupied purchases of $14 million and pay downs of $15 million.

Moving on to Slide 8. At the end of the quarter, discount on purchased loans was $39 million, up $3 million over the past quarter. The $39 million balance as of June 30th, which represents a discount of 16% from the outstanding loan balances consist of $27 million of accretable discount and $12 of non- accretable discount, which are contractual cash flows that in our estimation may not be collectible.

Now on Slide 9, which provides detail on returns from the LASG portfolio. For the quarter, the purchased portfolio generated a total return of 12.2%, including transactional income of $1.7 million from unscheduled loan pay-offs and asset sales, which as has been previously discussed varies and sometimes substantially from quarter to quarter. With respect to the portfolio originated by LASG, which does not benefit from any purchase discount, the return on the traditional originations was 9.7%, benefiting from gains on SBA loan sales totaling 403,000 and the yield on loans secured by securities was 1%. While 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 purchased portfolio may not be consistent from quarter to quarter.

Turning to slide 10, note that for the quarter we had a purchased portfolio run-off of $15 million and transactional income of $1.7 million as previously discussed. Turning to slide 11 which provide some statistics on the LASG portfolio as of June 30th, of significance, on an invested basis, the average loan size is approximately $738,000 with the largest loan at $12 million and with 70% of the portfolio consisting of loans of less than $4 million. Collateral is diverse by type, primarily focused on retail, industrial, office, hospitality and multifamily, and by geography with the largest concentrations in California and in New York. The purchase, loan portfolio had a weighted average price of 84% and the overall portfolio consist of 72% purchased loans and 28% originated loans.

Now I would like to turn the call over to Claire.

Claire Bean

Thanks Rick and good morning everyone. Starting on Slide 12, which is the slide that shows our earnings trend over the past five quarters; and I'd start by saying that results this quarter were affected significantly by several non-recurring expense items. Those total approximately $900,000 on a pretax basis, $555,000 or $0.06 after tax. These one-time costs relate principally to the departure of two senior managers in our community banking division and the restructuring of our IT department in light of our recent core systems’ conversion. If one excludes the effect of those items, core operating earnings were $1.1 million or $0.11 for the quarter. This is essentially the same core result in the comparable fiscal ’13 quarter but it was achieved with $1.1 million less in transactional income on the purchased loans. We made up that unfavorable variance mainly through growth in earnings assets, which increased base line net interest income compared to that prior year quarter by 1.2 million.

Slide 13 illustrates the amount and composition of our loan growth over the past year. As Rick, noted total loans were up $81 million or 19% year-over-year, the vast majority of that net growth coming in commercial loan purchases and originations. And looking at the quarter, at $45 million gross loan purchases and commercial originations were also strong but there was a fair amount of run-off as well, leaving the total loan portfolio essentially flat for the quarter.

Slide 14 shows the composition of the net growth year-over-year. Most of it was, as you’ve heard with repurchases, which grew by $37 million and national commercial origination, which were up by a net of $39 million for the year. There was also a six month period during which we were adding much of our residential production for the portfolio and that accounted for net growth of $24 million.

Now turning to Slide 15, we funded our growth this past year through $90 million of additional core deposits, increasing non-maturity accounts by approximately 5% or $11 million, and growing time deposits by 79%. The later were mainly obtained through deposit looping [ph] services which has proved to be an efficient way for us to add longer term deposits to our funding mix and this is critical to us since our regulatory commitments constrain us from using borrowing. Even with this addition of longer term CD funding, our overall cost of interest bearing deposits has declined from 91 basis points a year ago to 82 basis points for the current quarter.

Slide 16 illustrates the variability and transactional income, which can be seen both in interest income and non-interest income. Including amounts realized on the purchased portfolio and on sales of the guaranteed portions of SBA loan, the total for the quarter was nearly $2.1 million. Trends in non-interest expense shown on this slide exclude one-time items and with that, the increase in the current quarter compared to the linked quarter is mainly due to incentive comp.

Slide 17 tracks core operating expenses against loan growth. And the main point I’d like to emphasize as we have in prior calls is that we have considerable operating leverage remaining at this point. And as such, we continue to expect increases to be relatively modest in our expense base as we lever our existing capital. One accomplishment that enhances operating leverage is our recent core banking systems conversion. We moved away from an in-house data processing model to a service bureau platform with Jack Henry & Associates. This change reduced our operating risks, is expected to lower cost slightly and most importantly offers us state of the art mobile technology, a better user experience across all digital platforms and is a fully integrated system that will allow us to better serve commercial and retail customers alike.

