Good day, everyone, and welcome to the Northeast Bancorp Fiscal Year twenty nineteen First 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 J. P. Lapointe, 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 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 Bancorp. Forward looking statements are based upon the current expectations of Northeast Bancorp's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward looking statements. Northeast Bancorp does not undertake any obligation to update any forward looking statements. At this time, I would like to turn the call over to Rick Wayne.
Please go ahead, sir.
Good morning, and thank you all for joining us today. I'm Rick Wayne, the Chief Executive Officer of Northeast Bancorp. And with me on the call is J. P. Lapointe, our Chief Financial Officer.
After the close of the market yesterday, for the 2019, we announced quarterly net income of $4,500,000 or $0.49 per diluted common share, 12.8% return on equity, 1.5% return on assets and an efficiency ratio of 58.8%. As will be discussed in more detail, we had significant growth in our higher yielding LASG portfolio, strong volume in our SBA portfolio and a decline in nonperforming assets with continued disciplined expense management. Turning to Slide three. During the first quarter, bank wide, we generated $136,300,000 of loans, including $105,900,000 in our loan acquisition and servicing group or LASG. LASG loan production included $71,100,000 of originated loans and $34,800,000 of purchased loans.
Of the $71,100,000 of originated loans, 93% were variable rate and 85% were indexed to prime with a weighted average yield of 7.48% as of September 30. For the quarter, the LASG portfolio had net growth of $20,000,000 or 2.9 compared to the linked quarter or 11.6% on an annualized basis. Additionally, we generated $18,900,000 of loans in our SBA division, all of which were loans secured by hotels, demonstrated the continued build out of our SBA hotel vertical. We generated a net gain of $851,000 on the sale of $12,300,000 of SBA loans. Net interest margin for the quarter was 4.9% and our total return on purchased loans for the quarter was 9.5%, which included $1,500,000 of transactional income.
Turning to Slide four. As we have discussed in the past, under a regulatory commitment made in connection with the 2010 merger, purchase loans are limited to 40% of total loans. Loan purchasing capacity decreased to 92,700,000 as of September 30 as a result of the growth in the LASG purchase portfolio during the quarter. Loan purchasing capacity increases or decreases depending upon the relative amount of purchased and originated loans on our balance sheet at any given point in time. Now on Slide five, under another regulatory commitment, non owner occupied commercial real estate loans are limited to 300% of total capital.
As of September 30, capacity under this condition was $120,200,000 Moving on to Slide six. Of the $105,900,000 invested by LASG for the quarter, 34,800,000.0 were purchased loans and $71,100,000 were originated loans. Purchased loans for the quarter have unpaid principal balances of $37,100,000 representing a purchase price of 93.9 percent. As frequently mentioned in these investor calls, loan purchasing is transactional and can vary sometimes significantly from quarter to quarter. Since the merger in 2010, LASG has invested an aggregate of $1,600,000,000 consisting of approximately $762,000,000 of purchased loans and approximately $880,000,000 of originated loans.
During the past quarter, we reviewed loans with $179,300,000 of unpaid principal balances and bid on loans with $54,400,000 of UPB and we purchased loans with UPB of $37,100,000 at 93.9% or $34,800,000 invested. The $34,800,000 invested consisted of 58 loans acquired in five separate transactions. As I've said before, we remain disciplined in our selection, underwriting and bidding on loan pools and singularly focused on building a quality portfolio. Moving on to Slide seven. At the end of the quarter, the discount on purchased loans was $36,400,000 as compared to $37,100,000 at June 30.
The change is primarily due to $34,800,000 of purchases with the related $2,300,000 discount, offset by regularly scheduled accretion as well as purchase loan payoffs and pay downs in the quarter. Purchase loan payoffs generated $1,500,000 of transactional income. Approximately 85% of the $36,400,000 discount is expected to be realized over the remaining life of the purchased loans through scheduled accretion. The non accretable portion of the discount represents contractual cash flows that in our estimation may not be collectible. Turning to Slide eight, we provide detail on returns from the LASG portfolio.
