Rick Wayne - President and CEO Jean-Pierre Lapointe - CFO

Jeff Kitsis - Sandler O'Neill

Good morning and thank you all for joining us today. With me is JP Lapointe, our Chief Financial Officer.

After the close of the market yesterday, we announced net income of $3.3 million or $0.36 per diluted common share for the second quarter of fiscal 2018. Earnings were positively affected by strong loan growth in the LASG portfolios of $20.3 million or 4% growth over the linked quarter.

Transactional income of $1.9 million was lower than the average for the preceding four quarters and SBA gains of $341,000 were significant lower than prior quarters, as we transition from a BDO business origination model to an inside sales model with a focus on the hotel vertical. This quarterly activity help us achieve a return of equity of 10.2% and a return of assets of 1.3%.

Turning to slide three, for the quarter, we generated $101.8 million of loans, which included $44.3 million of LASG originated loans and $34.8 million of LASG purchased loans, $4.5 million of loans in our SBA Division and $18.2 million of loans in our community banking division. We generated a net gain of $341,000 on the sale of $3.4 million of SBA loans.

Net interest margin for the second fiscal quarter was 4.9% and our purchase loan yield for the quarter was 11%, which included $1.9 million of transactional interest income. Turning to slide four, as we have discussed in the past, under a regulatory commitment made in conjunction with the 2010 merger, purchased loans are limited to 40% of total loans, loan purchasing capacity was $113.4 million at December 31st as a result of the acquisitions of purchased loans in 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. On slide five referencing another regulatory commitment, non-owner occupied commercial real estate loans are limited to 300% of total capital.

At December 31st, capacity under this condition was $177.4 million. Moving on to slide six, of the $79.1 million invested by LASG for the quarter, $34.8 million were purchased loans and $44.3 million were originated loans.

Purchased loans for the quarter had unpaid principal balances of $38.2 million, representing a purchase price of 91.1%. As frequently mentioned in these investor calls, loan purchasing is transactional and can vary - and sometimes significantly from quarter-to-quarter.

As indicated on slide six, purchase volumes were relatively low in the third quarter of fiscal year 2017 and the first quarter of fiscal year 2018 and relatively high in the second and fourth quarters of fiscal year 2017 and this recent current quarter in fiscal year 2018. Since the merger in 2010, LASG has invested an aggregate of $1.3 billion, consisting of approximately $638 million of purchased loans and approximately $670 million of originated loans.

The quarter was very active in the purchased loan market. We reviewed loans with approximately $627 million of unpaid principal balances and bid on loans with approximately $104 million of unpaid principal balances.

As I mentioned 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 $32.2 million as compared to $30.9 million at September 30th.

The change is primarily due to $34.8 million of purchases, offset by purchase loan payoffs and pay downs in the quarter. Purchase loans payoffs generated $1.9 million of transactional income; approximately 84% of the $32.2 million discount is expected to be realized over the remaining life of the purchase loans through scheduled accretion.

The non-accretible portion of the discount represents contractual cash flows that in our estimation may not be collectable. Turning to slide eight, we provide detail on returns from LASG portfolio.

For the quarter, the purchased portfolio generated a total return of 11%, reflecting transactional income of $1.9 million as I've mentioned previously, which was below the average of $2.9 million of transactional income for the prior four quarters. As I've mentioned 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.

Also the LASG originated portfolio generated returns of 6.49% in the quarter. Turning to slide nine, we provide statistics on the LASG loan portfolio as of December 31 of significance.

As noted in the chart in the top right corner, the purchased loan portfolio has a net investment basis of 88%, which is consistent with the linked quarter. On an investment basis, the average loan size is approximately $743,000, with 85% of the portfolio consisting of loans with an investment size less than $6 million.

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 New York and California with 21% and 18% of the portfolio yield respectively.

Our collateral is geographically diverse with collateral in 40 different states. Turning to slide 10, 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 a subsequent quarter. In the current quarter, we closed and funded $4.5 million of SBA loans and sold $3.4 million of the guaranteed portion of loans in the secondary market.

For the quarter ended December 31, the net gain on sale including the capitalized servicing asset was $341,000. On slide 11, we show detail of the SBA sale pipeline as it stands as of December 31.