Turning to Slide 18, which shows trends in loan yields and purchased loan total return, which Rick discussed in his remarks. Our net interest margin this quarter at 475 reflects the relatively strong showing in transactional interest income realized in the period but it’s also worth noting that our base line NIM, excluding all transactional income has also grown over the year. It does bounce around a bit but not nearly as much as NIM overall does. For the current quarter it came in at 384 compared to 361 one year ago.

Turning to Slide 19 our residential lending group rebounded somewhat this quarter, generating total originations of 30 million, help support by the spring purchase market. And while we added 45 million of our residential production to our portfolio earlier in the fiscal year, we are currently selling nearly everything in the secondary market. While this is our preferred practice it’s always potentially subject to change as we monitor the pace of commercial originations relative to purchase loan capacity.

And lastly Slide 20 is a snapshot of our asset quality metrics, which remain strong across the Board. The graphs you see here show annual changes but if you were to look at the changes since 331 quarter NPLs, NPAs, classified loans and delinquency have all declined.

And with that I will turn it back over to our moderator for Q&A.

Question-And-Answer Session

Thank you. (Operator Instructions) Our first question comes from Alex Twerdahl of Sandler O'Neill. Your line is open.

Alex Twerdahl - Sandler O'Neill

My first question is the loans in originating LASG that are collateralized by securities, how quickly can you make those loans and close them, should you need them to increase your capacity for purchases?

Rick Wayne

I’m sorry Alex couple you restate that one more time?

Alex Twerdahl - Sandler O'Neill

I’m sorry, can you hear me okay.

Rick Wayne

Yes, I can.

Alex Twerdahl - Sandler O'Neill

The loans that you are originating that are collateralized by securities; how quickly can those be originated and closed, should you need them to increase your capacity for purchased loans?

Rick Wayne

Really good question. When we look at those loans, I’ll explain generally the structure of those loans. They are for some on the call may not be as familiar as you. Those are loans to broker dealers secured with marketable securities with appropriate haircuts that are very much like reverse repos. They're held in a custodian. They get marked every day. And when we look at those, while there is a lot of broker dealers in the world, we’re looking at those where we can not only get the loan to the broker dealer but generally a guarantee from a very strong parent.

And so we were certainly interested in doing more of them. We need to find the right combination of broker dealer, strong payer, willing to guarantee and willing to do it. Because for the broker dealer it’s a pretty small transaction. So us it’s meaningful, which is a long winded way of saying we’d like to do more of them if we can but we need to find the right structure that works from a credit perspective.

Alex Twerdahl - Sandler O'Neill

So does that mean that should you get a big pool of loan purchases that the preferred way to increase the capacity then would most likely be through residential loan originations?

Rick Wayne

Well I wasn’t trying to say that we couldn’t do anymore. I was just trying to make this suggestion that we can’t go from where we are by a factor of six overnight. The market is not there. We're hopeful we can do some more of those. And so we have a short-term issue and a long-term issue. The short-term issue is we will like to be able to put more of those than others on our balance sheet so they can purchase more. But long-term that’s not what we want on our balance sheet, because the yield on those are very low. So it’s transitional.

Alex Twerdahl - Sandler O'Neill

And then can you just talk about the loans that you did purchase during the quarter. The volume was much higher than we've seen over the past three quarters. Can you just talk about sort of the timing and when those loans become available for purchase and whether or not there is any way to read it further into the market for whether or not maybe this activity can maybe increase later in the year?

Rick Wayne

Well we bought -- it was a good quarter. We invested about $34 million, $35 million which brought us to $80 million for the whole year. We always say every chance we have, the business is lumpy. And the volume we saw in June, while it’s our fiscal year end, it’s not the calendar year end and typically there is more volume later in the year, but we saw almost $400 million worth. So we’re seeing a lot in the market. I would just say that there is -- a lot of what -- we see a lot but a lot of times the sellers have a different view on collateral value than we have. I don’t think you can draw a conclusion from this quarter. I think it does reinforce the point that we’ve made though that there is a real market there and it’s lumpy. $80 million of originations for a company our size is a lot.

