Q2 2020 Earnings Call
Come to the northeast Bank fiscal year, 2022nd quarter earnings results Conference call. This call is being recorded.
Yesterday from the bank as Rick Wayne.
President and Chief Executive Officer, and JP at the point Chief Financial Officer.
Earlier this morning in Investor presentation was uploaded to the banks website, which we were reference in this morning's call.
The presentation can be accessed at the Investor Relations section of North East Bank Dot com.
Our events and presentations.
You may find a helpful to download this investor presentation, if all 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 statements about northeast bank.
Forward looking statements are based upon the current expectations of North East banks management, that's subject to risks and uncertainties actual results may differ materially from those discussed in the forward looking statements.
These bank does not undertake any obligation to update any forward looking statements.
At this time I'd 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, you a point, our chief financial Officer.
Before turning the call over to J.P. 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 53 cents per diluted common share.
A return on average equity of 12.1%.
A return on average assets of 1.7%.
And the net interest margin of 5.6%.
Earnings were positively affected by strong loan growth in the L.A. is cheap portfolio of $75.4 million or 10% over the linked quarter.
On transactional income of $2.4 million as well as lower non interest expense.
Turning to slide three.
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.
At quarter end loan balance represents a significant increase over the average loan bounce of $946 million in the second quarter.
Owns close in the second quarter.
Included 163.4 million in L.A.S. tree.
Of which 98.6 million were originated.
And 64.8 million were purchased.
The weighted average yield of the L.E.S.G. loans originated in the second quarter was 7.4% as of December 31.
It was 82% were variable mostly tied to prime.
The total return on purchase 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 four of the $163.4 million invested by L.A.S.C. for the quarter 64.8 million, we're purchase loans and 98.6 million were originated loans.
Purchase loans for the quarter have unpaid principal balances of $66.8 million, representing a purchase price of 97.1%.
Since the merger in 2010 Ilias. She has invested in aggregate up $2.2 billion, consisting of $957 million a purchase loans.
And 1.2 billion of originated loans.
During the quarter during the quarter the market for purchase loans was quite robust.
We reviewed loans was 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 and 10 separate transactions.
Moving on to slide five.
At the end of the quarter, the discounted purchase loans was $33.8 million.
Unchanged from September Thirtyth.
During the quarter, there was acceleration accretion from purchase loan payoffs of $20.2 million, which generated $2 million uptick transactional interest income.
Offset by the quarters 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 purchase loans through scheduled accretion.
The non accretable portion of the discount represents contractual cash flows that in our estimation may not be collectible.
Turning to slide six.
We provide detail on returns from the L.A.S.G. portfolio.
For the quarter the purchase 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 purchase loan portfolio as well as the amount of loans purchased.
Not be consistent from quarter to quarter.
The L.A.S.G. originated portfolio generated a strong return of 7.7% in the quarter.
Turning to slide seven we provide statistics on the LSG loan portfolio as of December 31, 2019.
Significance as noted in the short in the top right corner. The purchase loan portfolio has a net investment basis of 92% and increased from 91% in the linked quarter.
Uninvested basis, the average loan size for purchase loans was $414000.
And the average loan size for originated loans was $2.2 million.
77% of LSG loans.
I didnt investment size of less than $6 million.
The loan portfolio has a diverse collateral type.
Primarily focused on multifamily retail industrial hospitality office and mix use.
By geography, the largest concentrations are in New York, and California, with 26% and 21% of the portfolio respectively.
Our collaterals geographically diverse.
With collateral and 45 different states.
And now I'd like to turn it over to J.P., 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 eight to provide more information on our financial results as announced in our earnings release. There was made public after the close of business yesterday.
Net income for the quarter was $4.9 million were 53 cents per diluted common share.
Diluted net income per common share was up one cents from the quarter ended September Thirtyth 2019.
I'll refer to as of the linked quarter and down three cents from the quarter ended December 31st 2018, which I show referred to as a comparable prior year quarter.
The increase of one cents per diluted common share from the linked quarter was due to a decrease in noninterest expense.
$565000 and an increase in non interest income of $161000.
Partially offset by a decrease in net interest income of $192000.
An increase in the provision for loan losses of $379000.
The decrease in noninterest expense was primarily related to a decrease itself and employee benefits expense.
