Good day, everyone, welcome to the Northeast Bank Fiscal Year 2020 second quarter earnings results conference call. This call is being recorded. With us today from the bank is Richard Wayne, President and Chief Executive Officer, and Jean-Pierre Lapointe, Chief Financial Officer. Earlier this morning, an investor presentation was uploaded to the bank's website, which we will reference in this morning's call. The presentation can be accessed at the investor relations section of northeastbank.com under events and presentations. You 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 statements about Northeast Bank.
Forward-looking statements are based upon the current expectations of Northeast Bank's management and are subject to risk and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements. At this time, I would like to turn the call over to Richard Wayne. Please go ahead, sir.
Good morning. Thank you all for joining us today. With me is JP Lapointe, our Chief Financial Officer. Before turning the call over to JP for a more detailed analysis, I would like to discuss highlights for the quarter ended 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 $0.53 per diluted common share, a return on average equity of 12.1%, a return on average assets of 1.7%, and a net interest margin of 5.6%. Earnings were positively affected by strong loan growth in the LASG portfolio of $75.4 million, or 10% over the linked quarter, and 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. The quarter-end loan balance represents a significant increase over the average loan balance of $946 million in the second quarter. Loans closed in the second quarter included $163.4 million in LASG, of which $98.6 million were originated and $64.8 million were purchased. The weighted average yield of the LASG loans originated in the second quarter was 7.4% as of December 31, of which 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 LASG for the quarter, $64.8 million were 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, LASG has invested an aggregate of $2.2 billion, consisting of $957 million of purchase loans and $1.2 billion of originated loans. During the quarter, the market for purchase loans was quite robust. We reviewed loans with $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 in 10 separate transactions. Moving on to slide five. At the end of the quarter, the discount on purchase loans was $33.8 million, unchanged from September 30th.
During the quarter, there was acceleration accretion from purchase loan payoffs of $20.2 million, which generated $2 million of transactional interest income, offset by the quarter's 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 LASG 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, may not be consistent from quarter -to -quarter. The LASG-originated portfolio generated a strong return of 7.7% in the quarter.
Turning to slide seven, we provide statistics on the LASG loan portfolio as of December 31, 2019. Of significance, as noted in the chart in the top right corner, the purchase loan portfolio has a net investment basis of 92%, an increase from 91% in the linked quarter. On an invested basis, the average loan size for purchased loans was $414,000, and the average loan size for originated loans was $2.2 million. 77% of LASG loans had an investment size of less than $6 million. The loan portfolio has a diverse collateral type, primarily focused on multifamily, retail, industrial, hospitality, office, and mixed use. By geography, the largest concentrations are in New York and California, with 26% and 21% of the portfolio respectively. Our collateral is geographically diverse, with collateral in 45 different states.
Now I'd like to turn it over to JP, who will discuss in more detail our financial results, after which we will be happy to answer your questions. JP?
Thanks, Rick. Good morning, everyone. I'm picking up on slide eight to provide more information on our financial results. As announced in our earnings release that was made public after the close of business yesterday, net income for the quarter was $4.9 million, or $0.53 per diluted common share. Diluted net income per common share was up $0.01 from the quarter ended September 30, 2019, which I shall refer to as the linked quarter, and down $0.03 from the quarter ended December 31, 2018, which I shall refer to as the comparable prior year quarter.
The increase of $0.01 per diluted common share from the linked quarter was due to a decrease in non-interest expense of $565,000 and an increase in non-interest income of $161,000, partially offset by a decrease in net interest income of $192,000 and an increase in the provision for loan losses of $379,000. The decrease in non-interest expense was primarily related to a decrease in salary and employee benefits expense, mostly related to decreased payroll taxes and a reduction in stock compensation expense. The increase in non-interest income was due to a gain on real estate owned on a property that was transferred in during the quarter and recorded at its fair value, less expected cost to sell.
Net interest income was down primarily due to a decrease in loan interest income of $214,000 due to lower average balances in the loan portfolio, along with lower interest income earned in the SBA and community bank portfolios, partially offset by a decrease in interest expense. Additionally, the provision for loan losses amounted to $243,000 in the current quarter, which increased from a credit of $136,000 in the linked quarter, primarily as a result of the growth in the loan portfolio. The effective tax rate for the current quarter was 28.9%, which increased slightly from 28.7% in the linked quarter.
