Q1 2025 Northeast Bank Earnings Call
Speaker Change: 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 northeast Pink Dot com under events and presentations.
Speaker Change: You may find it helpful to download this investor presentation and follow along during the call.
Speaker Change: Also this call will be available for rebroadcast on the website for future use.
Speaker Change: At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
Speaker Change: During the question and answer session. If you have a question. Please press star one one on your Touchtone phone as a reminder, the conference is being recorded.
Speaker Change: Please note that this presentation contains forward looking statements about northeast to make forward looking statements are based upon the current expectations of northeast banks management and are subject to risks and uncertainties.
Speaker Change: Actual results may differ materially from those discussed in the forward looking statements.
Speaker Change: Northeast Bank does not undertake any obligation to update any forward looking statements.
Speaker Change: I will now turn the call over to Rick Wayne Mr. Wayne You May now begin.
Rick Wayne: Thank you.
Rick Wayne: Good morning.
Rick Wayne: As indicated I am Rick Wayne the Chief Executive Officer.
Rick Wayne: Northeast Bank and with me.
Rick Wayne: Or Pat Dignan, our Chief operating officer.
Rick Wayne: Richard Cohen, our Chief Financial Officer.
Rick Wayne: This morning, I will cover some of the highlights on page three of the slide deck.
Rick Wayne: I also wanted to focus on some points on our asset quality, which are on slides eight through 10.
Rick Wayne: For the first time, a more comprehensive discussion on our small balance SBA.
Rick Wayne: Program, which.
Rick Wayne: Right.
Rick Wayne: Slide number 15.
Rick Wayne: Included in the deck are the usual slides on our loan portfolio, including land value in other information thats in the deck for you to reveal of course its updated for the quarter ending September 30th, but we won't cover that.
Today, unless someone has some questions.
Rick Wayne: Pat.
<unk> will discuss the loan activity for the quarter.
Rick Wayne: And Richard will discuss our funding strategy.
Rick Wayne: Interest rate risk management.
Rick Wayne: As well, including the funding around the loan purchase.
Rick Wayne: Purchase we made in the quarter now moving onto slide three.
Speaker Change: So without getting a hyperbolic I would say this was really born great quarter.
Speaker Change: Our loan production.
Speaker Change: Of 942 million.
Was the second best quarter in the bank's history.
Speaker Change: Behind only quarter in December 2022, when we purchased $1 billion of loans.
Speaker Change: Transaction that most of you are familiar with.
Speaker Change: This quarter we.
Speaker Change: It had $733 million of purchase loans and $209 million of originated loans.
Speaker Change: From an earnings perspective.
Speaker Change: Again, another really great quarter, we generated $17 $1 million of net income.
Speaker Change: And except.
Speaker Change: For the quarters in which we had triple P loans that we sold.
Speaker Change: And those were in Q3 and Q4.
Speaker Change: Our fiscal year 'twenty one.
This quarter was the highest.
Level of net income in the bank's history.
Speaker Change: Broke a few records.
Speaker Change: A few other items I'd like to point out the highlight age.
So we still have $23 million of availability under the at the market offering.
Speaker Change: Our loan capacity.
Speaker Change: As of September 30 was $462 million.
Speaker Change: After the very large.
Speaker Change: Loan activity, we had in the quarter.
Speaker Change: Earnings per share diluted were $2 at 11 cents.
Speaker Change: Return on equity was 17 five 3%.
Speaker Change: Our return on assets was two point or 9%.
Speaker Change: And tangible book value per share.
Speaker Change: It was $47.
Speaker Change: <unk> sense.
If we now turn to the slides.
Speaker Change: On page eight.
Speaker Change: First of all I want to point out that.
Speaker Change: Well we had.
Speaker Change: An increase in our allowance.
Speaker Change: Of $27 million.
Speaker Change: Which went from <unk> 90.
Speaker Change: Nine 7% of loans.
Speaker Change: 212, 5% of loans. So we have a lot more coverage now.
Speaker Change: And our allowance.
Speaker Change: And while nonperforming loans increased by $9 million.
Speaker Change: It's a few number of oils and <unk>.
Speaker Change: We estimate at least $7 million.
Be resolved in the next six months.
Speaker Change:
Speaker Change: So that is obviously, good and I do want to highlight in the bottom chart.
What happened with the.
Speaker Change: Charge offs, which this quarter were 20 basis points, not really focusing on the light green above that for this quarter or last quarter.
