Participants

Rick Wayne; President, Chief Executive Officer; Northeast Bank

Richard Cohen; Chief Financial Officer; Northeast Bank

Patrick Dignan; Chief Operating Officer, Executive Vice President; Northeast Bank

Mark Fitzgibbon; Analyst; Piper Sandler

Damon DelMonte; Analyst; KBW

Presentation

Operator

Welcome to the Northeast Bank second quarter fiscal year 2025 earnings call.
My name is Didi and I will be your operator for today's call.
This call is being recorded with us today from the bank is Rick Wayne, President and Chief Executive Officer Richard Cohen, Chief Financial Officer and Patrick Dignan, Executive Vice President and Chief Operating Officer. Prior to the call, an investor presentation was updated 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. (Operator Instructions)
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 risks 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. I will now turn the call over to Rick Wayne. Mr. Wayne. You may begin.

Rick Wayne

Thank you very much and good morning to all of you listening on this call. I'm going to start going over some of the financial highlights and other important matters during the quarter. And following my comments, Richard Cohen, our CFO will then spend some time going over certain important financial matters. And following Richard's presentation, Pat Dignan, who is our Chief Operating Officer. And importantly, our Chief Credit Officer will discuss the loan activity in our various loan lines including purchases and originations from our national lending group.
And also SBA activity and following all of that, we would be happy to answer any of your questions. Let me just start off by saying we think it was a really great quarter. You will hear in some of the matters I highlight on the financial highlights, which is page 1 of the investor deck that there were many records broken in this quarter. And so, with that, let me begin to point out that we had $361 million of loan volume, which included $14 million invested on approximately $15 million of UPB on purchase loans.
And, Pat will comment on the lumpiness of purchase activity. And why we think we should look at that on an annual basis much more than quarter to quarter. Now, you'll hear of a record on originations. We originated $246 million in the quarter. And again, Pat provide some commentary about what the what the pipeline looks like.
For us, we also, had another record in SBA origination activity where we originated $100.3 million of SBA loans of which $64.5 million were sold to point out that that was not necessarily the production in the quarter, some of it related to originations in the prior quarter.
But those loans sold generated a gain of $5.6 million. I want to also point out that our net income of $22.4 million was a record quarter for earnings. Excluding the third quarter of fiscal '21 where we had significant income from the sale of triple P loans. So, if you exclude that $22.4 million was a record. Another record is our base net interest income, which was $45.6 million for the quarter. Another record, as I mentioned, tangible book value for the quarter increased by $4.49 cents or 9% since September, 30 that is since the link quarter, of which it was, broken down of $2.74 cents.
From basic earnings plus the benefit of stock sales which were sold at a price higher than tangible book value, which increased, the tangible book value on a per share basis by a dollar 75. If we go back and we look to the increase in tangible book value from June 30. Which is our fiscal year end for six months. From the [12, 31] quarter, tangible book value increased by $5.95 cents or 13%. Over that six months period. I guess again, also a combination of earnings per share, which for that time period, the six months was 496 and also the benefit of selling stock.
And at the end of the quarter, Richard will talk about this much more. Our loan capacity based on our capital, was $856 million at the end of December or as they say, a lot of dry powder, I'm not sure that's a good metaphor anymore, but $856 million of loan capacity, I want to spend a few minutes talking about asset quality which of course is near and dear to our hearts. I say our those at the bank and you who are investors.
And we had, if you on page 7, I'm looking at some information there. I'm not going to go through each of the four slides. I point out that the ratio of nonperforming assets to assets and non performing loans to loans have declined from the linked quarter, nonperforming loans to total loans are 84 basis points, down from 106 basis points and up to the chart to the right of that on the same page, classified commercial loans have declined from $31.1 million to $26.6 million. That is one point I wanted to make.
If we go on to page 8, you can see that non-performing assets declined from $37 million to $31 million, a little rounding. There were six or a reduction of about $6 million or roughly 16% largely due to the payoff of two loans totalling $5.7 million.
And then I want to go to page 12 and point out that, if we take a look at the weighted average seasoning of our loan portfolio, this is on our purchase portfolio is [$5.2 million] of That's a long time of 5.2 years. And you can see we've now added one more column to what you have seen previously where we divide up the years, we've added a breakdown. We used to be just everything from 2019 forward.
Now we break that down to 2019 to 2021 and then 2022 and later, and you can see that only 17% of our purchased loan book was originated 2022 or later. And 83% was previous to 2021. And you can see it broken up by the columns and with that, I would ask Richard to again, thank you, Richard.