The decrease from the comparable prior year quarter of $0.03 per diluted common share was primarily due to a decrease in non-interest income of $208,000 due to a $638,000 decrease in gains from the sale of SBA loans as the bank has shifted its focus away from SBA originations, partially offset by an increase of $338,000 in gain on real estate owned due to a property transferred in during the quarter and $108,000 in 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, primarily due to a decrease in other interest and dividend income as the bank now holds less cash with the Federal Reserve, which resulted in a decrease of $644,000 in interest income due to lower average balances and lower rates earned.
This decrease was partially offset by a $556,000 increase in loan interest income due to increased average balances in the LASG portfolio. Interest expense was flat from the comparable prior year period, while the provision for loan losses increased $142,000 from the comparable prior year period due to the loan portfolio composition and management's evaluation of losses inherent in the portfolio.
Additionally, there was a decrease in non-interest expense of $114,000 from the comparable prior year quarter due to a $211,000 decrease in professional fees, partially related to legal expenses associated with the corporate reorganization recorded in the comparable prior year quarter, along with a $108,000 decrease in occupancy and equipment expense from decreased repairs and maintenance costs and a $104,000 decrease in loan 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 $227,000, mostly due to salary and incentive compensation increases and a $172,000 increase in data processing fees due to increased IT outsourcing costs. The effective tax rate for the current quarter was 28.9%, which increased slightly from 28.7% in the comparable prior year quarter. Turning to slide nine.
Over the past year, we have seen net growth in the LASG portfolio of $98.5 million or 13%. While payoffs, paydowns, and amortization were higher in the linked quarter, that activity has decreased to normalized levels in the current quarter, with current quarter LASG originations and purchases reaching record levels at $98.6 million and $64.8 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 LASG portfolio, which had net loan growth of $98.5 million, or 13%, since December 31st, 2018. In the current quarter, LASG originated $98.6 million of loans and purchased loans with a recorded investment amounting to $64.8 million.
84% of the LASG-originated loan portfolio have an interest rate floor, which was a weighted average floor of 7.2% as of December 31st, 2019. Additionally, 10% of the LASG-originated loan portfolio is fixed at a weighted average rate of 8.2%. Turning to funding on slide 11. Our 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 fourth quarter of fiscal 2019, we increased our loan-to-core deposit ratio from 100% - 125%, which allowed us to reduce our excess deposits. However, deposits increased compared to the linked quarter in order to fund the loan growth in the LASG portfolio. Over the past year, time deposits have grown while money market accounts have decreased.
Our non-maturity accounts, which include money market, savings, and demand deposit products, as a percent of total deposits, has decreased from 53% as of December 31st, 2018, to 48% as of December 31st, 2019. Compared to the linked quarter, interest expense decreased $45,000, $135,000 of which was interest expense savings on deposits, partially offset by a $93,000 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.
We had $40 million of bulletin board time deposits that matured in December 2019, which were at a weighted average rate of 2.99%, and bulletin board time deposits retained or put on during December, whether 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 $31,000 due to the decrease in net interest income, primarily caused by lower interest income in the SBA and community banking divisions, partially offset by an increase in interest income from the LASG portfolio and an increase in non-interest income from a gain on real estate owned.
Additionally, non-interest expense decreased by $565,000 from the linked quarter, primarily due to decreases in salary and employee benefits expense and loan acquisition and collection expense. Total revenue has helped us achieve an annualized return on average equity of 12.1%, a return on average assets of 1.7%, and an efficiency ratio of 58% in the current quarter. Compared to the comparable prior year quarter, total revenue has decreased by $306,000, while non-interest expense decreased by $114,000. The decrease in revenue is primarily due to the $208,000 decrease in non-interest income due to a $638,000 decrease in gain on sale of SBA loans, which was partially offset by a $338,000 increase in gain on real estate owned and a $108,000 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 as the bank has held less cash with the Federal Reserve, which was partially offset by an increase in interest income on LASG loans due to higher average balances. The decrease in non-interest expense compared to the comparable prior year quarter is primarily due to a $211,000 decrease in professional fees, partially related to legal expenses associated with the corporate reorganization recorded in the comparable prior year quarter, along with a $108,000 decrease in occupancy and equipment expense from decreased repairs and maintenance costs and a $104,000 decrease in loan 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 $227,000, mostly due to salary and incentive compensation increases, and a $172,000 increase in data processing fees due to increased IT outsourcing costs. Slide 13 shows trends in the key components of our income. Compared to the linked quarter, base net interest income decreased $161,000 due to a $466,000 decrease in interest income from the SBA division loan portfolio, which was due to fee recognition from payoffs in the linked quarter. This was partially offset by a $357,000 increase in base net interest income in the LASG portfolio compared to the linked quarter due to higher average balances and rates earned in this portfolio. Transactional interest income from the purchase loan portfolio decreased by $31,000 compared to the linked quarter.