For the quarter, the purchased portfolio generated a total return of 9.5%, reflecting transactional income of $1,500,000 from unscheduled loan payoffs and sales, which was lower than the average of 2,400,000 of transactional income and the weighted average return of 11.7% for the prior four quarters. As 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 LASC originated portfolio generated a return of 7.4% in the quarter. Turning to Slide nine. We provide statistics on the LASG portfolio as of September 30.
Of significance, as noted in the chart in the top right, the purchased loan portfolio has a net investment basis of 89%, consistent with the linked quarter. On an invested basis, the average loan size is approximately $733,000 and 85% of the portfolio consisted of loans with an investment size less than 6,000,000 The loan portfolio has a diverse collateral type, primarily focused on retail and mixed use, industrial, hospitality, multifamily and office. By geography, the largest concentrations are in California and New York with 1715% of the portfolio, respectively. Our collateral is geographically diverse with collateral in 42 states. Turning to Slide 10.
One of the benefits of the SBA program is the ability to sell the guaranteed portion of the loan and often at a substantial premium. For a variety of reasons, SBA loans closed in one quarter are sometimes sold in a subsequent quarter. In the current quarter, we closed 18,900,000 of SBA loans, of which $18,600,000 were funded. Additionally, the company sold 12,300,000.0 of the guaranteed portion of loans in the secondary market, of which $7,400,000 were originated in the current quarter and $4,900,000 were originated in prior quarters. For the quarter ended September 30, the net gain on sale, including the capitalized servicing asset, was $851,000 On Slide 11, we show the detail of the SBA sale pipeline as it stands at September 30.
The bank holds $1,400,000 in SBA loans held for sale, which represent the guaranteed portion of SBA loans, which have closed and are fully funded at quarter end. There is also an additional $12,800,000 in the guaranteed portion of SBA loans that have closed and will be fully funded in subsequent quarters. In total, this represents an additional $14,200,000 in future SBA guaranteed loan sales before considering any loan production in future quarters. And 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, and good morning, everyone. I'm picking up on Slide 12 to provide more information on our financial results. Net income for the quarter was $4,500,000 or $0.49 per diluted common share. Diluted earnings per share were up $01 from the quarter ended June 3038, which I shall refer to as a linked quarter, and down $01 from the quarter ended September 3037, which I shall refer to as a comparable prior year quarter. The increase of $01 from the linked quarter was due to higher interest income, which amounted to $18,800,000 in the current quarter compared to $18,000,000 in the linked quarter as a result of higher average balances in the LASG and SBA portfolios.
This was offset by higher interest expense of $4,400,000 in the current quarter compared to $3,600,000 in the linked quarter as a result of higher cost of deposits to fund loan originations. Non interest income was down $405,000 from the linked quarter due to no gain on sale of other loans as no other loans were sold during the current quarter, offset by higher loan servicing fees in the current quarter. Non interest expense had a favorable variance of $123,000 compared to the linked quarter due to lower salary and employee benefit costs, offset by higher loan expense. Additionally, we saw the benefit of the lower federal corporate income tax rate in the current quarter, which drove income tax expense down to $1,500,000 or an effective tax rate of 24.8% as compared to $2,300,000 or an effective tax rate of 34.5% in the linked quarter. The decrease from the comparable prior year quarter of $01 was due to an increase in deposit funding costs, which increased $1,500,000 along with an increase in non interest expense of $641,000 primarily due to higher salary and employee benefit costs and an increase in other non interest expense from the quarterly valuation of servicing rights as well as a decrease in non interest income of $404,000 primarily due to lower gains on sales of SBA and residential loans.
