Northeast Bancorp (NASDAQ:NBN)
Q4 2016 Earnings Conference Call
July 28, 2016 10:00 AM ET
Richard Wayne - President and Chief Executive Officer
Brian Shaughnessy - Chief Financial Officer
Alex Twerdahl - Sandler O'Neill
Good day, everyone. And welcome to the Northeast Bancorp Fiscal Year 2016 Fourth Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is Rick Wayne, President and Chief Executive 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 constitutes forward-looking statements within the meanings 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 over to Rick Wayne. Please go ahead, sir.
Thank you. Good morning and thank you all for joining us today. With me is Brian Shaughnessy, our Chief Financial Officer and Treasurer. Let's start a Slide 3, which provides the highlights of both the fourth fiscal quarter and year-to-date. This quarter was one of our strongest quarter's to-date with net income of $2.2 million of $0.24 per diluted common share.
Net income for the year was $7.6 million of $0.80 per diluted common share. Earnings for the quarter and the year were positively affected by strong loan growth, transactional income from LASG purchased loans, gains on the sale of SBA loans originated by our SBA division and the repurchase of our common shares through the repurchase plan announced previously.
Bank wise for the quarter, we originated $96.6 million of loans including $18.8 million of purchased loans and $31.8 million of originated loans in LASG. $28.6 million in our community banking division including $25.6 million of residential mortgages and $3 million of commercial loans and $17.4 million in our SBA division while generating a net gain of $1.6 million on the sale of the SBA loans.
Net interest margin for the fourth quarter was 4.73%, up 4.25% for the linked quarter ended March 31. All of the above coupled with strong non-interest income and disciplined non-interest expense the company generated quarterly earnings of $2.2 million or $0.24 per share.
For the year, we closed $380.9 million of loans, which includes $210.6 million of LASG commercial loan purchases and originations, $54.5 million from the SBA division and $115.8 million in our community banking division, which included $93.8 million in residential loan originations and $22 million in commercial loan originations.
We sold $39.1 million of the guaranteed portion of SBA and USDA loans for a gain of $4.2, with $7.3 million transactional income the purchase loan portfolio generated a return of 11.4% and bank-wide net interest margin of 4.59%. For the year, we have purchased 322,900 share of Northeast Stock at an average share price of $10.40.
Turning to Slide 4, as we have discussed in the past, under a regulatory commitment made in connection with the 2010 merger, purchase loans have limited to 40% of total loans. Loan purchasing capacity was $67 million at June 30. Loan purchase capacity increases or decreases depending upon the relative amount of purchase and the originated loans on our balance at any point of time.
Now on Slide 5, under another regulatory commitment non-owner occupied commercial real estate loans are limited to 300% of total capital. At June 30, capacity under this condition was $180 million. It is important to note that owner-occupied commercial real estate is not subject to this regulatory condition.
Owner occupied commercial real estate generally speaking, real estate collateral used in the business of the borrower. SBA loans Secure by commercial real estate are typically considered owner-occupied purposes of the regulatory conditions. We have in focus of loans to borrowers of owner-occupied commercial real estate collateral with $176.4 million portfolio at June 30, an increase of 48% over the prior 12 months.
Moving on to Slide 6, of the $50.6 million invested by LASG for quarter $18.8 million were purchase loans and $31.8 million were originated loans. Purchase loans for the quarter have unpaid principal balances of $20.6 million representing a purchase price of 90.1%. Since the merger in 2010, LASG has invested an aggregate of $836 million consisting of $488 million of purchase loans and $348 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 quarter. As I noticed we purchased loans at an invested amount of $18.8 million and an unpaid principal balance of $20.6 million. During the past quarter, we reviewed loans with approximately $118 million of unpaid principle balances and bid our loans with approximately $36 million of unpaid principle balances.
Of interest in this quarter, purchases with UPB of $20.6 million, this represents a successful bidding percentage of 57% generally higher than that in prior quarters. As I have said before, remain disciplined in our selection underwriting and bidding our loan pools and singular focused on building a quality portfolio.