The purchase loan portfolio had a yield of 9.8% in the current quarter, compared to 9.7% in the linked quarter. Interest expense also decreased by $45,000 from the linked quarter. The decrease in net interest income from the comparable prior year quarter is largely attributable to a 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 LASG portfolio as a result of increased average balances, which was then partially offset by a 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% in the comparable prior year quarter due to less transactional interest income, along with loans purchased at lower rates and thinner discounts over the past year, paired with a higher average balance, which requires higher interest in transactional amounts to be recognized to maintain higher returns. Non-interest income increased by $161,000 over the linked quarter, while non-interest income decreased by $208,000 from the comparable prior year quarter. The increase from the linked quarter is primarily a result of an increase of $316,000 in gain on real estate owned, partially offset by $133,000 decrease in 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 $638,000 decrease in gain on sale of SBA loans, partially offset by a $338,000 increase in gain on real estate owned and a $108,000 increase in gain on residential loans. Slide 14 provides additional information on trends in yields, average balances, and our net interest margin, which is 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 SBA interest income resulting from 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 in the linked quarter due to lower average balances in the SBA, community banking, and LASG originated divisions, partially offset by growth in the LASG purchase portfolio. Compared to $910 million in the comparable prior year quarter due to growth in the LASG 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, non-performing loans to total loans has increased to 1.88% from 1.51%, and non-performing assets to total assets has increased to 1.76% from 1.43%. The increase in non-performing loans is primarily due to one LASG originated loan totaling $2.7 million and three LASG purchase loans totaling $2.1 million that were placed on non-accrual during the quarter.
These loans are well secured and in the process of collection. In the top right-hand corner, classified commercial loans were $12.4 million as of December 31st, 2019, an increase from $11.1 million in the linked quarter. As noted in the chart on the bottom right-hand corner of the slide, annualized net charge-offs to average loan balances have remained at very low levels over the past several years and were seven basis points in the current quarter 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 and the coverage ratio, which is primarily due to the change in the composition of the loan portfolio and management's analysis of qualitative loss factors inherent in the loan portfolio. That concludes our prepared remarks.
At this time, we would like to open up the call to Q&A.
If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone to ask a question, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one on your touchtone telephone to ask a question. Again, that is star, then one if you'd like to ask a question. Our first question comes from David Minkoff with DCM Asset Management. Your line is now open.
Good morning, Rick and JP. How are you today?
Good morning, David.
Good morning, David.
Good. JP addressed the non-performers that went up a little bit to $21 million from $16.7 million, and I think you said it was one loan of $12 million that caused that. I noticed there was past due loans of $28 million versus 2.84% versus $14.6 million or 1.5%. Is that indicative of the economy overheating or getting a little dicey? Is it concerning in any way?
First of all, David, thank you for. Asking that question because it's a topic that I'd like to address. I'm going to answer it a little bit broader for the others on the call and, of course, respond to your question about the reason for that. One, to put in context, LASG, between purchased and originated, has 1,100 loans. It's a fair number. I want to address both NPLs and delinquencies. NPLs went up a little bit less than $5 million from September 30th to December 31. There were really two loans that accounted for 75% of that increase. Both of which, one has an LTV of around 60% and one 50%. I'm going to come back to it at the end as why the numbers in our NPLs and delinquencies can change from quarter -to -quarter.