These were offset by higher interest income of $18,800,000 compared to $16,200,000 from higher average balances in the LASG and SBA portfolios as well as a lower effective tax rate. The tax rate for both the current quarter and the comparable prior year quarter included income tax benefits recognized under ASU 20 sixteen-nine, whereby the tax effects of vested stock awards or exercised stock options are treated as discrete items in the reporting period in which they occur. The tax benefits recognized in the current quarter decreased by $637,000 compared to the comparable prior year quarter. Turning to Slide 13. Over the past year, we have seen net loan portfolio growth of $127,600,000 The majority of the growth over the last twelve months comes from our LASG portfolio with $410,200,000 of purchases and originations.
As shown in the chart, in the trailing twelve month period, we have closed $56,200,000 of SBA loans and sold $32,400,000 of the guaranteed piece portion of these loans into the secondary market. While bank wide loan production has been strong over the trailing twelve months, increases have been significantly offset by paydowns and amortization in the purchased and originated portfolios, which amounted to $306,200,000 over the trailing twelve months. These results are further detailed on Slide 14, which shows the composition of the loan portfolio over the most recent five quarters. The net loan growth over this time is primarily driven by the strength of the LASG portfolio, which had net loan growth of $137,000,000 or 24% since September 3037. In the current quarter, LASG originated 71,100,000 of loans and purchased loans with a recorded investment amounting to $34,800,000 Turning to funding on Slide 15.
In order to fund loan growth, we have had net deposit growth of $153,000,000 or 18% over the trailing twelve month period. Over the past year, all of the deposit types, excluding demand deposits, have seen growth. However, the majority of the growth has been within our time deposit products. Despite the growth in the time deposit products, our non maturity accounts, which include money market, savings and demand deposit products as a percent of total deposits, remains high at 57% as of September 3038, as compared to 65% of total deposits at September 3037. Slide 16 shows trends in the main components of our income.
Compared to the linked quarter, base net interest income increased $436,000 due to higher average balances in the LASG and SBA portfolios, along with higher rates earned on our loans as the majority of our LASG originated and SBA portfolios are tied to the prime interest rate. Base interest income increased $1,300,000 due to the increase in the average balance of the LASG and SBA portfolios and the increase in the prime interest rate, which was then offset by increased funding costs, which increased $844,000 from the linked quarter. Transactional interest income from the purchased loan portfolio decreased by $485,000 compared to the linked quarter. The purchased portfolio had a return of 9.5% in the current quarter compared to 11.5% in the linked quarter. The increase in net interest income before loan loss provision from the comparable prior year quarter is largely attributable to an increase in base net interest income of $2,400,000 due to higher average balances in the LASG portfolio and higher rates earned on the loans in this portfolio, offset by lower transactional interest income from the purchased portfolio.
The 9.5% return in the purchased portfolio in the current quarter is down from 12.3% in the comparable prior year quarter due to higher transactional interest income amounts in the comparable prior year quarter. The lower purchase yield was more than offset by higher average balances in the current quarter as compared to the comparable prior year quarter. Compared to the comparable prior year quarter, base interest income increased $3,900,000 while funding costs increased $1,500,000 Non interest income decreased by $405,000 over the linked quarter, primarily due to the decrease of $402,000 in gain on sale of other loans and a $182,000 decrease in gain on the sale of SBA loans, partially offset by a smaller loss recognized on the sale of real estate owned and higher loan servicing fees compared to the linked quarter. Non interest income is down $404,000 from the comparable prior year quarter, primarily due to a decrease in the gains on sale of SBA loans $168,000 due to lower pricing in the SBA guarantee market in the current quarter and a decrease in the gain on sale of residential loans $117,000 due to lower volumes sold in the current quarter. These results are further detailed on Slide 17, which shows trends in total revenue and noninterest expense over the past five quarters.