The bank holds $818,000 in SBA loans held for sale, which represents the guaranteed portion of SBA loans, which have closed and are fully funded as of quarter-end. Next you will note an additional $6 million in the guaranteed portion of the SBA loans that have closed as of December 31, but were not fully funded.

The $6 million consist of seven loans with an average guarantee balance of approximately $860,000. These seven loans have a combined balance of approximately $1 million that has yet to be disbursed.

In total this represents an additional $6.8 million in future SBA guarantee loan sales before considering any loan production in the third quarter of fiscal 2018. And now I would 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 $3.3 million or $0.36 per diluted common share. Diluted earnings per share were down $0.14 from the quarter ended September 30, 2017, which I still refer to as a linked quarter and up $0.01 from the quarter ended December 31, 2016, which I still refer to as a comparable prior year quarter.

The decrease in the linked quarter is due to lower purchased loan transactional interest income, which amounted to $1.9 million in the current quarter, compared to $2.8 million in the linked quarter and $2.9 million in the comparable prior year quarter. Additionally, the gain on the sale of SBA loans into the secondary market decreased to $341,000 in the current quarter, compared to $1 million in the linked quarter and $1.7 million in the comparable prior year quarter.

These decreases were partially offset by reduction in income tax expense of $458,000, primarily due to the new tax laws send into effect on December 22, 2017, which reduced our blended federal corporate income tax rate to 28% for fiscal year 2018. Resulting in the $762,000 decrease in income tax expense during the current quarter.

In addition, we recorded a $279,000 tax benefit from stock-based compensation during the current quarter. These two decreases in income tax expense were partially offset by $498,000 expense to revalue our deferred tax assets at the newly inactive federal corporate income tax rate.

The company's effective tax rate for the current quarter was 29.5%, compared to 26% in the linked quarter and 37.2% in the comparable prior year quarter. The linked quarter effective tax rate was lower due to $818,000 of tax benefits from stock-based compensation.

Turning to slide 13. Over the past year, we have seen net loan portfolio growth of approximately $7 million or $74 million, excluding the broker-dealer loan payoffs of $48 million and the sale of the Community Bank commercial portfolio of $18.3 million in third quarter of fiscal year 2017.

The majority of the growth over the last 12 months comes from our LASG portfolio with $326 million of purchased and originated loans. As shown in the chart, in the trailing 12-months period, we have closed $53.8 million of SBA loans and sold $41.6 million of the guaranteed portion of these loans into the secondary market.

While bank-wide loan production has been strong over the trailing 12-months, increases have been significantly offset by pay downs and amortization in the LASG purchased and originated portfolios, which were $269 million over the trailing-12 months and the payoff of four secured loans to broker dealers for $48 million in the same period. These results are further detailed on slide 14, which shows the composition of loan portfolio over the most recent five quarters.

The net loan growth over this time is primarily driven by the strength of LASG originations, which had net growth of $116 million or 50% since December 31, 2016. In the current quarter, LASG originated $44.3 million of loans and purchased loans amounting to $34.8 million.

Turning to the funding on slide 15, we have had net deposit growth of approximately $9 million or 1% over the trailing 12-months period. Over the past year, all of the growth is due to an increase in our money market products.

The growth in these products have strengthened our overall deposit mix, where non-maturity accounts, which include money market, savings and demand deposit products, represent 63% of total deposits as of December 31, 2017 up from 60% of total deposits at December 31, 2016. Deposits are down $14 million or 1.6% from the linked quarter.

The decrease is primarily attributed to money market accounts with an increase in time deposits. Slide 16 shows trends in the main components of our income.

Compared to the linked quarter, base net interest income increased $61,000 due to higher average balances in the LASG portfolio. Total net interest income before loan loss provision decreased due to lower transactional interest income from the purchased loan portfolio.

The purchased portfolio had a yield of 11% in the current quarter, compared to 12.28% in the linked quarter. Compared to the comparable prior year quarter, the increase in net interest income before loan loss provision is largely attributable to an increase in base net interest income of $1.7 million due to higher average balances in the LASG originated portfolio, partially offset by lower transaction interest income from the purchased portfolio.

The purchased portfolio had yield of 11% in the current quarter down from 13.01% in the comparable prior year quarter, due to higher transactional interest income amounts in the comparable prior year quarter. The lower yields was more than offset by the higher average balances in the current quarter from the comparable prior year quarter.