Mostly related to decrease payroll taxes and the 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 recorded at its fair value that's expected costs itself.
Net interest income was down primarily due to a decrease in loan interest income of $214000 due to lower average balances in the loan portfolio along with lower interest income earned in the U.S.P.A. community Bank portfolios.
Partially offset by a decrease in interest expense.
Additionally, the provision for loan losses amounted to $243000 in the current quarter, which increased from a credit of $136000 in the linked quarter, primarily as a result of the growth in the loan portfolio.
Active tax rate for the current quarter was 28.9%, which increased slightly from 20.7% in the linked quarter.
Yes.
The decrease from the comparable prior year quarter of three cents per diluted common share.
Was primarily due to a decrease in non interest income.
$280000.
Due to a $630000 decrease in gains from the sale of SPD loans as a bank has shifted its focus away away from us be a originations.
Partially offset by an increase of $338000 engaged on real estate owned due to a property transferred in during the quarter.
And $108000 and 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.
Our merely due to a decrease in other interest and dividend income as a bank now holds less cash with the federal reserve.
Which resulted in a decrease of $644000 and interest income due to lower average balances and lower rates earned.
This decrease was partially offset by a $556000 increase in loan interest income.
Due to increased average balances in the last few 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 managements evaluation of losses inherent in the portfolio.
Additionally, there was a decrease in non interest expense of $114000 from the comparable prior year quarter.
Due to a $211000 decrease in professional fees, partially related to legal expenses associated with the corporate reorganization.
Ordered in the comparable prior year quarter.
Along with a $180000 decrease in occupancy and equipment expense from decreased repairs and maintenance costs.
The $104000 decrease in load 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 $227000.
Mostly due to salary and incentive compensation increases.
And a $172000 increase data processing fees due to increase I T outsourcing costs.
The effective tax rate for the current quarter was 28.9%, which increased slightly from 20.7% the comparable prior year quarter.
Turning to slide nine.
Over the past year, we've seen that growth in the last few portfolio $98.5 million were 13% well payoffs paydowns and amortization were higher in the linked quarter that activity is decreased to normalized levels in the current quarter with current quarter, LSG originations and purchases, reaching record levels and $90.6 million six.
Q4 point $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 Elliot's few portfolio.
Which had net loan growth of $90.5 million were 13% since December 30, Onest 2018.
In the current quarter at least you originated $90.6 million of loans purchased loans with a recorded investment amounting to $64.8 million.
84% of the earliest you originated loan portfolio, having interest free floor, which was a weighted average for 7.2% as of December 30, Onest 2019. Additionally, 10% of the LSG originated loan portfolio is that is fixed at a weighted average rate of 8.2%.
Turning to funding on slide 11, or deposits have decreased by $47 million or 5% over the trailing 12 month period in connection with the corporate reorganization that was completed during the first fourth quarter fiscal 2019.
We increased our low to core deposit ratio from 100% to 125%.
Which allowed us to reduce or excess deposits, however deposits increased compared to linked quarter in order to fund the loan growth in the last few portfolio.
Over the past year time deposits have grown well money market accounts of decrease.
Our non maturity accounts, which include money market savings in demand deposit products as a percent of total deposits has decreased from 53% as of December 30, Onest, 2018% to 40% as of December 30, Onest 2019.
Compared to the linked quarter interest expense decreased $45000 $135000 of which was interest expense savings on deposits, partially offset by.
By $93000 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 four basis points from the linked quarter. However, we had $40 million Bulletin board time deposits that matures in December 2018, which were at a weighted average rate of 2.99% in.
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 $31000 due to the decrease in net interest income primarily caused by lower interest income in the SP a community banking divisions.
Partially offset by an increase in interest income from the LSG portfolio and then increase in noninterest 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 benefit expense and load acquisition and collection expense.
Total revenue has helped us achieve annualized return on average equity of 12.1%.
Return on average assets of 1.7%.
And then the efficiency ratio of 50% the current quarter.
Compared to the comparable prior year quarter total revenue has decreased by $306000.
While non interest expense decreased by $114000.
The decrease in revenues, primarily due to the $208000 decrease in noninterest income.
Due to a $630000 decrease in gain on sale of SPD loans, which was partially offset by 330000 dollar increase in gain on real estate owned and a $108000 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.