Richard Cohen

Thanks very much Rick. So, I'm going to speak about two principal themes. I'm going to speak about interest rates as well as the bank's growth capacity as far as interest rates are concerned. We have mentioned on previous calls that we monitor our interest rate risk in an effort to remain relatively neutral if rates were to increase or decrease.
What has happened is we have been slightly positively benefited from the fact that rates have decreased. In particular, as you'll see on slide 15, our average cost of deposits for the second quarter was 4.15% contrast that with 4.34% in the prior quarter. In other words, the average cost decreased 19 basis points quarter on quarter.
What we think is worth pointing out is that the spot cost of funding as of 1,231 is 3.89%. That then is down a further 26 basis points. We have noted in the past and continue to see that as our liabilities is repriced. They do so with the delay, but we are relatively well matched in a rate down environment and have seen that play through in our interest rates and our net interest margin.
Turning now to the two key aspects that will enable the bank to grow responsibly. Should the opportunity arise to add quality assets at a favourable rate? Those two factors are liquidity and capital.
Let me start with liquidity. Our liquidity position improved which in turn enables scope for growth as of December 31, 2024, our on balance sheet liquidity was set at $430 million. That's an increase compared to $379 million. As at September, importantly, our off balance sheet capacity sits at over $1 billion and that is up very significantly.
And in turn helps in the event that we have an opportunity to add loans whether through purchase or origination, turning now to the second piece which is capital. Our leverage ratio sat at 11.2% for the quarter and our total capital ratio sat at 13.9% as at the end of the quarter.
This was a healthy level of capital which enables us to grow significantly, particularly in light of the fact that the end of September we had a significant increase in our loan portfolio due to the material purchases that took place at that date. The reason for the healthy capital, not with standing the significant growth in the book arises as Rick had said before from both the ATM at the money offering as well as our retained earnings.
Speaking about that, in particular, we have been approved for a further $75 million of ATM of which $69 million remains to be utilized as and when the opportunity comes forth from a loan capacity perspective. Rick has already mentioned the $856 million and that capacity increases as we retain earnings and continue to grow.
In summary, should the opportunities present themselves? We're comfortable that our liquidity as well as our capital will enable us. Let me turn over now to Pat Dignan.