Alex Twerdahl - Sandler O'Neill

And then just final question. Just on the SBA loans, which I guess is relatively new strategy for you guys. Could you just remind us exactly how that works and where that comes into the income statement?

Rick Wayne

Maybe I’ll explain how it works and Claire can describe where it is on the income statement. The SBA loans are loans that have a guarantee from the small business administration as the name suggests. The ones we have done last quarter, they carry a guarantee of 75% by the government and once you book those loans, there is a very efficient secondary market to sell those and the amount of the premium on the sale [indiscernible] relates to the structure how long -- what's the term of the loan and what’s the rate; whether it’s fixed or variable. And in the case of the largest chunk of those, the loan was priced at current plus two and three quarters which is the maximum price. And when we booked it we sold off the guaranteed piece and got the premium. That incidentally represented the numbers in there, the 4.6 were three loans to the one borrower and then another loan to another borrower.

Claire Bean

Alex they come into the income statement through -- first of all the gain income which hits non-interest income. That was up $403,000 this past quarter. There is also some servicing income on the guaranteed piece that we sell off that also over time would come in to non-interest income. And then the interest income on the unguaranteed piece, just close to normal.

Operator

Thank you. Our next question comes from Marc Heilweil of Spectrum Advisory. Your line is open.

Marc Heilweil - Spectrum Advisory

First a small question. The 100,000 share block that traded, were you involved in that trade, I don’t six weeks ago or so? Was that part of your repurchase program?

Claire Bean

Mark, we did purchase a couple of blocks as part of this, but I can’t really offer any specifics about individual blocks.

Marc Heilweil - Spectrum Advisory

Okay. there was a $10 -- it was $10. You can’t confirm whether that was part of it?

Rick Wayne

Well, we did say that we brought $290,000 at an average price of $9.69.

Marc Heilweil - Spectrum Advisory

Okay. Can you talk a little about the profitability of the community bank? You’ve got a new President there. Is the community bank profitable?

Claire Bean

We don’t actually do very detailed business line reporting at this point. We -- certainly it's on our agenda over the next year to begin to do that. I would say that certainly the community bank portfolio since the merger has declined in size. There has been net run off. And with the arrival of Jeanne Hulit and the team she is building in the community banking division, we’d expect loan balances to begin to grow instead of declining over time and that would certainly add to revenues in that division.

Marc Heilweil - Spectrum Advisory

So the $9 million or so that were put on the books this quarter is much lower than you had expect going forward return?

Rick Wayne

We -- just want to amplify a little bit of what Claire said when we had the merger in 2010, part of normal integration issues, our initial focus in hiring and staffing up was building LASG and as mentioned in my comments, during that time period we put on over $400 million of assets. The market Maine for originated loans was that it’s very competitive and our focus initially was on residential originations which we’ve done a fair amount of, particularly going back a year and before that when the rate climate was more favorable. But we really do think of the community banking division as a great opportunity for us. And now the one we can execute on better with Jeanne’s arrival. We think it’s an important one, because there are loans, good quality borrowers there that we can spend money to increase our loan book, the deposit franchise where we have 10 branches is very valuable. We also have main loan operations, deposits operations, IT and other services that support not only the activities in the community bank, the residential loan division and also the LASG in Boston and Maine is a stable quality workforce at a cost structure that’s less expensive than in Boston. And so there is a lot about that that we like and we do expect as Claire said to grow our loan book. We’ve recently hired another senior lender in Maine and we'll probably hire one more during the year. And we’re committed to growing that loan book. But a lot of the growth occurs as we described today and before, occurs both in the loan purchasing business and in the national originations we do as well.

So we like all that because between the purchases out of LASG, the national originations, the resi, the lending in Maine now starting to build an SBA practice, we have lots of different revenue sources all within our skill set. So we think that’s a good structure. So I really I just want to underscore that the community banking division is a very important part of our business plan.

Operator

Thank you. (Operator Instructions) And there are no further questions and I'll like to turn the call back over to Rick Wayne for closing remarks.

Rich Wayne

Thank you all for participating and for your good questions and supporting our bank. I wish you all a very enjoyable weekend. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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Northeast Bancorp (NASDAQ:NBN): FQ4 EPS of $0.11 Revenue of $9.92M (-0.6% Y/Y)