As you may recall from previous conversations.
Because it just balance sheet items slowly those representing the green purchase loans, where we had a credit mark.
Speaker Change: And that.
Speaker Change: Under our CSO and are required to.
Speaker Change: Increased the balance of the loan set up the allowance the green Mark was just simply charging off.
Speaker Change: Part of that.
Speaker Change: The balance, which we did not pay for but the blue the blue bar below a 20 basis.
A real number and I want to point out what that was because we don't have that many charge offs.
Speaker Change: It was one loan.
Speaker Change: The out of the pool that we purchased 194 loans.
Speaker Change: The total purchase was <unk> 85.
Speaker Change: With $4 million of discounts.
Speaker Change: And all of those 194 of loans of which only 159 remains as there have been some pay offs only two loans.
Speaker Change: Our nonperforming out of that total $85 million or 190 <unk>.
Speaker Change: Including this one so the whole pool did really well.
Speaker Change: And this is one loan that we had a charge off are at play now.
Speaker Change: Now go to <unk>.
Speaker Change: Slide 15.
Speaker Change: I first want to provide some context to this discussion.
Speaker Change: On our small balance.
Speaker Change: Loan activity.
Speaker Change: In.
Speaker Change: Just a 2021.
Speaker Change: We entered into a long service provider agreement and a marketing agreement with.
Speaker Change: No it <unk>.
Speaker Change: To serve as our loan service provider.
Speaker Change: Sure.
Small available for a seven day loans small balance or neither our focus.
Speaker Change: Simply.
Speaker Change: On small balance and as is and the reason we started with them you may recall also that they were small P partner.
Speaker Change: Triple P lending in which we originated $3 billion in purchase.
Speaker Change: An additional $8 billion from other banks and the transaction that generated significant income.
For the bank.
Speaker Change: Based on that we thought there would be an opportunity to go market to those more to that.
Speaker Change: Borrowers.
Speaker Change: Small balance triple pay.
Speaker Change: Small balance <unk>, I'm, sorry, and when I say small balance.
Speaker Change: <unk>.
Speaker Change: A lot of what we do is under 150000 or even under 25000.
Speaker Change: We do have some that are higher than that but not that much.
Speaker Change: And I was very cautious when I discussed this.
Speaker Change: Over promise because we really did not know at all.
Speaker Change: If there would be demand for this product.
Speaker Change: Whether or not we can get the technology working.
Speaker Change: Whether what our marketing spend would be and whether it would be a good business and we're very interested and are working as a way to generate.
Speaker Change: Fee income.
Speaker Change: Uncorrelated to interest income, but we really didn't know.
Speaker Change: Well.
Speaker Change: It took a while to get there.
Speaker Change: The.
Speaker Change: Steve.
Speaker Change: <unk> provides the right data here.
Speaker Change: When we started this.
Speaker Change: Fiscal 'twenty two I mentioned was August 21 that it started and we were at June 30 year end.
Speaker Change: We did 48 wells total.
Speaker Change: $6 $5 million.
Speaker Change: And in the following year FY2023 we did 256 for.
Speaker Change: For $16 million.
Speaker Change: And for our last fiscal year 'twenty four we're starting to get some traction.
That's for the whole year, we did 1039 loans for $92 $5 million.
Speaker Change: And now and the reason.
Speaker Change: Really excited about it now for the quarter that just ended September 30.
Speaker Change: Did.
Speaker Change: 766 wells.
Speaker Change: 82, $4 million and I don't want to make sure, we're giving appropriate credit not only to our own team that northeast bank, but also to annuity as our loan service provider and so that has already picked up.
We also.
Speaker Change: And is our agreement with Lilly.
Speaker Change: Which previously was going to expire in August of 2006, it was a five year contract.
Speaker Change: Subject to a lot of technical things that are.
We have filed a <unk>.
Speaker Change: 8-K, where we have posted the two agreements that I'm discussing.
Speaker Change: But generally speaking it's another five year contract with an automatic renewal for another five years.
Speaker Change: And last one party ups out so we now have the basis of a what we believe.
Speaker Change: A very solid.
Speaker Change: Business <unk> platform to generate significant.
Speaker Change: Small balance SBA loans.
Speaker Change: As well as.
Speaker Change: Fee income.
Speaker Change: On the portion of the guaranteed loans and the.