Patrick Dignan

Thanks Richard. As Rick pointed out, this is a good quarter for us with record volume in both our SBA and origination verticals for purchase loans. We bought 70 loans in three transactions with gross balances of $14.8 million and at a purchase price of $14 million or $0.91.
The weighted average loan to value of these loans was around 55% at our purchase price. And we're mostly small balance with a variety of collateral collateral types and located in '25 states. Although purchase loan volumes were below average this quarter, it really should be looked at annually as Rick pointed out and it's not indicative of a diminished appetite on our part or of a slowing market.
On the contrary, we saw a lot of purchase loan volume this quarter including several sizable portfolios in our strike zone, most of which were either pulled or delayed by the sellers. There were a couple of larger clean multifamily portfolios that did trade but at very skinny yields and to groups with securitization exits.
We'll see whether this represents a shift in market pricing for larger pools or a one off for just the right deal. At just the right time. In any event, there's a lot of volume out there. We remain optimistic that 2025 will be a good year for loan purchasing.
Unlike loan, purchasing loan originations is less lumpy in SBA lending. We closed just over $100 million of loans this quarter up from $82 million in the previous quarter. This includes 917 loans with an average size of 110,000 and weighted average interest rate of 10.85%.
Slide, 14 illustrates the growth in this business over the past few quarters. And you may not hear that loan sales remained roughly flat since last quarter despite a significant increase in loan volume. That's because we had $35 million of loan sales at the end of December that were held for sale.
This should normalize over time annuity our lending service provider continues to refine its marketing and technology efforts and we believe that the current level of lending is sustainable going forward a level that puts us near the top of SBA lenders nationally.
We're very excited to see this business taking off and look forward to continued growth in our national real estate lending program. We closed $246 million for the quarter. These included 28 loans with an average balance of $8.2 million collateral types included multi family hospitality, retail, and industrial and generally located in New York, California, and Florida.
At origination. The weighted average LTV for these loans was just over 50% and average rates were approximately 8.5%. A particular note is the net growth of the originated portfolio as we discussed in the past. It's a bit of a treadmill given our higher rates and shorter loan terms and we've grown the originated portfolio by over 10% in the past year due to both an increase in loan volume as well as a proactive effort by our asset managers to retain maturing loans.
Looking forward, we're continuing to see a lot of confidence in the markets from both real estate investors and lenders and our loan pipeline is showing no indication of stall back to you, Rick.

Rick Wayne

Pat. Thank you, Richard. Thank you. And now we would be happy to entertain any questions that any of you might have.

Operator

(Operator Instructions)
Thank you. We will now begin the question and answer session.

Question and Answer Session

Operator

Mark Fitzgibbon of Piper Sandler is online with a question. Your line is open.

Mark Fitzgibbon

Hey guys, good morning.

Rick Wayne

Good morning.

Mark Fitzgibbon

Couple questions maybe starting with you Richard. It looks like you're letting cash balances build a bit and I can only assume that that's the fund, loan purchases and maybe the first half of the year. How do you think that will impact the net interest margin, and, and say the early part of 2025? And what other factors should we be thinking about as we model the margin?

Richard Cohen

So I can answer a part of that mark. Thanks for the question. As far as cash balances are concerned, we watch that very closely because we clearly don't want to sit with excess cash. But it's important that we sit with sufficient cash on the balance sheet to make sure that we are, we are liquid. So, it's not so much that we're trying to accumulate excess cash, but to manage it to an appropriate level in terms of the net interest margin.
The cash balance should not act as much of a drain on that because that of course, is primarily driven by a how the liabilities repriced and the composition of those liabilities as well as whether we, whether we fund longer term or shorter, shorter term and how much of that is variable versus fixed.
On the on the income side of that, from the asset perspective, there clearly is a difference in the mix of the portfolio as we, for example, purchase lumpy books or put on originated loans and they've got different interest rates profiles.
So, I think the summary of what I'm answering for you is we don't think there's a direct link between cash and the likely path of net interest margin. It will be driven by other factors which are of course, the composition of assets and liabilities, cash then being held at appropriate levels.

Rick Wayne

Let me just add one thing to that. You know, normally we run around 8% is our target for cash and short-term investments. And it's not always at 8% sometimes and it's typically at the quarter end where we have transactions that we are going to believe they're going to close at the end of the quarter and sometimes they roll over into the next quarter.
So, I would say that the answer is we normally at 8% the extent we were a little bit higher than that, it most likely had to do with transactions anticipated to close. That did not, but we generally run right around 8% of which we've done for a very long time. So that would be consistent, and you know how the nim is determined that weighting of the 8%.

Mark Fitzgibbon

Okay. And then secondly, you obviously had a very strong volume in the SBA business. And I know that might bump around a little bit from quarter to quarter, but I was curious how you're thinking about, volumes going forward, how much, you're willing to, grow that business, how much volume you're willing to, sort of take on.

