Northeast Bancorp Q1 2025 Earnings Call Transcript

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Provided by Quartr
October 30, 2024

Key Takeaways

  • This quarter’s loan production of $942 million was the 2nd highest in bank history, and net income of $17.1 million set a record for periods without PPP sale gains.
  • The allowance for credit losses was increased by $27 million to 1.25% of loans; nonperforming loans rose by $9 million but approximately $7 million is expected to be resolved within six months.
  • Small-balance SBA lending jumped to 766 loans totaling $82.4 million in Q1, and the bank extended its Nuity agreement to expand fee income from this high-growth, uncorrelated business.
  • A laddered portfolio of brokered CDs was used to match the repricing of purchased loans, keeping net interest income stable despite a 50 bp rate reduction in September.
  • Core commercial real estate originations remained robust at $127 million, with a return to a ~40% direct/60% lender-finance mix, underscoring ongoing competitiveness in target markets.
AI Generated. May Contain Errors.
Earnings Conference Call
Northeast Bancorp Q1 2025
00:00 / 00:00

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Operator

Welcome to the Northeast Bank First Quarter FY 2025 Earnings Call. My name is Bri, 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 Pat Dignan, Executive Vice President and Chief Operating Officer. Prior to the call, 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 the 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. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

Operator

During the question-and-answer session, if you have a question, please press star one one on your touch-tone phone. As a reminder, the conference is being recorded. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon the current expectation 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 now begin.

Rick Wayne
CEO at Northeast Bank

Thank you. Good morning. As indicated, I am Rick Wayne, the Chief Executive Officer of Northeast Bank, and with me are Pat Dignan, our Chief Operating Officer, and Richard Cohen, our Chief Financial Officer. This morning, I will cover some of the highlights on page three of the slide deck. I also want to focus on some points on our asset quality, which are on slides eight through 10, and for the first time, a more comprehensive discussion on our small balance SBA program, which is on slide number 15. Included in the deck are the usual slides on our loan portfolio, including loan-to-value and other information. That's in the deck for you to review. Of course, it's updated for the quarter ending September 30th, but we won't cover that today unless someone has some questions.

Rick Wayne
CEO at Northeast Bank

Pat will discuss the loan activity for the quarter, and Richard will discuss our funding strategy, interest rate risk management, as well as including the funding around the loan purchase we made in the quarter. Now, moving on to slide three, without getting hyperbolic, I would say this was really one great quarter. Our loan production of $942 million was the second best quarter in the bank's history, behind only the quarter in December 2022 when we purchased $1 billion of loans in a transaction that most of you are familiar with. This quarter, we had $733 million of purchased loans and $209 million of originated loans. From an earnings perspective, again, another really great quarter. We generated $17.1 million of net income.

Rick Wayne
CEO at Northeast Bank

And except for the quarters in which we had PPP loans that we sold, and those were in Q3 and Q4 of our fiscal year 2021, this quarter was the highest level of net income in the bank's history. So broke a few records. A few other items I'd like to point out on the highlight page. We still have $23 million of availability under the at-the-market offering. Our loan capacity, as of September 30th, was $462 million. That's after the very large loan activity we had in the quarter. Earnings per share diluted were $2.11. Return on equity was 17.53%. Our return on assets was 2.09%, and tangible book value per share was $47.80.

Rick Wayne
CEO at Northeast Bank

If we now turn to the slides on page eight, first, I want to point out that we had an increase in our allowance of $27 million, which went from 0.97% of loans to 1.25% of loans, so we have a lot more coverage now in our allowance, and while non-performing loans increased by $9 million, it's a few number of loans, and we estimate at least $7 million will be resolved in the next six months, so that is obviously good, and I do want to highlight in the bottom chart what happened with the charge-offs, which this quarter were 20 basis points. I'm not really focusing on the light green above that for this quarter or last quarter because, as you may recall from previous conversations, those are just balance sheet items, those represent in the green purchased loans where we had a credit mark.