Speaker Change: The part that is unwarranted, which for the last year.
Speaker Change: Year, or so has been only about 18%.
Speaker Change: Based on the mix of woes.
Speaker Change: <unk> yield.
Speaker Change: Prime.
Speaker Change: Plus $2 75.
Speaker Change: So this is an exciting business and we will now continue to provide information.
Speaker Change: Our SBA business each quarter.
Speaker Change: And with that.
Speaker Change: Thanks, Rick.
Speaker Change: This is a big quarter for US, we purchased 191 loans and seven transactions with gross balances of $808 million.
Purchase price was $733 million or <unk> 91.
Speaker Change: These were mostly bank originated term loans sold for a variety of reasons, but mainly liquidity.
Alonso 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% of our purchase price, but no loans are about 65%.
Speaker Change: Generally these loans were purchased credit and yield levels consistent with what you've seen from us previously.
Speaker Change: Looking forward, we think they'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.
Speaker Change: In our real estate originated origination business.
Speaker Change: We closed $127 million for the quarter a level, we believe to be core. These included 17 loans with an average balance of seven 5 million.
Collateral types include multifamily hospitality retail and industrial.
Speaker Change: And generally located in New York, California, and Florida.
At origination the weighted average LTV for these loans was just over 50% in average rates were just under 9%.
Speaker Change: 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.
Speaker Change: But in the last fiscal year over 90, 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 of an increase in real estate transactions led to a more confidence around valuation.
Speaker Change: Others are sharing that confidence while many banks remain on the sidelines with respect to commercial real estate lending. There is a lot of new capital in the non linear non bank lender space and we're starting to see some very aggressive blending as they chase yield.
Fortunately there remains plenty of opportunity in our lending niche and based on our current pipeline. We are optimistic we can maintain the current level of originations with loans that meet both our credit and yield requirements.
Speaker Change: Now I'll turn it over to Richard.
Richard Cohen: Thanks very much.
Richard Cohen: So I wanted to just quickly recap what we discussed in the previous earnings call we spoke about <unk>.
Richard Cohen: Interest rate risk and what might happen to us and how we are positioned in a rates down environment.
Richard Cohen: I am going to speak to you quickly as well about prepayments and to remind you of the position of the bank is in from a prepayment perspective.
Richard Cohen: I will speak about how we funded the purchases that Pat just 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.
Richard Cohen: A recap on the Q4 investor call I would say that that stays that we would benefit from interest rates falling.
Richard Cohen: And the reasons for those that I gave was because of the floors. We have in place overall variable rate loans, the tendency of lows to prepay in a rates down environment, which I'll expand on in a short while.
Richard Cohen: And the repricing of our liabilities to which to some extent is a lag factor.
Richard Cohen: I also shared on that call is that we do not position ourselves for excessive exposure to changes in interest rates in either direction.
Richard Cohen: 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: One of the reasons that I've just spoken about is prepayments I'll speak quickly about that and then I'll tell you what in fact has happened.
As Youll see if you look at slide number 22.
Richard Cohen: As we have a $223 $5 million right Mark discounts.
Richard Cohen: To remind you what that represents the rate Mark is the rate at which we have.
Richard Cohen: Received a discount off the face value when we purchased the loans and the reason we received that is not for credit reasons. It's because the loan was originated at what is now a below market rates and we purchased loans such as to produce the return that we are targeting.
Richard Cohen: That $223 $5 million will into our income statement in two different ways. The first way is as an accretion and other words with the passage of time, we believed that discount into interest income and we earn it over the period of the loan.
Speaker Change: Yes on the assumption that these loans do not defaults.
Speaker Change: These loans would either.
Speaker Change: <unk> or in the event that they prepay, we would take that discount in respect to the loan upfronts.
Speaker Change: The reason why I'm focusing on that is it that discount would be a benefit to us in a rates down environment, because everything else equal we expect when rates fall prepayments increase.
Speaker Change: Okay.
Speaker Change: Ill.
Speaker Change: In our current approach the way that we approach interest rate risk is as follows we have a system in place, which forecast 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 and it also considers both the shock as well as a ramp.
Speaker Change: Shock being a sudden and significant change in rates and a ramp being a slow progression of rates either rising or falling.
Speaker Change: That system that we use and ran scenarios through had told us that that's a rates down.
Speaker Change: <unk> would be favorable to us, but only marginally which is exactly what we want.