Rick Wayne

Well, subject to the forward-looking statement, which I won't bore you by reading again. We're very optimistic about that business. You know, if you, there's a slide in here that shows the volume. I going back, I think we have five quarters on there, we were $100 million this quarter. I don't have it over quarter $82 million last quarter and then it was much lower in the preceding quarters.
The pipeline or as we kind of refer to as the top of the funnel for what we're looking at with [Nity] is very large. Pat, mentioned that their technology is continues to improve. And so, we think there's lots of opportunity there as to how much we want to hold. I would point out that from a cap u use of capital perspective, It's really self sustaining because we generate more gain when we sell off loans and we are required to have on the 18% or 20% that we retain, I say 18% or 20% because some loans have an 85% guarantee if they're under [100 and 50,000] and then over that 75%.
So, it's about 18% that we're holding on. And we're holding on to those loans with a good deal. They're generally at prime 275 which is good, and we reserve roughly 3% of on the unguaranteed portion that we hold. And, you know, there's lots of data from the SBA on these kinds of loans as to what you might expect for losses in the future.
We're actually running better than that because our credit box is tighter than what the SBA would permit under their credit scoring requirements for smaller balance loans long with the way of saying we would, we expect the business is going to grow. We're happy to hold more of the unguaranteed portion our balance sheet and we think this will continue to be a meaningful revenue stream for us.

Mark Fitzgibbon

Okay, great. And then I guess I was curious what caused the large uptick in FDIC cost this quarter? What drove that.

Richard Cohen

Primarily balance sheet size balance sheet growth?

Mark Fitzgibbon

Okay. Super. And then Richard will you be able to share with us the average price on the 280,000 shares that you issued this quarter?

Richard Cohen

Yeah. I'm just we're just having a look. Give us a second.

Rick Wayne

We have handlers with us that are providing us the information there.

Richard Cohen

9,836 is the average price 9,836.

Rick Wayne

Okay, super. It's on the highlight page mark with on the deck.

Mark Fitzgibbon

Got it. And then last question is can you help us think about the outlook for expenses? I know to some degree, it depends upon how successful you are with loan purchases and, tools, etc... But any any help there would be much appreciated.

Rick Wayne

You know, this quarter. It was what page is that on? That was about $19 million for the quarter. Which it compared to let me get the exact number so I can thank you. I have it now. So, from memory not bad, it was $19.1 million this quarter and the two preceding quarters were the last one, $17.7million & $17.1million. And then prior to that they were in the $16million, the there has to be a range on this because, part of this reflects this extra as, (comp) and hiring more people. But, I think, somewhere between $18million and $19 million would probably be, a good range based on what we know now.

Mark Fitzgibbon

Super. Thank you. Great quarter.

Rick Wayne

Thank you very much. Thank you, Mark.

Operator

(Operator Instructions)
Thank you, Damon DelMonte from KBW is online with a question. Your line is open.

Damon DelMonte

Hey, good morning, everyone. I hope you're all doing well today. Just to follow up on the expense. Great, just to follow up on the Expense commentary. So, the higher FDIC cost I think Richard noted were due was basically due to like the larger balance sheet. So, should we kind of expect that kind of run rate going forward just given the growth this quarter and then continued growth or do you feel like this is kind of an aberration this quarter?

Richard Cohen

No, I, so I think it's roughly in the right side. It may come down a slight amount but.

Damon DelMonte

Okay, great. And then, could you just maybe talk a little bit about your, your thoughts on the opportunities for, the larger loan purchases with, the market disruption that we've seen and we've talked about in the past kind of, do you feel that that you're kind of in the negotiating stages for some increased activity here in the upcoming quarter or do you think it kind of drags out for a little bit longer into the latter part of this calendar year?