Rick Wayne
CEO at Northeast Bank

And that under CECL, you're now required to increase the balance of the loan, set up the allowance, and this green mark was just simply charging off part of the balance, which we did not pay for. But the blue bar below at 20 basis, that's a real number. And I want to point out what that was because we don't have that many charge-offs. It was one loan out of a pool that we purchased 194 loans. The total purchase had a UPB of $85 million with $4 million of discount. And of all of those 194 loans, of which only 159 remain because there have been some payoffs, only two loans are non-performing out of that total $85 million or 194 loans, including this one. So the whole pool did really well. And this is one loan that we had a charge-off on.

Rick Wayne
CEO at Northeast Bank

If we now go to slide 15, I first want to provide some context to this discussion on our small balance SBA loan activity. In August of 2021, we entered into a loan service provider agreement and a marketing agreement with NEWITY to serve as our loan service provider for small, well, for 7(a) loans, whether small balance or not. Now we're focused simply on small balance. And the reason we started with them, you may recall also that they were our SBA partner in PPP lending, in which we originated $3 billion and purchased an additional $8 billion from other banks in a transaction that generated significant income for the bank. And based on that, we thought there would be an opportunity to go market to those small borrowers, small balance PPP. I mean, small balance 7(a) loans. I'm sorry.

Rick Wayne
CEO at Northeast Bank

When I say small balance, a lot of what we do is under 150,000 or even under 25,000. We do some that are higher than that, but not that many. I was very cautious when I discussed this, not to overpromise, because we really did not know at all if there would be demand for this product, whether or not we could get the technology working, what our marketing spend would be, and whether it would be a good business line. We're very interested in it working as a way to generate fee income uncorrelated to interest income, but we really didn't know. It took a while to get there. Let's see if I can provide the right data here. When we started this in fiscal 2022, I mentioned it was August 2021 that it started, and we're at June 30 year-end.

Rick Wayne
CEO at Northeast Bank

We did 48 loans total for $6.5 million. And in the following year, FY 2023, we did 256 loans for $16 million. And for our last fiscal year 2024, we were starting to get some traction. That's for the whole year. We did 1,039 loans for $92.5 million. And now, and the reason we're really excited about it now, for the quarter that just ended, September 30, we did 766 loans for $82.4 million. And I do want to make sure we're giving appropriate credit not only to our own team at Northeast Bank, but also to NEWITY as our loan service provider. And so that has already picked up. We also extended our agreement with NEWITY, which previously was going to expire in August of 2026.

Rick Wayne
CEO at Northeast Bank

It was a five-year contract, subject to a lot of technical things that we have filed an 8-K where we have posted the two agreements that I'm discussing. But generally speaking, it's another five-year contract with an automatic renewal for another five years unless one party opts out. So we now have the basis of, we believe, a very solid business line platform to generate significant small balance SBA loans, as well as fee income on the portion of the guaranteed loans and the part that is unguaranteed, which for the last year or so has been only about 18% based on the mix of loans. Those loans yield Prime plus 275. So this is an exciting business. And we will now continue to provide information on our SBA business each quarter. And with that, Pat?

Pat Dignan
EVP and COO at Northeast Bank

Hey, Rick. This was a big quarter for us. We purchased 191 loans in seven transactions with gross balances of $808 million and at a purchase price of $733 million or $0.91. These were mostly bank-originated term loans sold for a variety of reasons, but mainly liquidity. The loans are secured mostly with retail, industrial, and mixed-use collateral and located primarily in New York, New Jersey, and California. The weighted average loan-to-value on these loans was around 55% at our purchase price, with no loans above 65%. Generally, these loans were purchased at credit and yield levels consistent with what you've seen from us previously. Looking forward, we think there'll continue to be purchase opportunities for us. M&A activity appears to be picking up, and historically, that's been our biggest source of loan purchasing opportunity.