Speaker Change: If the results said that we would be significantly favorably.
Speaker Change: Affected by rates down that implies we've taken an interest rate position, which we do not do.
Speaker Change: 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 is a commensurate changing in the cost of funding and it's also to ensure liquidity is managed in other words for the maturity of our liabilities to match.
Speaker Change: Closely as possible the maturity all the repricing of the assets.
Speaker Change: Turning to the purchases.
Speaker Change: Spoke about that's exactly what we did we looked at the repricing profile of the book that was purchased and we match debt profile with brokered Cds and had a lateral approach taking off brokered Cds with different maturities to approximately matched debt as the book.
What what was interesting for us is to Dan in light of the fact that rates fell 50 basis points on the 18th of September we ran an analysis to see what actually happens to our interest income and interest expense over that period of time and what that might imply for the remainder of the year.
Speaker Change: Recall as I said, a short while ago, we expected it initially negative impacts and for that to reverse over the subsequent three quarters. What in fact happened was 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.
Speaker Change: The net effect in the first 18 days plus the subsequent.
Speaker Change: The next to 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.
Speaker Change: So I'll 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.
Speaker Change: Positively affected by a rates down environment, but not significantly so due.
Speaker Change: Due to our approach to interest rate risk, we are attempting wherever possible to be as neutral as possible.
Speaker Change: And not to take a position wherever we can avoid it.
Speaker Change: I'll turn it back to Rick.
Rick Wayne: Thank you Richard.
Rick Wayne: And I will turn it back to our listeners subsidy. If there are any questions about what we have covered or otherwise.
Thank you we will now begin the question answer session. If you have a question. Please press star one on your Touchtone phone, if you wish to be removed from the queue. Please press star. 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.
Rick Wayne: Please press star one one on your Touchtone phone.
Speaker Change: Our first question comes from Mark.
Speaker Change: Fitzgibbon of Piper Sandler is on the line with a question.
Mark Fitzgibbon: Thank you good morning, guys.
Speaker Change: Good morning, Mark.
Mark Fitzgibbon: 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.
Mark Fitzgibbon: Would you be able to share with us what the margin look like for the month of October.
Mark Fitzgibbon: Since we are well thus far for the month of October.
Speaker Change: No we don't have that information.
Mark Fitzgibbon: Available for.
Speaker Change: October yet okay.
Speaker Change: Okay, but it sounds like on balance you would 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.
Speaker Change: But with respect to the large purchase Pat had indicated that.
Speaker Change: We would expect.
Speaker Change: That to behave as well like other purchases in the past.
Speaker Change: If we go back and look at.
Speaker Change: Other purchases are purchased.
Speaker Change: On our purchased loan book.
Speaker Change: In recent vintage it's been between eight and a half and nine.
Speaker Change: Roughly we would expect.
Speaker Change: That to be the case with our.
Speaker Change: Loans that we purchased.
Speaker Change: Yes.
Speaker Change: We didn't put out we don't have a number out.
Speaker Change: Or are the funding.
Speaker Change: Costs, but.
Speaker Change: It actually.
Speaker Change: Easily figure it out.
It was about four 'twenty four 'twenty five.
Speaker Change: Fund those purchases so.
Speaker Change: Describing now a spread on that.
Speaker Change: Between.
Speaker Change: Probably.
Speaker Change: $3 five and four.
Speaker Change: I think is a reasonable.
Speaker Change: Yes.
Speaker Change: Number four the spread we would expect to earn on the large purchase volume.
Speaker Change: On our.
Speaker Change: Originated loans that we put on the.
Speaker Change: Our balance sheet are originated.
The loan portfolio.
Speaker Change: <unk>.
Speaker Change: Or we say it is on page three.
Speaker Change: Almost 9% 885 on on what we originated.
Speaker Change: And it is.
Speaker Change: Same analysis with respect to the cost of funds on that.
Speaker Change: Can I add one more thing the equity market turning 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.
Speaker Change: For three 4% and dropping.
Speaker Change: The $4, one eight which is at a point estimate.
Speaker Change: The end of the month, remembering that 16 basis point drop.
Speaker Change: Does not reflect all of the other liabilities that will reprice. So severely 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.
Speaker Change: And would not reflect the impact of brokered Cds as those roll and reprice.
Speaker Change: Okay.
Speaker Change: 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 as the volume of that picked up.
Speaker Change: And in that same vein I was curious if.