The bank is held less cash with the federal reserve.
Which was partially offset by an increase in interest income on alias three loans due to higher average balances.
The decrease in non interest expense.
Compared to the comparable prior year quarter is primarily due to a $211000 decrease and professional fees.
Partially related to legal expenses associated with the corporate reorganization recorded in the comparable prior year quarter, along with a $180000 decrease in occupancy and equipment expense decreased repairs and maintenance costs and a 104000 dollar decrease in load acquisition and collection expense due to expense reimbursements received during the.
Our current quarter.
These decreases were partially offset by an increase in salary and employee benefits of $227000, mostly due to salary and incentive compensation increases and a $172000 increase and data processing fees due to increase ITM sourcing costs.
Slide 13 shows trends in in the key components of our income.
Compared to the linked quarter based noninterest income decreased $161000 due to a $466000 decrease in interest income from the SP Division loan portfolio, which was due to fee recognition from payoffs in the linked quarter.
This was partially offset by $357000 increase in basin interest income in the last few portfolio compared to compared to the linked quarter due to higher average balances in rates earned in this portfolio.
Transactional interest income from the purchase on portfolio decreased by $31000 compared to the linked quarter.
The purchase on portfolio had a yield of 9.8% in the current quarter compared to 9.7% in the linked quarter.
Interest expense also decreased by $45000 from the linked quarter.
The decrease in net interest income from the comparable prior year quarter is largely attributable to 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 last few portfolio as a result increased average balances which was.
Partially offset by 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% the comparable prior year quarter.
Due to less transactional interest income along with loans purchased at lower rates and sooner just comes over the past year paired with a higher average balance which requires higher interest in transactional amounts to be recognized to maintain higher returns.
Noninterest income increased by $161000 over the linked quarter.
Well noninterest income decreased by $208000 from the comparable prior year quarter.
The increase from the linked quarter is primarily the result of an increase of $316000 in gain on real estate owned partially offset by $133000 decrease 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 $630000 decrease in gain on sale of SPD loans.
Partially offset by a $338000 increase in gain on real estate owned and a $108000 increase in gain on residential loans.
Slide 14 provides additional information on trends in 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 SP interest income, resulting from Rick 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 and linked quarter due to lower average balances in the SBA.
Immunity banking and nearly as she originated divisions, partially offset by growth in the earliest you purchase portfolio compared to $910 million the comparable prior year quarter due to growth in nearly as she 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 nonperforming loans to total loans has increased a 1.8% from 1.51% and nonperforming assets. A total assets has increased a 1.76% from 1.43%.
The increase in nonperforming loans is primarily due to one eleonore originated loan totaling $2.7 million in three ileus, you purchased loans totaling $2.1 million that were placed on non accrual during the quarter. These loans are well secured in the process of collection.
The top right hand corner classified commercial loans were $12.4 million as of December 30, Onest 2019 I.
An increase from $11.1 million in the linked quarter.
As noted in the chart on the bottom right hand corner the slides.
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 in 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 QNX.
If he would like to ask a question.
Please do so by pressing the star key followed by the digit one on your touched on telephone if you're using a speaker phone to ask a question. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
They will proceed and the order that you signaled last and we'll take as many questions as time permits.
Once again, please press star one on your touched on telephone to ask a question.
Huh.
And again Nice Star then one if you'd like to ask a question.
Our first question comes from David men carpet DCM asset management. Your line is now open.
Good morning, Rick and JP, how are you today in one as David pointed David good.
So a J.P. address the nonperformers that went up a little bit the 21 million from 16.7, I think you said it was one loan or 12 billion that cores that but I noticed that was past due loans of 28 million versus or 2.84% versus 14.6 million or one of the half percent would you just.
Indicative of the economy, overheating or getting a little dicey that's.
And there's a concerning in anyway.
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 then of course respond to your.
A question about.
The reason for that.
One to put in context LSG between purchase and originated as 1100 loans. So it's up so it's a fair number and I want to address both npls in delinquencies so npls.
When up a little bit less than $5 million from September thirtyth.
To December 31, and there were really two loans that accounted for 75% of that increase.
Both of which one as an LTV of around 60% of 150% and I'm going to come back to it at sort of at the end as why the numbers in our mpls and delinquencies.