Pat Dignan
EVP and COO at Northeast Bank

In our real estate origination business, we closed $127 million for the quarter, a level we believe to be core. These included 17 loans with an average balance of $7.5 million. Collateral types include multifamily, 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 just under 9%. Interestingly, about 40% of these loans were direct and 60% lender finance, which is a return to a more historically normal mix between these two loan products. Recall that in the last fiscal year, over 90% of our loan originations were lender finance. We think we became more competitive in the direct lending space as the year went on because an increase in real estate transactions led to more confidence around valuation. Others are sharing that confidence.

Pat Dignan
EVP and COO at Northeast Bank

While many banks remain on the sidelines with respect to commercial real estate lending, there's a lot of new capital in the non-bank lender space, and we're starting to see some very aggressive lending as they chase yield. Fortunately, there remains plenty of opportunity in our lending niche. And based on our current pipeline, we're optimistic we can maintain the current level of originations with loans that meet both our credit and yield requirements. Now I'll turn it over to Richard.

Richard Cohen
CFO at Northeast Bank

Thanks very much, Pat. So I want to just quickly recap what we discussed in the previous earnings call, where we spoke about interest rate risk and what might happen to us and how we're positioned in a rates-down environment. I'm going to speak to you quickly as well about prepayments and to remind you of the position the bank is in from a prepayment perspective. I'll speak about how we funded the purchases that Patrick spoke about. I'll speak about our general approach to interest rate risk management, and then I'll speak about what happened in practice once rates fell. A recap on the Q4 investor call. I'd say at that stage that we would benefit from interest rates falling.

Richard Cohen
CFO at Northeast Bank

And the reasons for those that I gave was because of the floors we have in place over our variable-rate loans, the tendency of loans to prepay in a rates-down environment, which I'll expand on in a short while, and the repricing of our liabilities, which to some extent is a lagged factor. What I also said on that call is that we do not position ourselves for excessive exposure to changes in interest rates in either direction. Our analysis at that stage had said to us that with rates down, we would expect to initially have a compression of our net interest income, thereafter followed by an expansion resulting on a net basis in a slightly positive effect over the year and, in fact, the subsequent two years in a rates-down environment.

Richard Cohen
CFO at Northeast Bank

One of the reasons that I've just spoken about is prepayment, and I'll speak quickly about that, and then I'll tell you what, in fact, has happened. As you'll see, if you look at slide number 22, we have a $223.5 million rate mark discount. To remind you what that represents, the rate mark is the rate at which we have received a discount off the face value when we purchase the loans. And the reason we receive that is not for credit reasons. It's because the loan was originated at what is now a below-market rate, and we purchased the loan such as to produce the return that we are targeting. That $223.5 million will enter our income statement in two different ways. The first way is as an accretion.

Richard Cohen
CFO at Northeast Bank

In other words, with the passage of time, we bleed that discount into our interest income, and we earn it over the period of the loan. On the assumption that these loans do not default, these loans would either accrete or, in the event that they prepay, we would take that discount in respect to the loan upfront. The reason why I'm focusing on that is that that discount would be a benefit to us in a rates-down environment because everything else equal, we expect when rates fall, prepayments increase. In our current approach, the way that we approach interest rate risk is as follows. We have a system in place which forecasts our balance sheet into the future, and it takes into account a number of different scenarios, both rates up and rates down by different amounts.

Richard Cohen
CFO at Northeast Bank

It also considers both a shock as well as a ramp, a shock being a sudden and significant change in rates and a ramp being a slow progression of rates, either rising or falling. That system that we use and run scenarios through had told us that a rates-down environment would be favorable to us, but only marginally, which is exactly what we want. If the results said that we would be significantly favorably affected by rates down, that implies we've taken an interest rate position, which we do not do. Our objective in funding is to make sure that we match the best of our ability, the asset side of the book, to make sure that when rates change, there's a commensurate change in the cost of funding. It's also to ensure liquidity is managed.