Non-interest income is down significantly from the comparable prior year quarter, primarily due to the $1.4 million decrease in gains on the sale of SBA loans due to fewer originations during the current quarter. These results are further detailed on slide 17, which shows trends in total revenue and non-interest expense over the past five quarters.

Compared to the linked quarter, total revenue has decreased by $1.6 million while non-interest expense has decreased by $151,000. The decrease in revenue is primarily due to decrease in purchased loan transactional interest income and decreased gains from the sale of SPA loans.

The decrease in non-interest expense compared to the linked quarter is primarily due to a decrease in other non-interest expense due to a recovery of previously recorded impairment charges on our servicing asset portfolio. Compared to the comparable prior year quarter total revenue has decreased by $838,000, while non-interest expenses decreased by $393,000.

The decrease in revenue is primarily due to a decrease in the gain on sales of SBA loans, partially offset by an increase in net interest income of $624,000 from the comparable prior year quarter. The impact of the decrease in revenue in the current quarter was reduced by lower non-interest expense, which has helped us achieve an annualized return on equity of 10.2% and ROI of 1.3% and an efficiency ratio of 62.6% in the current quarter.

Slide 18 shows originations and the associated gains in the residential portfolio over the past five quarters. These gains continue to be a positive contribution to our non-interest income.

We sold substantially all residential loan production into the secondary market. Slide 19 provides additional information on trends and yields, average balances and our net interest margin, which was 4.93% in the current quarter as compared to 5.13% in the linked quarter and 4.94% in the comparable prior year quarter.

As previously discussed the net interest margin, which was consistent with the comparable prior year quarter is largely driven by an increase in base net interest income, offset by lower transactional interest income from the purchased portfolio. Slide 20 provides a snapshot of our asset quality metrics.

Compared to the linked quarter non-performing loans to total loans has increased slightly to 2.34% from 2.19% and non-performing assets to total assets has increased slightly to 1.84% from 1.78%. These metrics have both increased compared to June 30th primarily due to the addition of two loan relationships with an aggregate principal balance of $3.4 million.

The two loan relationships are well secured and of the $3.4 million, $2.1 million is current. In the top right corner classified commercial loans were $13 million as of December 31st, which increased from $9.6 million in the linked quarter.

Finally as noted in the chart on the bottom right hand corner of the slide net charge-offs to average loan balances remained at low levels over the past several years and were 4 basis points in the current 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&A.

Good morning.

Good morning, Jeff.

This is Jeff Kitsis on for Alex this morning. I was wondering if you could please give us an update on where you are in the transition of the SBA business.

And also should we expect volumes to pick up in the next few quarters?

Sure, good morning, Jeff. Usually Jeff, when you call in.

I say good morning, Alex and then you say, it's Jeff. This time I got the rhythm.

Take two or five calls but I got it. Yes, I would say that - and I'll start with a broader statement for the listeners to make sure that everyone is on the same page relative for the context of this.

Previously in our SBA business, we had originations generated through business development officers working in various cities typically out of their home, sending in loans that were underwritten in our credit group in Boston. And overtime, we decided we didn't think that was the best model to create franchise value for the company for a few reasons.

One is that, it's mostly a brokered business and the brokers have the relationship with the BDO and not with the bank. And secondly, at some point when we would turn down deals, the brokers - the BDOs brought in not uncommonly they may leave and go to some other SBA lender to get their deals approved.

So it didn't feel like we were building up a business that while we had more volume certainly than we did in the last quarter that overtime was going to benefit the company as much. So we moved to an inside sales model, and we've been transitioning to do that over the last three or four quarters.

Where now we don't have any BDOs anymore, everyone that is in that group gets paid not on commission, but gets paid salary and bonus depending upon how well the bank does and how well they contribute. And as you can see from the decline in volume, it has taken us longer to transform that business from the BDO model.

Frankly we weren't thrilled with the level of volume that we did this quarter of $4.5 million, which obviously had an impact on the amount of gains, which had an impact on the amount of the earnings. On a related matter, and then I'll tie it all together.

We announced in December that we have hired Fred Schwartz, who was previously the President of AAHOA, which is the Asian-American Hotel Owners' Association. Of which it has 15,000 or 16,000 members representing about half of all the hotels owned in the United States.