Ken can change from quarter to quarter with respect to delinquencies.
Went up about $14 million from the September thirtyth quarter after them, our three loans one of the loans, which is 2.7 million of that is already paid off another one of the loans. It is 2.7 him again 2.7 million of it is in the process of foreclosure we would.
We expect.
No 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 Theres some variability.
With different quarters I went to look back this morning at the quarter that was two years ago 12, 30 117.
Delinquencies were $30 million.
Last year 12, 30, 118, they were $18 million now 28 million.
And so.
The reason our numbers are probably.
That's more tentative ignored are higher than banks with more traditional lending programs as we buy we buy loans at a discount occasionally borrowers trying game us.
Somebody whispers them, if they stopped paying they make an assumption how much discount we bought it for at least they stopped paying that they'll cut a deal.
That they never get a deal because of that factor you know who is looking how to maximize.
The return until we see level, 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 are 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 lses originated.
$1.2 billion of loans.
And the charge offs on that 1.2 billion EUR zero none.
And on the purchase loans.
What should we have 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 a that's the brought 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 as we take a look.
In every market in which we have collateral by collateral type and our real estate group determines whether.
The market is stable for it's getting better it's getting worse than based on that we stress at different levels of portfolio.
I see the impact of what that might do to our portfolio when will 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 in one of the.
Calls a couple.
Quarters ago, we talked about that and then.
Influences, how much we would loan or how much we would buy alone for but we don't see the economy as we sit here today adversely affecting.
Our portfolio.
Okay understood on that and the in the past due a section though the went to 28 million from 14 and and the absolute number is not that terrible and consider you had a higher volume of loans, but what what did the jump out of mid little bit was the percentage went from 1.46 I'm sorry, 1.5 go to 2.8 for the percentage of.
Oh past due doubled is that that's I guess, what was more concerning the absolute number going from 14 to 28.
Reading this wrong the from her Europe , what would you know your arithmetic is right, but now let me take that.
Long.
Comment I gave earlier in kind of narrowed down to.
It's basics one.
In our portfolio, we can have a higher level of non.
Accruals or.
Or delinquent loans, we can fit for the reasons I described which right now I won't more 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 increases I describe three of those.
There are a half of that increase is attributable to three loans, which I you know I will say with great confidence theirs and they've been a loss on those.
Totally understood understood, that's that's kind of clear.
One other thing was the last quarter, you announced a significant share buyback. We authorized one lets say that was not for 900000 shares and at that time I think the stock was in the 22 range.
I'm just wondering talks a little lower now, but most of the lower part came in after the second quarter.
I think both here and there was only 20 wanted to have.
Should I assume that no shares were bought back in the last quarter, Oh, I guess, you or would you have announced it if you did.
We would have announced that then you are correct. There were no shares purchased in the last quarter.
Very good at which point.
I know you have and others do question of.
Stock repurchases and.
And.
In the past.
Desire for more dividends.
We're not in the business supporting capital you know it's Eric.
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 if you are using just simple math it could be a little more complicated but have you said you know you can leverage that by 10 has 50 million. If you were 80% loans too.
To that number that would be $40 million of loans and we grew our loan book by $75 million and so 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 instant thinking about utilization of capital whether through a stock repurchase or a dividend, which as you know David from our.
Conversations in the past I was in part a function of stock price and all those kinds of factors right, where we sit today based on what we're seeing the best thing. We can do is leveraged capital we have and if we had to go back to the market and raise more capital I suspect that would be fairly expensive. So we wanted to make sure. We we what we what we believe we can.
Use of capital if that changes we'd have a different plan.
Good, which you would say.
Right very good I'll get back into the queue nice talking to you guys and well talk again soon delightful. Thank you David.
Okay.
Thank you and as a reminder to ask a question you will need to press Star then one on your Touchtone telephone.
Seeing 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 have called isn't for those of you that are going to listen after the call. Thank you for them.
Following in pay attention to our stock I think you can tell from both the press release and the enthusiastic discussion of the past quarter. We thought it was a very very strong one with a record level of.
Loan volume out of Las Jay Good control of expenses.
And and good level of earnings and with that.
Hi.
Thank you again and look forward to talking to you when we report our earnings and and three months in April . Thank you very much.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your programming you may now disconnect.