Speaker Change: It is likely we will see another big loan pool purchase.
Speaker Change: In the next couple of quarters or do.
Speaker Change: Do you think it's more likely that youll sort of digest, what you just put on.
Speaker Change: Well.
Speaker Change: The volume of loans for purchases.
Speaker Change: It's quite cyclical there've been periods going up we've been at Tesoro.
Speaker Change: The time.
Speaker Change: Periods, where there's a lot of activity and there is periods, where there are there has not been.
Speaker Change: We're seeing a lot of activity in the market.
Speaker Change: Yes.
Speaker Change: But that's not to say.
Speaker Change: We are necessarily going to.
Speaker Change: Have a lot more on our balance sheet, we're optimistic but it's fine areas, where do you when you don't win.
Speaker Change: 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.
Speaker Change: But whether we bid on and whether we went on them.
Speaker Change: I don't want to provide.
Speaker Change: A false hope per se, but certainly looking at a lot.
Speaker Change: Tom I would just add that the.
Speaker Change: Loan sale advisors.
Speaker Change: We speak frequently are all <unk>.
Speaker Change: Slant, they're very busy there, although again that doesn't necessarily mean, it will translate to actual opportunities because there's a lot of tire kicking in this business.
Speaker Change: They're as busy as they've ever been and I would say one thing that.
Speaker Change: Is new.
Speaker Change: New and interesting is the number of single loan.
Speaker Change: To be a growing number of banks or nonbanks, selling single loans, which we haven't seen in a while.
Speaker Change: When pools for quite a while.
Speaker Change: Interesting.
Speaker Change: So it's a different kind of opportunity, where we think we can be competitive.
Speaker Change: On the sides so.
Speaker Change: Whether or not there's more whales out there or we hope so but you never know.
Speaker Change: 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 raised to take advantage of some of these loan purchase opportunities.
Speaker Change: And what you might be targeting for capital ratio.
Speaker Change: That is a very good question.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: We have $23 million remaining in the existing ATM facility.
Speaker Change: A facility, we like very much.
Speaker Change: Mark but for other.
Speaker Change: Listeners.
Speaker Change: Has the benefit of.
Speaker Change: Okay.
Speaker Change: For us of being able to raise capital when we need it and not <unk>.
Speaker Change: <unk> a lot of capital for working capital purposes.
Speaker Change: And then nothing.
Speaker Change: Not being able to use it with 2012, we raised $55 million in a transaction.
Speaker Change: That we thought there'll be a lot of loan purchasing opportunities and there were not.
Speaker Change: Kind of a good side and we wound up over time buying back a third of our bank stock at about 16 Bucks as it turned out.
And as <unk> as they say.
Speaker Change: With respect to the ATM, we have now.
Speaker Change: That's why we put out the information what is our loan capacity.
Speaker Change: We need the capital.
Speaker Change: We will.
Speaker Change: Sell stock out of the ATM.
Speaker Change: To do it and of course.
Speaker Change: Our stock is now trading it's much more attractive to sell stock.
Speaker Change: Alright.
Speaker Change: Well, we were trading below tangible book now.
Speaker Change: Our tangible book is about 48 Bucks.
We're trading at.
Speaker Change: In the nineties.
Speaker Change: Now as to whether we'll do another one to answer your question.
Speaker Change: The board will evaluate that and.
Speaker Change: Make a decision as to how much although.
Speaker Change: It's not it's a relatively inexpensive way to raise capital so.
Speaker Change: There is no guarantee but I would not be surprised if we wind up adding to the ACM.
Speaker Change: Allowing ourselves more flexibility going into the future I think that's a good sign for investors that we have confidence in the business one where.
Speaker Change: Increasingly ACM.
Speaker Change: Okay, Great and then one of the optics are 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%.
Speaker Change: And many banks are telling their investors that they're pushing down towards that 300% guidance.
Speaker Change: Regulators have given a while back and I know you all feel differently about where you you ought to sit on that I wondered if you could just at a high level of share with US a couple of thoughts on.
Speaker Change: Why do you think.
Speaker Change: Your company is different and justifies being able to have a much higher level than than other banks.
Speaker Change: Well first of all.
Speaker Change: The only kind of lending we do is commercial real estate and of course, the small balance SBA lending.
Speaker Change: But our balance sheet.
Speaker Change: 97% I'm rounding here commercial real estate, we have.