Compared to the linked quarter, total revenue has decreased by $454,000 primarily due to the decrease in gain on sale of other loans of $402,000 Additionally, noninterest expense decreased by $123,000 from the linked quarter, primarily due to lower compensation expense due to lower incentive compensation costs as compared to linked quarter, which was offset by higher loan expense in the current quarter. Total revenue has helped us achieve an annualized return on equity of 12.8%, a return on assets of 1.5%, along with an efficiency ratio of 58.8% in the current quarter. Compared to the comparable prior year quarter, total revenue has increased by $644,000 while noninterest expense has increased by $641,000 The increase in revenue is primarily due to an increase in base net interest income due to higher average balances in the LASG originated and purchased portfolios, offset by a decrease in gains from the sale of SBA loans. The increase in non interest expense compared to the comparable prior year quarter is primarily due to a $255,000 increase in compensation expense due to increased employee compensation and a $167,000 increase in other noninterest expense, primarily due to the quarterly valuation of servicing rights. Slide 18 provides additional information on trends in yields, average balances and our net interest margin, which was 4.93% in the current quarter as compared to 5.28% in the linked quarter and 5.13% in the comparable prior year quarter.
As previously discussed, the net interest margin, which decreased from the linked quarter, is largely driven by an increase in basin interest income offset by higher cost of deposits and average deposit balances as well as lower transactional interest income from the purchased loan portfolio. Additionally, the average balance of loans for the current quarter was $894,000,000 as compared to $825,000,000 in the linked quarter and $773,000,000 in the comparable prior year quarter, primarily due to growth in the LASG originated and purchased portfolios. Slide 19 provides a snapshot of our asset quality metrics. Compared to the linked quarter, nonperforming loans to total loans has decreased to 1.3% from 1.37, and nonperforming assets to total assets has decreased to 1.08% from 1.23%. These metrics have also both decreased compared to June 3037.
In the top right hand corner, classified commercial loans were $8,900,000 as of September 3038, a slight decrease from $9,100,000 in the linked quarter. Finally, 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 four basis points in the current quarter consistent with the linked quarter. Overall, our allowance coverage has continued to increase and appears appropriate to address the risk in our loan portfolio. That concludes our prepared remarks. At this time, we would like to open up the call to Q and A.
Our first question or comment comes from the line of Alex Twerdahl from Sandler O'Neill. Your line is open.
Good morning, guys.
Good morning, Alex.
Good morning, Alex.
I'm first off wondering if you could, Rick, us a little bit more commentary or color on sort of what you're seeing in the SBA line. I appreciate you kind of giving us sort the color on what the pipeline looks like for potential gains going into the fourth quarter, maybe the pipeline as well for originations, as well as kind of whether or not you saw I think there's maybe a little seasonality that impacted the third quarter. And then also maybe a little bit more about how you're thinking about that on sale, which seems like it took kind of a step back in the calendar third quarter relative to where we've seen it over the last couple of years really.
Just so I get it, Alex, is your first question is what do we see in the market on originations? And then there's a second one, what might we expect for pricing in this the quarter that we're in now or the following quarter?
Yes.
Well, I thought, first of all, that our almost $19,000,000 of originations was actually quite good. There is some seasonality in the summer months. And while close to $19,000,000 I thought was we thought was a strong number for that. I can tell you though that to kind of think about the future, it's a very, very competitive marketplace for SBA loans. We have seen in our own case in the hotel vertical that for loans of the quality that we want to book, the pricing is not well, tell you what the pricing is.
The pricing is more between prime 1.51.75% and a couple of points to the brokers. If you go back a while ago, say, a year one years, point the pricing on those loans was more like prime plus 2.25%. So the reason that is occurring, of course, is there are a lot of lenders chasing that business. There are 3,000 or 4,000 banks that do SBA loans. There's maybe I don't know this number exactly, but directionally and most of those are doing them in their local marketplaces, maybe 100 that do as we do that do them nationally.
And there's a lot of competition, which is driving down the pricing and also, frankly, driving down the availability. The business is getting tougher. Secondly, on the question of pricing, we're also seeing and I'm sure you're seeing this with banks that you follow, the premiums that buyers are willing to pay are going down. By way of example, I have this somewhere in the current quarter, when you look at our gain, which includes both the gain and the servicing asset created, it was 7% of loans sold and it was 9.5% in the linked quarter. So that I don't want to be totally gloomy about that because we're pleased with the inroads we're making to in the hotel vertical.