Richard Cohen
CFO at Northeast Bank

In other words, for the maturity of the liabilities to match as closely as possible the maturity or the repricing of the assets. Turning to the purchases that Pat spoke about, that's exactly what we did. We looked at the repricing profile of the book that was purchased, and we matched that profile with brokered CDs and had a laddered approach, taking out brokered CDs with different maturities to approximately match that of the book. What was interesting for us is to then, in light of the fact that rates fell 50 basis points on the 18th of September, we ran an analysis to see what actually happened to our interest income and interest expense over that period of time and what that might imply for the remainder of the year.

Richard Cohen
CFO at Northeast Bank

Recall, as I said a short while ago, we expected an initially negative impact and for that to reverse over the subsequent three quarters. What, in fact, happened was a pleasant surprise is that given the rate at which we were able to reprice our liabilities, which was better than we had modeled, the net effect in the first 18 days plus the subsequent 12 days plus the subsequent 18 was that due to quicker repricing of the liabilities, the net effect on net interest income just for that month was relatively flat. So I reiterate what I'd said in the previous earnings call, that given the way that we are positioned, we would expect that NII would be positively affected by a rates-down environment, but not significantly so due to our approach to interest rate risk.

Richard Cohen
CFO at Northeast Bank

We are attempting, wherever possible, to be as neutral as possible and not to take a position wherever we can avoid it. I'll turn back to Rick.

Rick Wayne
CEO at Northeast Bank

Thank you, Richard, and I will turn it back to our listeners to see if there are any questions about what we have covered or otherwise.

Operator

Thank you. We will now begin the question-and-answer session. If you have a question, please press star 11 on your touch-tone phone. If you wish to be removed from the queue, please press star one one again. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star one one on your touch-tone phone. Our first question comes from Mark Fitzgibbon of Piper Sandler. He's on the line with a question.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

Thank you. Good morning, guys.

Rick Wayne
CEO at Northeast Bank

Good morning, Mark.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

First question I had, Richard, could you just follow up on the margin discussion a little bit? I heard your comments, and they were helpful. Would you be able to share with us what the margin looked like for the month of October since we're well, thus far for the month of October?

Rick Wayne
CEO at Northeast Bank

No, we don't have that information available for October yet.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

Okay. But it sounds like on balance, you expect the net interest margin to be down a little bit in the fourth quarter and then start to sort of flatten out. Is that a fair characterization?

Rick Wayne
CEO at Northeast Bank

With respect to the large purchase, Pat had indicated that we would expect that to behave like other purchases in the past. If we go back and look at other purchases, our yield on our purchase loan book, in recent vintage, it's been between 8.5%-9%, roughly. We would expect that to be the case with our loans that we purchased. We didn't put out, we don't have a number out for the funding cost, but actually, you could easily figure it out. It was about 420-425 to fund those purchases. So I'm describing now a spread on that between probably 3.5%-4%, I think, is a reasonable number for the spread we would expect to earn on the large purchase volume. On our originated loans that we put on the balance sheet, our originated loan portfolio for, oh, we say it is on page three.

Rick Wayne
CEO at Northeast Bank

It's almost 9%, 885 on what we originated, and you could do the same analysis with respect to the cost of funds on that.

Richard Cohen
CFO at Northeast Bank

Can I add one more thing there, quickly, Mark? If you turn to slide 16, that may also give you some insight in terms of your question. So slide 16 talks about the impact of the cost of funds for the first quarter being 4.34% and dropping to 4.18%, which is a point estimate at the end of the month. Remembering that that 16 basis point drop does not reflect all the other liabilities that will reprice. So merely in those 12 days, there was a 16 basis point reduction in our cost of funding. As I said, that would take some time to come through with some lags and would not reflect the impact of brokered CDs as those roll and reprice.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

Okay. And then changing gears a little bit on the loan front, I guess I was curious, are you seeing a lot more loan pools today than you have in the past? Has the volume of that picked up? And in that same vein, I was curious if it's likely we'll see another big loan pool purchase, say, in the next couple of quarters, or do you think it's more likely that you'll sort of digest what you just put on?