Speaker Change: <unk> been doing this for quite a while we have been a lot of controls in place we have an excellent experienced team.
Speaker Change: <unk>.
Speaker Change: I'll remind listeners that Pat and I were doing this at capital crossing Bank, which was a bank by former partner and I started 30 years ago.
Speaker Change: A lot of.
Speaker Change: A bunch of folks.
Speaker Change: The national lending business that came from capital across the bank.
Speaker Change: A bunch more that has <unk>.
Speaker Change: And us.
Speaker Change: Incredible.
Speaker Change: Incredible record around asset quality.
Speaker Change: The charge offs.
Speaker Change: Okay.
Speaker Change: Really really really small I think overall at a weighted average basis.
Speaker Change: Charge offs on our purchase loan book have been five or six basis points.
Speaker Change: With.
Returns that have been.
Speaker Change: At 975 or so.
Speaker Change: Yes.
Speaker Change: And on the originated side.
Speaker Change: Charge offs have been really really really small I'm, probably over $4 billion over of originations.
Speaker Change: The things that we focus on not only risk management risk control and all of the things that one would expect.
Speaker Change: We have very low ltvs.
So.
Speaker Change: Kind of in the low fifties overall on our on our on our loan book.
Speaker Change: And that gives us a lot of protection.
Speaker Change: Restructured loans.
Speaker Change: If it's an originated loan in the bankruptcy remote and.
Speaker Change: Cities.
Speaker Change: With the highest default rate permitted under state law typically with advances in our lender finance that are cross collateralized Cross defaulted.
Speaker Change: Often even with the LTV setup with interest reserves.
Speaker Change: On our part because on a loan a law for example, so we have very good counter parts and <unk>.
Speaker Change: And we've been successful.
Speaker Change: I had it for very long time.
Speaker Change: And.
Speaker Change: And we have in place.
Speaker Change: A protocol for how may.
Speaker Change: How many real estate loans, we can have an E.
Speaker Change: 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 and those but in the.
Speaker Change: And substandard loans kind of rated.
Speaker Change: Eight and above it's 30, 30% on that.
Speaker Change: 30% of that bucket and so there is a relationship between how.
Speaker Change: How much we will have on our balance sheet and the quality of our loans well structured too.
Speaker Change: Cause.
Speaker Change: Level of very.
Speaker Change: High quality commercial real estate loans.
Speaker Change: I can go on much longer on all the things that make them, but that's a great answer.
Speaker Change: I'm bragging about the team that labor we are grateful.
Speaker Change: I think thats, a great answer and then.
Speaker Change: Sorry, just got did two more quick ones.
Speaker Change: Are there any plans to grow the core deposits with either new branches products or anything to try to bring down that broker deposit number over time.
Yes, but.
Speaker Change: Growing deposits.
Speaker Change: No.
Speaker Change: Kind of brick by brick.
Speaker Change: In summary by lessors.
Speaker Change: A transaction I'd say and May now we have seven branches.
Speaker Change: We have.
Speaker Change: Now $900 million of deposits in those branches, which for us.
Speaker Change: <unk>.
Is the highest number in <unk>.
Speaker Change: Some time on.
Speaker Change: On top of that we have government deposits and Maine for another four or Thats about a $1 billion three I've just described.
Speaker Change: And then of course as you pointed out we have a lot of broker deposits, which we actually like quite a bit different as very efficiently ordered up the money for that low or in a couple of weeks and brought in seven or $750 million of deposits yet.
Good pricing.
Speaker Change: And with respect to growing it in a massive way in a transaction of course, we see them from time to time and we are open to the idea, but so far.
Speaker Change: They have not been attractive in terms of the economics.
Speaker Change: 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.
Speaker Change: No I don't think it was at <unk>.
Speaker Change: Second joneses.
Speaker Change: Brands, just a matter of Becker and <unk>.
Speaker Change: Well to answer that question, Yes general legal expenses audit expenses as we grow.
Speaker Change: We continue to increase slightly.
Speaker Change: Okay, Great and lastly, the effective tax rate.
Speaker Change: Feel like Thats, probably stays in that 32 ish percent range going forward.
Speaker Change: Yes, I'm sorry.
Speaker Change: I will just say, we do think so.
Speaker Change: Great. Thank you.
Speaker Change: Thank you Mark Thank you.
Speaker Change: Thank you.
Our next caller comes from David Minkoff of DCM asset management. Your line is now open.