As you know well, we moved from a BDO model to focusing more on a vertical model. And when you compare that number with what we had done in the BDO and the quality of it, it's gotten better much better, I would say. But that's how I would describe the fairly describe the state of affairs in the SBA world.
Okay. That's some helpful color. And then maybe give us a little bit more color on the funding pressures that you're seeing this quarter. Obviously, the whole industry is seeing higher rates translate to higher deposit costs. But this quarter specifically, were there some longer duration CDs or something that you put on that kind of impacted that more than what you've seen?
Or maybe talk about kind of how you're planning to address and think about the funding side of the balance sheet over the next couple of quarters?
So this quarter as we grew and as JP mentioned, most of our funding came from term deposits, CDs that we're running in our Able banking channel. And most of that has come from one year CDs that are currently priced at $2.70. And that's on the obviously on the expensive side, kind of the focus first on the good news and then talk about the cost of it. As we have a condition that we need to fund our loans with core deposits, so we don't have the liberty of going to borrow money. I suspect borrowings would be roughly the same.
The good news is because we make so much money on the asset side, we're able to pay those rates and we're able to attract money at those rates. So we're able to fund ourselves, but we need to pay up for it. One of the other things that is unique about our bank is that because we have to fund our loans with core deposits, we need to inventory money. And so we have a lot more cash on hand than probably other banks that you look at. And that money that we're paying $270,000,000 for until we can deploy it in loans where it's sitting at the Fed at $220,000,000 So we have 50 basis points of negative spreads on the extra cash that we carry.
And given that we're in the business of buying loans and that is somewhat transactional, we need to even inventory, if you will, more cash than others. So I think we see tell me confirm, JP, that this is right. I want to say that our funding costs on deposits went up 25 basis points last quarter compared to the linked quarter. And but I would also point out on that, that or I would amplify it because I've said it once I've said it before, that when you look at our portfolio, our originated portfolio where we funded $71,000,000 most of which 91% or 92% of which tied to is variable, mostly tied to prime, that had a rate of September 30 after adjusted of 7.5%. So one of the reasons, Alex, that as you noted in your as usual well written report, that there's some compression on net interest income, but some chunk of that really has to do with the fact that we're our balance sheet's I would not artificially higher, but needs to be higher because of the deposit requirements, and we're losing 50 basis points on that.
But when you look at the spreads on our loan book, on our originated book, having loans at the end of the quarter that are variable that are yielding seven fifty, I think we think is terrific. The main reason, the very main reason that from an earnings perspective, this quarter was not as good, frankly, as we'd like to see is because our transactional income was $1,000,000 compared to an average of $2,400,000 over the preceding four quarters. And that on an after tax basis is almost $09 And I know you know this, but I'll remind I'll just say it so the other listeners on the call will hear it. The difference is if we have a loan that's paid off on September 30 and there's discount that goes into that quarter. And if it pays off on October 1, it goes into the following quarter.
And so we've invested $700,000,000 or so in purchased loans with yields between eleven and twelve, and this quarter was 9.5. We still have a lot of discount on the books and a lot of it's timing. I know we get judged quarter by quarter. So I'm not attempting to rationalize it. I'm only trying to make the point that as we say, but it's got the charm of being the truth and that purchase business, both in amount of loans you buy and the transactional income can vary quarter by quarter.
I didn't say lumpy because we say that all the time, but it really can vary quarter by quarter. And for that, I apologize for a very long winded answer to your very precise question, but I wanted to touch on some of the things that I know are of interest to you.
I think that, yes, you certainly have some lines that can be somewhat lumpy. In some quarters, they all fire at the same time. In some quarters, they all kind of don't fire at the same time. And so just to the point on the LASG originated loans, which I know most of those are prime based and have been repricing higher, but just relative to the June, yields were kind of flat. Was there something that kind of inflated the June yield on the LASG originated loans to make that kind of not seem as asset sensitive as it is?