Moving onto Slide 7, at the end of the quarter the discount on purchase loans was $31.6 million relatively consistent with discount of $32.6 million for the linked quarter. The change is primarily due to approximately $11.7 million of purchase loan payoffs offset by purchases in the quarter. Purchase loan payoffs generated $1.5 million of transactional income.
I would like to point out that approximately 84% of the $31.6 million discount is expected to be realized over the remaining life of the purchase loans through scheduled accretion. The non-accretive portion of the discount represents contractual cash flows that in our estimation may not be collectable.
Turning to Slide 8, we provide detail on returns from the LASG portfolio. For the quarter, the purchase portfolio generated a total return of 10.88% reflecting transactional income of $1.5 from unscheduled loan payoffs, as compared with an average of $2 million of transactional income for the prior four quarters.
As we have 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 returns of 6.98% in the quarter, which includes the effect of $385,000 of loan fees collected on one loan, which was paid off. In addition, you will note the yield of 51 basis points on secured loans to brokered dealers.
Turning to Slide 9, we provide some statistics on the LASG loan portfolio as of June 30. Of significance, as noted in the chart in the top right corner, the purchase loan portfolio has a net investment basis of 88%. On an invested basis, the average loan size is approximately $756,000 with the largest individual loan at $12 million. Excluding loans to broker dealers, 16% of the portfolio consisted of loans of an investment size greater than $4 million.
The loan portfolio has a diverse collateral type, primarily focused on retail, hospitality, office, industrial and multi-family. By geography, the largest concentrations are in New York at 17% and California at 16% of the portfolio. Our collateral is geographically diverse in 36 states.
Turning to Slide 10, for the SBA Division activity, and as discussed earlier, originations for the quarter were $17.4 million. 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 a variety of reasons, SBA loans closed in one quarter are sometimes sold in the subsequent quarter.
In the current quarter, we closed $17.4 million of SBA loans, of which $16.1 million were fully funded in the quarter. The Company sold $14.2 million of the guaranteed portion of loans in the secondary market, of which $9.4 million were originated in the current quarter and $4.8 million were originated in prior quarters. For the quarter ended June 30, the next gain on sale including the capitalized servicing assets was $1.6 million.
And now, I would like to turn it over to Brian to discuss in more detail our financial results after which we will be happy to answer your questions, Brian.
Thanks, Rick and good morning everyone. Picking it up on Slide 11 to provide a little more color on our financial results. As Rick noted, it was a solid quarter with net income of approximately $2.2 million up $0.05 from the linked quarter and up $0.02 from the comparable fiscal year 2015 quarter.
Results were driven in part by $1.6 million of gains on loan sales from our SBA division. Transactional interest income of $1.5 from our purchase portfolio, to benefit of our larger average balance sheet in keeping our operating expenses in check.
Turning to Slide 12, over the past year we have seen net loan portfolio growth of $80 million or 13%. The majority of the growth comes from our LASG portfolio with approximately $211 million of purchases and originations.
As shown in the chart, in the trailing 12-month period since June 30, 2015, we have originated $54.5 million of SBA loans and we have sold approximately $39 million of the guaranteed portion of these loans into the secondary market. These loan seals have contributed approximately $4.2 million to revenue in the current fiscal year. Well bank-wide loan production has been strong; increases have been partially offset by the following.
A high level of paid downs and amortization and the LASG purchased and originated portfolio, which averaged approximately $29 million per quarter over the past year and a pay down of one secured loan to a broker dealer for the $12 million during the quarter. Excluding this broker deal loan payoff, the loan portfolio had net growth of approximately $92 million or 15% over the past fiscal year.
These results are further details on Slide 13, which shows the composition of net long growth over the past five quarters. The net loan growth is primarily driven by the strength of purchases and originations by LASG, which excluding the loan to broker dealer payoff of $12 million had net growth of approximately $94 million or 29% of since June 30,2015.
In the current quarter, loans generated by LASG totaled $50.6 million, which consisted of $18.8 million of purchase loans and $31.8 million of originated loans. In addition, the SBA loan portfolio has increased slightly as compared to the linked quarter as large portion of these loans are sold into the secondary markets.