Patrick Dignan

It's hard to say, Rick and I have been in and others here at the bank have been in this business a very long time. And all I could say is that they're the number of pools that are available that have been, that are out there. Is a lot, is there seems to be a lot of M&A activity as a lot of the larger institutions are looking to, balance reposition their balance sheet.
For whatever reason, last quarter, there was a lot, we looked at a lot and there's just a bunch of them that just, they decided not to sell it at that particular time, whether it was due to pricing or their own logistics. But we're, we're all I can say is we're looking at a lot, we're very optimistic. Given the volume that's out there, but it's hard to say whether or not what the competition or pricing will be. When it comes to the day we make a bid.

Rick Wayne

I just want to amplify a little bit on Pat's comments. One is and Damon I'm sure and others mark others. You must see this you know, there's a lot of talk of M&A activity out there, M&A activity, is you know, typically generates opportunities to purchase loans.
Secondly, and Pat mentioned that and secondly, there's been a lot of equity being raised for banks, which is kind of a new phenomenon with the increased interest by investors and in bank stocks and banks, some of the banks that are doing that are using it as an opportunity.
You know, to reposition their balance sheet, including selling commercial real estate in some loans in some cases. And so we're seeing that, but I think we have to answer your question with some humility because you know, it, we expect there's going to be a lot of volume, that's our expectation.
I also expect that when right after COVID, there would be a great opportunity to buy loans as well and there wasn't and the, and the commercial real estate loan market held up pretty well. The I think one of the things that is really important to understand about our opportunities is that, when there are opportunities to buy, put a lot of volume on our balance sheet in single transactions as you can do with the purchase loan business reminding you that we bought a billion in December, 22 and roughly $800 million in September of late September, 24. It's a cyclical business.
It usually doesn't last forever and such great volume. But we're also building a large a commercial real estate loan origination business with good rates, low LTVS and good effect quality. So, it's really important to understand our business is not slowly loan purchasing. And in fact, if we went back, I don't know, a couple of years before December, 22 our loan activity was more like 75% originations in '25 purchases. So, you know, we're going to take advantage of the opportunities wherever we find them.

Damon DelMonte

Got it great, appreciate that color. And then just lastly, you know, given the national scope of the loan portfolios, do you guys have any exposure to California in light of the massive amount of wildfires that are out there?

Rick Wayne

This is such a great question and we have such a great answer. Pat.

Patrick Dignan

We have around a billion dollars of real estate in and around that, that area. And we looked at every single loan we had and not a single, one of them damaged. And all of them with insurance had they been damaged. And that's because if you look at where the fires were and, and, and mostly residential areas and also mostly on the sides of hills and canyons where, where the brittle vegetation caught fire so quickly.
And a lot of the real estate we have is in the more urban areas of Los Angeles. So fortunately, we fared very well in this tragedy. But it's also you know, along with flooding in Florida and other places is, on our list of concerns as we look at new opportunities.

Rick Wayne

So one thing on the fire question, Damon, so we're not unique. That's why all banks do this. Of course, when we make loans or buy loans, our borrowers are required to have insurance for that casualty and we track all of that and in the event that something slipped through the cracks, we have a mortgage impairment policy that gives the bank insurance protection for any of our borrowers that don't have fire insurance.
For example. So, it's a horrible tragedy, of course, but as Pat said, we haven't had those pro we were fortunate. Very fortunate, but if something happened, we have insurance covering all of that.

Damon DelMonte

Got it. Okay. Well, good, good to hear that. Okay, that's I think that's all that I have for now. So, thank you very much for taking my question.

Richard Cohen

Thank you, Damon.

Operator

Thank you. We have no further questions at this time. Now I will turn the call over to Rick Wayne for closing remarks.

Rick Wayne

Thank you for that. Thank you. For those of you. Who have listened and those of you who will listen when they go to our website to review this, and appreciate your good questions. Mark and Damon, and we always say this, we like to present as much and as helpful information as we can in our investor deck.
We've gotten complimented on it frequently for the all the transparency we provide. You know, if there's something that you think would be helpful to you and other investors, let us know and you know, if we agree and we can include that we will. And on that note, I wish all of you a good weekend. Thank you.

Operator

Thank you, ladies, and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.