And we have - so our business plan we're trying to develop the hotel space as a vertical in the SBA arena. We are spending - we will be over the next quarters attending lots of conferences, lots of AAHOA conferences.

We've hired a marketing firm to help us to do that. We have inside sales people making calls to hotel owners and brokers.

And so we are optimistic that that business will grow. I would say categorically, I will be for one extraordinarily disappointed if the quarter we're in now on SBA originations and on SBA gains from sales looks like the quarter that we just finished that would be I would categorize that as very poor result.

So we do expect that business to grow, the volume to grow, the gains to grow. And we will - I don't want to make a prediction, how long it will take to get to the level that we would like it to get to.

But we think we have a good team in place to make that happen.

Okay, thanks for that color. That's helpful.

And next I was hoping you can help us understand how we should be thinking about the tax rate in coming quarters?

I'm sorry, did you say about the tax rate?

Yes, the tax rate.

Well, for - I'll use in this context say unfortunately a fiscal year company as you know and others on the call know for banks, well for all corporations but for banks, as we are talking about it now. They were at a maximum rate of 35% for calendar year 2017, and it goes to 21% starting in calendar year 2018.

But because we have a June 30th year end, the way the accounting works is that we average those out. And so our federal rate maximum for the balance of our fiscal year the next two quarters will be 28%.

And then we go back and look at the - and that's for quarters three and four of our fiscal year 2018 ending on June 30th. And we go back, as we have and JP described in his comments on the tax expense for us.

We also go to 28% for the first and second quarter of fiscal year 2018. The impact of that of course was our first quarter, we reported a $0.35, we made an adjustment to bring that down to $0.28.

I am talking about federal taxes now of course we have state taxes. And then for the quarter ending December 31, taxes were - federal taxes were calculated at 28%, which is a long winded way of saying that for the quarters that ended on the March 31, and on June 30th, our federal rate will be 28% and the quarter that ends on September 30th, which is our first fiscal quarter in fiscal year 2019 the federal rate will be 21%.

Okay, that's very helpful, thank you. And then on my last question is LASG originated loans are now about 45% of the total loan booked.

Is there any reason, why that percentage cannot be meaningfully higher?

I am sorry, are you questioning why it cannot be what?

Meaningfully high, could it go meaningfully higher from about 45% of the total loan book?

Yes, I mean, that - well first let's talk about what one might think would limit, which it doesn't. We have that there are a big part of that is our originated portfolio, is that the one you are referring to when detailing, so I can be specific in addressing your comment, as oppose to the purchased one.

Yes, it's exactly. I am referring to the LASG originated portfolio.

Yes, well there is lot of regulatory limited on how large that can be, as there is in the case of purchased loans, which are limited to 40% of total loans. The one limit that could come into play on that is that we are limited to 300% of total cap-CRE rather, investment CRE is limited to 300% of total capital.

So I don't see that really being a practical limitation for the originated book. And so to answer your question, we can grow that significantly higher and we would like to and we're seeing - we saw a high level of originations last quarter and we have a fairly robust pipeline.

And we have business development officers that work in the bank, not to be confused with the BDOs, I described earlier in SBA space originating business. And we're getting I believe an excellent reputation as a bank that is a very good lender for those kinds of customers particularly in the portfolio of finance area.

So I would expect over time that will become a larger percentage of our balance sheet. As JP noted in his comments, over the last quarter, meaning the one that ended December 31, our LASG book increased 4%.

And we saw some reduction in our commercial book in our Community Banking Division. And so because the yields are higher on the LASG originated book, we saw our base net interest income increase, which is of course a good thing.

Got it, thank you. That's helpful.

Those are all my questions for today. Thank you for taking them.

Jeff, those are good ones. Thank you.

Thank you. And thank you all for listening to this call and supporting us.

Jeff were asking good questions and we continually try to provide more visibility and transparency into our company through both this call including the - and also the slide deck, which accompanies this to the extent that any of you either listening now or very often people listen to it online later have some suggestions on information that would be helpful to you, we would certainly like to hear that. And if we can provide greater visibility, we would like to do so.

And so with all that, I say thank you and look forward to talking to you again in April to report the results of our third quarter and fiscal 2018. Thank you.