Rick Wayne
CEO at Northeast Bank

The volume of loans for purchase is quite cyclical. There have been periods going up. We've been at this for a long time. There are periods when there's a lot of activity, and there's periods where there has not been. We're seeing a lot of activity in the market. But that's not to say we're necessarily going to have a lot more in our balance sheet. We're optimistic, but it's binary. As you bid, you win, you don't win. But it's been pretty busy for quite a while. As to whether or not we could expect another very large purchase, very hard to say. There are certainly large pools out there. But whether we bid on them, whether we win on them, I don't want to provide a false hope. We'll see. We're certainly looking at a lot. Pat, do you want to add to that comment?

Pat Dignan
EVP and COO at Northeast Bank

I would just add that the loan sale advisors that we speak with frequently are all slammed. They're very busy. Though, again, that doesn't necessarily mean it'll translate to actual opportunities because there's a lot of tire kicking in this business, but they're as busy as they've ever been, and I'd say one thing that is new and interesting is the number of single loans. There seems to be a growing number of banks and non-banks selling single loans, which we haven't seen in a while, it's been pools for quite a while, and this is interesting in that it's a different kind of opportunity where we think we can be competitive on the size, so whether or not there's more whales out there, we hope so, but you never know.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

And in that same vein, I guess I'm curious what your thoughts are on adding to the ATM or doing sort of a spot capital raise to take advantage of some of these loan purchase opportunities and what you might be targeting for a capital ratio.

Rick Wayne
CEO at Northeast Bank

That is a very good question. We have $23 million remaining in the existing ATM. It's a facility we like very much. I know you know this, Mark, but for other listeners, it has the benefit for us of being able to raise capital when we need it and not raising a lot of capital for working capital purposes and then not being able to use it. In 2012, we raised $55 million in a transaction that we thought there'd be a lot of loan purchasing opportunities, and there were not. Kind of the good side is we wound up over time buying back a third of our bank stock at about $16, as it turned out, and I digress, as they say, but with respect to the ATM we have now, that's why we put out the information, what is our loan capacity.

Rick Wayne
CEO at Northeast Bank

As we need the capital, we will sell stock out of the ATM to do it. Of course, where our stock is now trading, it's much more attractive to sell stock than when we were trading below tangible book. Now our tangible book is about $48, and we're trading in the $90s now. As to whether we'll do another one to answer your question, the Board will evaluate that and make a decision as to how much. Although it's a relatively inexpensive way to raise capital, so there's no guarantee. But I would not be surprised if we wind up adding to the ATM and allowing ourselves more flexibility going into the future. I think it's a good sign for investors that we have confidence in the business when we're increasing the ATM.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

Okay. Great. And then one of the optics or metrics that stands out for you guys relative to a lot of other banks is that CRE concentration. And I think it was over 600%. And many banks are telling their investors that they're pushing down toward that 300% guidance that the regulators had given a while back. And I know you all feel differently about where you ought to sit on that. I wondered if you could just, at a high level, share with us a couple of thoughts on why you think your company is different and justifies being able to have a much higher level than other banks.

Rick Wayne
CEO at Northeast Bank

First of all, the only kind of lending we do is commercial real estate and, of course, the small balance SBA lending, which is. But our balance sheet is 97%. I'm rounding here, commercial real estate. We've been doing this for quite a while. We have a lot of controls in place. We have an excellent experienced team. I'll remind listeners that Pat and I were doing this at Capital Crossing Bank, which was a bank my former partner and I started 30 years ago. We have a bunch of folks in the national lending business that came from Capital Crossing Bank and a bunch more that have joined us. We have an incredible record around asset quality. The charge-offs have been really, really small.