Turning to funding on Slide 14, we have had net deposit growth of approximately a $125 million or 19% over the past year and were up approximately $47 million or 6% as compared to the linked quarter. For both the full-year and next quarter comparison, the majority of the growth is due to an increase in our community accounts which consist of our money market, savings and demand deposit products.
The growth in these products represents 96% of the net deposit growth for the year and all of the growth as compare to the linked quarter. The growth in sticker deposits has strengthened our overall deposit mix where non-maturity account represents approximately 56% of total deposits as of June 30, 2016.
Slide 15 shows trends in the main components of our income. Compared to the linked quarter, the increase in net interest income before loan loss provision is largely attributable to the benefit of a larger average loan portfolio and increase in transactional interest income from the LASG purchase portfolio and $385,000 of fees provided to one loan, which paid off in the LASG originated portfolio.
These results are further detailed on Slide 16, which shows trends in total revenue and non-interest expense over the past five quarters. Compared to the linked quarter ending March 31, total revenue has increased by approximately $1.8 million. As noted previously the main components of this change are primarily due to the following.
An increase in transactional interest income from our purchased portfolio of $600,000 million, an increase in base net interest income of approximately $800,000 due to the benefit of a larger balance sheet, the originated loan fee noted above of $385,000 and finally an increase in the gain of sales loans from our SBA division of approximately 400,000.
The increase in Non-interest expense as compared to the linked quarter is primarily attributable to an increase in incentive compensation. Non-interest expense is averaged approximately $8.5 million over the trailing five quarters.
Slide 17 shows originations and the associated gains in the residential portfolio over the past five quarters. The gains from the sale of these loans continue to be a positive contribution to non-interest income. We sell substantially all residential loan production into the secondary market.
Slide 18 provides additional information on trends in yields, average balances in our net interest margin, which was 4.73% as compared to 4.25% in the linked quarter and 4.7% in the comparable prior year quarter. The increase in the net interest margin as compared to a linked quarter was driven primarily by the income related items noted previously on slide 15 and slide 16.
Slide 19 provides a snapshot of our asset quality metrics. Compared to the linked quarter, non-performing loans to total loans has decreased to 1.13% from 1.25% and non-performing assets to total assets has decreased to 96 basis points from 1.02%. Finally as noted in the chart on the bottom right hand corner of the slide, net charge offs to average loan balances have remained at low levels over the past several years and were 18 basis points in the trailing 12-months.
That concludes our prepared remarks. We would like at this time to open up the call to Q&A.
Thank you. [Operator Instructions] And our first question comes from Alex Twerdahl from Sandler O'Neill. Your line is open.
Good morning guys.
Good morning Alex.
Good morning Alex.
I wanted to dig into something you said in that prepared remarks. Rick you alluded to the percentage of loan that you bid on and versus what you won this quarter as being 57% and being a little bit higher than - is typical. Actually, if I look back, I can see there has been as low as 11% not more than two years ago. So, I'm just wondering if the competitive landscape has changed a little bit for loan bidding or you just happened to get lucky this quarter or kind of what the outlook is and a little bit more into what you are seeing out there from a competitive standpoint?
I think this quarter the reason the percentage was high it's just had to do with the particular transactions we were looking at and the opportunity. There is a trend there, it's in the realm of reasonable possibility that next quarter when we talk that number could be 20% or 25%. I wouldn't read anything into that.
With respect to the market, we are still seeing a lot - well we don't include - with the number I provide in this is the number of those loans that review, which I was referring of $118 million or so. We look at a lot more than that. These are just we report on the ones where we actually do a fair amount of work in the file to do that. And relative to our size, we are seeing plenty to meet our your business objectives.
Okay what about from the SBA side of things, I mean the originations have solid, you have now hired a bunch of BDOs and that had good success. Has the competitive landscape changed at all for SBA originations?
You know I think there are a lot of players that are interested in the SBA space. Now, this is directionally correct and then was not absolutely correct, but I’m going to say something like there is about 2,000 banks that are participating in the in the SBA business. There are many fewer of those banks that are doing it on a national scale, there certainly are some and you probably know a bunch of the names.