With respect to delinquencies, they went up about $14 million from the September 30th quarter. Half of them are three loans. One of the loans, which is $2.7 million of that, is already paid off. Another one of the loans that is, again, $2.7 million of it, is in the process of foreclosure. We would expect, 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. There was another one for $2.2 million, which was recently purchased in August. Our delinquency levels, there's some variability from different quarters. I went to look back this morning at the quarter that was two years ago, 12/31/2017. Delinquencies were $30 million.
Last year, 12/31/2018, they were $18 million, and now $28 million. The reason our numbers are probably, that's more tentative, are higher than banks with more traditional lending programs is we buy loans at a discount. Occasionally, borrowers try and game us. Somebody whispers them if they stop paying. They make an assumption how much discount we bought it for. If they stop paying, they'll cut a deal. They never get a deal because of that factor. We always look at how to maximize the return. We see loans coming in and out of delinquency and non-accrual, et cetera. I encourage investors and other constituents who look at this number to really look at charge-offs rather than the level of either delinquencies or 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, LASG's originated $1.2 billion of loans. The charge-offs on that $1.2 billion are zero. None. On the purchased loans, which we've 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.
Correct.
Your question now was, is there anything in that? That's the broad answer to your question. You asked whether we see anything in the economy that's affecting that. One of the things we do in terms of managing our portfolio risk is 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 or it's getting better, or it's getting worse. Based on that, we stress at different levels the portfolio to see the impact of what that might do to our portfolio. What we see in our portfolio is things are pretty good.
Right.
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 of quarters ago, we talked about that, and it influences how much we would loan or how much we would buy a loan for. We don't see the economy, as we sit here today, adversely affecting our portfolio.
Okay. Understood on that. In the past due section, though, it went to $28 million from $14 million, and the absolute number is not that terrible when you consider you had a higher volume of loans. What did jump out at me a little bit was the percentage. It went from 1.50% to 2.84%. The percentage of past due doubled. That I guess, was more concerning than the absolute number going from 14 - 28. Am I reading this wrong? What would you say?
No, your arithmetic is right, but now let me take that long comment I gave earlier and kind of narrow it down to its basics. One, in our portfolio, we can have a higher level of non-accruals or delinquent loans. We can, for the reasons I described.
Right.
I won't bore everyone by repeating. They resolve themselves. The level of charge-offs are very small. I would not be concerned. Furthermore, that increase, as I described, Half of that increase is attributable to three loans, which I will say with great confidence there's going to be no loss on those or the other ones, we believe.
Understood. That's kind of clear. One other thing was, last quarter, you announced a significant share buyback, or you authorized one, let's say. It was not for 900,000 shares. At that time, I think the stock was in the 22 range. I'm just wondering. Stock's a little lower now, but most of the lower part came in after the second quarter. I think by the year-end, it was only 21 and a half. Should I assume that no shares were bought back in the last quarter? I guess, would you have announced it if you did?
We would have announced it. You are correct, there were no shares purchased in the last quarter.
Very good.
I would point out, I know you have, and others do, a question of stock repurchases and you've mentioned in the past your desire for more dividends. We're not in the business of hoarding capital if we can't use it. If you take a look at the last quarter, we earned around $5 million, a little bit less, which if you, using this simple math, it could be a little more complicated, but if you said you can leverage that by 10, that's $50 million. If you were 80% loans to that number, that would be $40 million of loans, and we grew our loan book by $75 million.
Right.
What 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 had more capital than we could use, it would be appropriate as both management and the board does, is to think about utilization of capital, whether through a stock repurchase or a dividend, which as you know, David, from our conversations in the past, is 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 leverage the capital we have. If we had to go back to the market and raise more capital, I suspect it would be fairly expensive. We want to make sure we believe we can use the capital. If that changes, we'd have a different plan.
Understood.
Which you would see.
Right. Very good. I'll get back into the queue. Nice talking to you guys, and we'll talk again soon.
Delightful. Thank you, David.
Okay.
Thank you. 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 Richard Wayne for closing remarks.
Well, thank you. For those of you who have called in and for those of you that are going to listen after the call, thank you for following and paying 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 strong one with the record level of loan volume out of LASG, good control of expenses, and a good level of earnings. With that, I thank you again and look forward to talking to you when we report our earnings in three months in April. Thank you very much.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.