Rick Wayne
CEO at Northeast Bank

I think overall, on a weighted average basis, the charge-offs on our purchase loan book have been five or six basis points with returns that have been, call it 9.75 or so. And on the originated side, charge-offs have been really, really small on probably over $4 billion of originations. Some of the things that we focus on, not only risk management, risk control, and all the things that one would expect, we have very low LTVs. So kind of in the low 50s overall on our loan book. And that gives us a lot of protection. We structure loans. If it's an originated loan into bankruptcy remote entities with the highest default rate permitted under state law, typically with advances in our lender finance that are cross-collateralized, cross-defaulted, often even with the LTV set up with interest reserves.

Rick Wayne
CEO at Northeast Bank

And on our part, because on a loan-on-loan, for example, we have very good counterparts. And we've been successful at it for a very long time. And we have in place a protocol for how many real estate loans we could have in buckets relating to their risk rating. So that, for example, in the highest risk rating, what we would call one through three, we could have 850% of capital in those. But in substandard loans, kind of rated eight and above, it's 30% in that bucket, 30% in that bucket. And so there's a relationship between how much we will have on our balance sheet and the quality of our loans, all structured to cause a level of very high-quality commercial real estate loans. I could go on much longer on all the things that make us great, but.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

That's a great answer.

Rick Wayne
CEO at Northeast Bank

I'm bragging about the team, not me, but we have a great team.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

I think that's a great answer. And then I'll, sorry, I just got two more quick ones. Are there any plans to grow sort of the core deposits with either new branches, products, or anything to try to bring down that brokered deposit number over time?

Rick Wayne
CEO at Northeast Bank

Yes, but growing deposits is kind of brick by brick in some respects, unless there's an acquisition transaction. So I'd say in Maine now, we have seven branches, and we have now $900 million of deposits in those branches, which for us is the highest number in quite some time. On top of that, we have government deposits in Maine for another $400 million. That's about $1.3 billion I've just described. And then, of course, as you point out, we have a lot of brokered deposits, which we actually like quite a bit. It's very efficient. We ordered up the money for that loan pool in a couple of weeks and brought in $750 million of deposits at good pricing. And with respect to growing it in a massive way in a transaction, of course, we see them from time to time, and we're open to the idea.

Rick Wayne
CEO at Northeast Bank

But so far, they just have not been attractive in terms of the economics.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

Okay. Great. And then just a couple of little modeling things. I assume professional expenses were a little bit elevated due to the loan purchases, and we should see those start to come back down. Is that fair?

Rick Wayne
CEO at Northeast Bank

No, I don't think it was that. Becca Jones's friend just got married. Becca Jones, do you want to answer that question?

Becca Jones
SVP and Director of Accounting at Northeast Bank

Yeah. It's just general legal expenses, audit expenses as we grow. Those just continue to increase slightly.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

Okay. Great, and lastly, the effective tax rate, you feel like that probably stays in that 32-ish% range going forward?

Rick Wayne
CEO at Northeast Bank

Yes. I'm sorry. No, I was just going to say we do think so.

Mark Fitzgibbon
Mark Fitzgibbon
Analyst at Piper Sandler

Great. Thank you.

Rick Wayne
CEO at Northeast Bank

Thank you, Mark.

Pat Dignan
EVP and COO at Northeast Bank

Thank you.

Operator

Thank you. Our next caller comes from David Minkoff of DCM Asset Management. Your line is now open.

David Minkoff
Analyst at DCM Asset Management

Good morning, Richard, Rick, and Pat. Congratulations on another.

Pat Dignan
EVP and COO at Northeast Bank

Good morning.

David Minkoff
Analyst at DCM Asset Management

Congratulations on another nice quarter. Actually, the quarter was even nicer than it appeared because, as you pointed out, those loans that were purchased at the high level were done late in the quarter and really didn't work its way into the quarterly numbers yet. We'll see that in the ensuing quarter. So the report was even better than it looks. The $805 million loan purchase, which was kind of outstanding, what would the normal loan purchases have been in the last couple of quarters? I don't have those numbers in front of me. How were they running?

Rick Wayne
CEO at Northeast Bank

We do have it. It's a slide on that, which we could go over. Let's see what page it said on.