We are trying to build a national platform to leverage the skills we have in lending nationally and with respect to that, there are not as many. I would say one of the things; our model has been and as we have talked about it, is with BDOs. We are looking as into the next year and I don't have a number to put on this. So to increase the channels of originations to include inside sales generation as well, we have retained a local marketing firm to help our presence on the web and provide support to what I expect will be hiring a few inside lenders to solicit business directly.
So we would like to increase that volume both through growing the and supporting the BDOs that we have, but also generating leads directly to the bank not only through the BDOs and where we can refinance some of the loans that we purchased in LASG where there is an appropriate fit for refinancing with an SBA guarantee. So we are looking to increase the channels that we have. But your question was, is there lot of competition and there is a lot of competition.
How many BDOs do you have till today?
We are nine as we sit here. We were eight and we just recently hired another one. Recently meaning in the last month.
And do you have intention to continue hiring more or is it more…
We will hire more and we will also try and generate business through inside sales as well.
Inside sales, you mean being loan that are already in the SBA or what exactly do you mean by that?
An inside sales are loan in which either someone who works as a bank is not commission based, but reports of Jonathan Smith. Get's paid up a salary and a bonus, but not tied exactly to production, or hopefully borrowers would be reaching us directly or brokers reaching out to the inside sales person directly or generating leads through trade shows and otherwise.
So two models. A commissioned based model and a model with inside sales. As I say, we are just starting that, so I don't want to set the expectations too high and how fast that will grow, but that is another way we are looking at growing that business.
Okay thanks. And then in terms of the deposit growth, you had sequentially the money market deposit growth. Did you have some promotions that you are in during the quarter or has something changed that caused a lot of inflow?
We did one our promotion in the fourth quarter with the - one of the products that we have now is the Peal Money Market product out of the Community Bank, which is a premium rate, it's consistent with the Able Money Market rate that we have out there as well. We ran a promotion in the fourth quarter and that's why a lot of the money came in. Some of it through main and the Community Bank branches and some of it nationally.
Okay. And then, as the mix of loan has shifted a little bit now you have some SBA on there, LASG recognitions in the main and purchased LASG. How should we think about the reserve and provisioning today and going forward?
Obviously one of the things that we think about monthly and quarterly is the reserve that we are providing on these loans. One of the things in the final slide of the presentation, what we tried to do is show the reserve that we present in the release and in our Qs and Ks, but we also show the reserve which excluded loans to broker dealers, because those loans have collateralized by marketable securities, that are mark-to-market each day.
And also our purchased loans, because when we acquire those loans, we acquired them in their market to fair value and if they need an allowance subsequent to acquisition, it's done so under purchase accounting methodology. So as we grow our originated portfolio and based on the type of collateral or borrower, we will continue to provide for those loans as necessary and I would say consistent with other peer reserve models.
Okay thanks. And then just a final question with respect to expenses. This quarter comp is higher because of your final fiscal quarter and there is some comp true ups. Should we expect these numbers to near more of what we saw in 2015 through the final quarters of the calendar year?
I think as Brian indicated in his comments, we averaged $8.5 million a quarter, somewhere around $34 million in expenses, I would think about that number increasing slightly over the next year. People get salary, the biggest component of that is comp and as in most organizations people get raises over the year, and we have some headcount increasing, but I think that will be a relatively modest increase over that number.
We are not expecting that number to - I think you may want to think about - in the $35 million range on an annual basis, over the next year, that's something unpredictable happening as in buying gigantic loan pool or doing something like. But kind of normal course, we would expect that the increase in that base level will increase only modestly.
Okay, great. Thanks for taking the...
We think of that as mode I don't know if you do, but we do, pretty mindful of expense side of the business.
Very good. Thanks for taking my questions.
Thank you Alex.
Thank you. [Operator Instructions] Now, I will turn the call over Rick Wayne for closing remarks.
Thank you very much and for those of you listening, thank you for listening and supporting us. We try and provide more information on the each quarterly call and to the extent there are other topics that would be helpful and that were permitted to discuss, I'm sure you will continue to let us know. And with that, I wish you a nice weekend coming up and have a nice summer and we will talk to you again in October. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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