Well, I'm going to need some help from somebody here to answer that. Can you what was $7.53.
It's $7.43 this quarter. Last quarter, was $7.45.
There must have been some fee income in there because the I'd have to look at it more closely. Don't want to I don't have the answer to that as we sit here with that, but I will take a look at our public information where there will be an answer to that, and we'll have something more to say on it. Don't want to mumble through it here. It's certainly within the realm of possibility that on our loans, there is a little bit of price compression on we may have done some more loans that were prime plus 2.5% and now maybe some are at prime plus 2% in the mix. But we have public information on that, that I will be able to figure out.
Got it. But we would expect that portfolio based on the September hike to be yielding higher in the final quarter, the final calendar quarter of the year relative to what we saw this quarter, correct?
Yes. I did yes. And I would say this that the virtually all of the originated portfolio are variable, generally tied to prime. The only there's two things that could affect the question that you're asking. One is, was there some amount of an exit fee or some kind of something that went into that interest income in the prior quarter?
And secondly, sometimes we do loans at prime plus two, sometimes prime plus 2.5. There could be some of that in the mix. But it's there's still very good numbers and it's knowable. But let me just use that as a launching point, Pat, to make one more point, which I intended to earlier. When you touch on this in your report, one of the things I think that is important to point out, and I think very significant in as we're building our earnings and the quality of the earnings.
For those of you that have the slide deck, if you look on Page 16 of the deck, we have a slide that shows the components of our net interest income quarter by quarter. And we break it up into base net interest income, which is the blue bar, and transactional interest income, which comes from generally from prepays. And you can see that in the quarter that ended September 30, our base net interest income was 12 point call it, 12,900,000.0 income $12,900,000 with a little bit of rounding. If you go back just a year ago to the first quarter of fiscal quarter of fiscal year 'eighteen, it was $10,500,000 So it went up to $2,400,000 the base net interest income in that time period. But why does that happen?
It happens because we're building our portfolio. By way of example, our average loan balance for the quarter, if you go to Slide 18, for the quarter that ended on September 30, the average loan book was $895,000,000 The average loan book in the quarter that ended June 30 was $825,000,000 That's $75,000,000 increase in our average loan size and a big chunk of you look quarter to quarter end, you wouldn't see that as clearly, but a lot of the loans were booked at the very end in the month of June. So between June and September, we've grown our loan book significantly. And so therefore, transactional income is important. Yield on our purchase loan book is important.
But one of our goals is to build a high yielding, high quality loan book so we can have more consistent and predictable earnings. Even with this quarter with transactional income $900,000 lower than last quarter and SBA gains $200,000 lower, we still had a very in my opinion, a very strong quarter, not to our potential, but earning almost 13% ROE and 1.5% ROA and efficiency ratio of 58% or 59% compared to most banks, pretty strong with lots of loan growth capacity.
My final question is, just JP, you gave some color on the tax rate this quarter. How should we be modeling that for the remainder of the year, excluding the impact of the of what happened this quarter?
Sure, Alex. I think for the year, we should be excluding discrete items, should be somewhere around 27% tax rate going forward. So somewhere around there should be appropriate.
Great. Thank you for taking my questions.
Thank you, Alex.
Thank you.
I'm showing no additional audio questions in the queue at this time. I would like to turn the conference back over to Mr. Rick Wayne for any closing remarks.
Thank you. And thank you all for listening and participating, reviewing our material. Every quarter, we try and provide more visibility into our company so you can understand it more. I hope that the Q and A with Alex and some of my expanded answers were helpful and not tedious for you. I tried to provide some color to what's going on and look forward to talking to you in our next call.
And as always, if you have suggestions on items you like us to provide some more visibility into and we can, we would be happy to do it. And with that, I wish all of you a very nice day and week. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.