David Minkoff
Analyst at DCM Asset Management

I'm not on the slide. I'm on the phone call in, so I don't have access to the slides at that moment.

Rick Wayne
CEO at Northeast Bank

Oh, no. I was going to—no, I know. That was actually a question for ourselves to find it. It's on page six. Well, this is not just the—this is the total—oh, yeah, we have both here. So on the purchase side, this was significantly larger than the last four quarters. If we go back a year ago, we purchased $52 million. The following quarter was $186 million. The following quarter was zero. The following one, which was June 30th, was $143 million. And then this, of course, was $732 million.

David Minkoff
Analyst at DCM Asset Management

Okay. So that's an incredible increase. Now, I'm assuming that those numbers and those purchases were done at the same stringency that you've used in the past. I mean, you haven't lowered your standards to get those numbers up to that number, correct?

Rick Wayne
CEO at Northeast Bank

Correct.

David Minkoff
Analyst at DCM Asset Management

You may look at to get $732 million in purchased loans. What do you look at? $7 billion, perhaps, or something to come up with that number?

Rick Wayne
CEO at Northeast Bank

No. It wasn't that because the $732 million, a big chunk of that was in one transaction. So we were pretty busy with that one transaction. So it wasn't $7 billion.

David Minkoff
Analyst at DCM Asset Management

Right. I know. So it's somewhat of an aberration then because of that one large transaction. Is that right?

Rick Wayne
CEO at Northeast Bank

Yeah. Well, I have in front of me what our market funnel looked like. So for the quarter, we looked at total 20 pools for $2.7 billion. And then out of those, that means those are transactions that we came across. We took a more in-depth look on $2 billion, which means that was 11 pools that we looked at, and we did a fair amount of work on those. And of those, we wound up bidding on $839 million. And we wound up closing on $807 million, which is a very high rate. It's not typically that high, the rate, but a lot of those were negotiated transactions. And so the likelihood of closing was higher.

David Minkoff
Analyst at DCM Asset Management

Understood. So it's a good number, and it should translate into better earnings, I guess, going forward. You first announced this. You pre-announced this, I guess you might say, on September 24th when you came out and said you purchased $805 million, I think the number was. $805 million, right? That was the number. And the next day, on the 25th, Piper Sandler came out and increased your target price from $82 to $95 a share. So that was a pretty hefty increase. What was the earnings estimate that they have for the ensuing year, for the year ending June 2025, that gave them that $95 price target? I didn't see the report in depth.

Rick Wayne
CEO at Northeast Bank

So for the fiscal year we're in now?

David Minkoff
Analyst at DCM Asset Management

The fiscal year that just began. Yeah, that ends next in June, June 25th.

Rick Wayne
CEO at Northeast Bank

It's in the range of $10.

David Minkoff
Analyst at DCM Asset Management

$10. Okay. So.

Rick Wayne
CEO at Northeast Bank

I don't have it exactly in front of me, David, but give or take a little bit, it's in that range.

David Minkoff
Analyst at DCM Asset Management

Right. Okay. So.

Rick Wayne
CEO at Northeast Bank

And, as you mentioned, we did 211 this quarter, and that does not include the spread on all of the loans that we booked late in September. So, you said it. You'll see that in the ensuing quarters.

David Minkoff
Analyst at DCM Asset Management

Right. So in other words, hypothetically, you might say that had you increased those loans on July 1st, the earnings for the quarter might have been in the 250 range or something like that, 260. And that would stand to reason when Piper has an estimate of $10 a share. So I guess, okay, we'll see that as things go forward. You don't usually give projections, so I'm not going to ask you to comment on that. So again, congratulations on a great quarter, and we're looking forward to this to continue.

Rick Wayne
CEO at Northeast Bank

David, before you go, I'd say you were a legend for your comments on the last call.

David Minkoff
Analyst at DCM Asset Management

Is there anyone in the queue? I have another quick story for you if you have the time.

Rick Wayne
CEO at Northeast Bank

We may have some others. You can call me afterwards and tell me.

David Minkoff
Analyst at DCM Asset Management

We'll save that for another time. Congratulations on a great quarter, and I'm glad to be a legend. Okay.

Rick Wayne
CEO at Northeast Bank

Thank you, David.

David Minkoff
Analyst at DCM Asset Management

Bye.

Operator

Thank you. Our next caller is Adam Wilke of Pacific Ridge Capital. Your line is now open.

Adam Wilkie
Analyst at Pacific Ridge Capital

Yeah. Good morning. I think I was one of those folks that mentioned David's comments. Yeah.

Pat Dignan
EVP and COO at Northeast Bank

Hey. Good morning, Adam.

Adam Wilkie
Analyst at Pacific Ridge Capital

Yeah. Yeah. Great job, guys. Happy to see the loan purchase. I was going to ask actually about that 7(a) business. How big would you like to grow that on your balance sheet? I know it's pretty small right now. And what should we expect the charge-off rate to be on the total originated loan balance on average through the cycle and then maybe at the peak?

Rick Wayne
CEO at Northeast Bank

So just to remind everyone else, you probably know this. So the guaranteed portion has been roughly, unguaranteed portion has been roughly 18%. And the reason for that is loans under 150,000 have an 85% guarantee, and over 150 is a 75% guarantee. We're doing a lot of small ones. And so we have 18% on our, we wound up putting on our balance sheet. From the business perspective, it's very profitable because you can sell off the guaranteed portion for premiums now between 10.5%-11%. Roughly, we think that, and so therefore, I think we'll keep running with this on our balance sheet. Our balance sheet's getting much bigger, and it's not a lot that we're putting on. I think the real question as to that is how comfortable are we with the credit quality around these.

Rick Wayne
CEO at Northeast Bank

And to answer part of your question, there's a lot of data from the SBA about charge-offs for these kinds of loans. And we think that if you look at historically over a lot of information in this category, it would be about 3% on the unguaranteed portion. But so far, probably we may have a tighter credit box than those averages that have been using. Of everything we've booked, we've had something like $150,000 of charge-offs on a couple hundred million of originations. That's $100,000, not much, much less than 3%. But we now have a 3% reserve against our SBA loans. We increased it by about $1 million or so this quarter. So now our unguaranteed SBA portfolio is a little bit less than $50 million, and we have 3% of that in the allowance, which we believe is the appropriate coverage.

Rick Wayne
CEO at Northeast Bank

As to your question, what are the peaks and the, it's knowable. I don't know that offhand, though.

Adam Wilkie
Analyst at Pacific Ridge Capital

All right. That's fine. And so if I understand correctly, on the purchase business, a lot of potential opportunities right now. You might do something. You might not. And if you do, the ATM is there to fund it, and you would probably, sorry, the ATM is there for the capital if necessary. And then you would do probably, again, some sort of laddered activity to help fund it if those possibilities come through. Is that fair to say?

Rick Wayne
CEO at Northeast Bank

Yes. Well said.

Adam Wilkie
Analyst at Pacific Ridge Capital

All right. That's all I have. And keep up the great work. Thank you.

Rick Wayne
CEO at Northeast Bank

Thank you very much, Adam.

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
CEO at Northeast Bank

Thank you. Thank you all for listening and those that asked questions for your questions. It'd be interesting when we have our next call to see how some of these things play out that we've discussed today. If you have any suggestions on ways we can provide more relevant information on our slides and the information we provide, let us know. If we can do it, we will. And with that, I thank you, and we will sign off now.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you.

Analysts
    • David Minkoff
      Analyst at DCM Asset Management
    • Richard Cohen
      CFO at Northeast Bank
    • Becca Jones
      SVP and Director of Accounting at Northeast Bank
    • Pat Dignan
      EVP and COO at Northeast Bank
    • Adam Wilkie
      Analyst at Pacific Ridge Capital
    • Rick Wayne
      CEO at Northeast Bank
    • Mark Fitzgibbon
      Analyst at Piper Sandler
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