David Minkoff: Good morning, Richard Rick and Todd Congratulations on another.
David Minkoff: Congratulations on another nice quarter.
Speaker Change: Actually this is Ed.
Speaker Change: It was.
Speaker Change: The quarter was even nicer than it appeared because as you pointed out.
Speaker Change: Those loans that were purchased at the high level.
Speaker Change: We're done late in the quarter and really didn't work its way into the quarterly numbers you will see that in the ensuing quarters. So.
Speaker Change: The report was even better than it looks.
Speaker Change: The $805 million loan purchase.
Speaker Change: Wow.
Speaker Change: It was kind of outstanding.
Speaker Change: Normal.
Loan purchases have been in the last couple of quarters I don't have those numbers in front of me.
Speaker Change: How are they running.
Speaker Change: We do have a slide on that which they could go over those.
Speaker Change: Thank you.
Speaker Change: No.
Speaker Change: Well im not on the slide I'm on the phone phone call in so I don't have access to the slides at that moment.
Speaker Change: No that was actually a question for ourselves to find its on page six.
Speaker Change: Yes.
Speaker Change: Well this is not just the this is the total.
Speaker Change: We have both here so.
Speaker Change: On the on the purchase side.
Speaker Change: This was significantly larger than the last.
Speaker Change: Four quarters, if we go back a year ago, we purchased $52 million.
The following quarter was $186 million.
Speaker Change: Following quarter was zero.
Speaker Change: Following one which was June 30 of $143 million and then this of course was 732 million.
Speaker Change: That's an incredible increase out I'm assuming.
Speaker Change: Those numbers those purchase was done at the same stringency that you've used in the past I mean, you havent lowered your standards to get those numbers up to that number correct.
Speaker Change: Correct.
Speaker Change: You may look at to get $732 million and purchase loans. What do you look at 7 billion, perhaps or something to come up with that number.
Speaker Change: No it wasn't exactly clear.
Speaker Change: $732 million, a big chunk of that.
Speaker Change: In one transaction, so we were pretty busy with that one transaction.
Speaker Change: So it wasn't a $7 billion.
Speaker Change: Right.
Speaker Change: So it's somewhat of an aberration and because of that one large transaction as that Ryan.
Speaker Change: Well I have in front of me.
Speaker Change: But our market funnel look like so for the quarter.
Speaker Change: We looked at.
Speaker Change: Totaled 27, or 20 pools for $2 7 billion.
Speaker Change: Billion.
Speaker Change: And then that is though is that those are transactions that we.
Speaker Change: Came across we took a more in depth look on.
Speaker Change: $2 billion.
Speaker Change: Which means that was 11 tools.
Speaker Change: We looked at and we did a fair amount of work on those and those wells are bidding on $839 million.
Speaker Change: Uh huh.
Speaker Change: We wound up closing on 807.
Speaker Change: Which is a very high rate, it's not typically that high rate, but most a lot of those were negotiated transactions.
Speaker Change: So.
Speaker Change: Multi ahead of closing was higher.
Speaker Change: Understood.
Good.
Speaker Change: It's a good number and it should translate into better earnings and I guess going forward, you first announced pre announced if I guess you might say on September 24th when you came out and said you purchased.
Speaker Change: $805 million I think the number was.
Speaker Change: $805 million right.
Speaker Change: The number and then the next day on the 25th on the 20 <unk> of Piper Sandler came out and increased your target price from $82 to $95 a share.
Speaker Change: So that was a pretty hefty increase.
Speaker Change: What was the what was the earnings estimate for the half.
Speaker Change: For the ensuing year for the year ending June.
Speaker Change: 2025 that gave them that $95 price target I didn't see the report in depth.
Speaker Change: For the fiscal year, we're in now.
Speaker Change: Yes, that's.
Speaker Change: Yes that ends next syndrome June 25.
Speaker Change: It's in the range of $10.
Speaker Change: Okay. So I don't have it exactly in front of me David.
Speaker Change: So it may take a little bit it's in that range. Okay.
Speaker Change: We did 211 this quarter and that does not include the spread.
Speaker Change: All of the loans that we book.
Speaker Change: Late in September So you said that thats going to Youll see that.
Speaker Change: Linked quarters.
Speaker Change: Alright.
Speaker Change: And if I recall, you might show that had.
Speaker Change: Increased.
Speaker Change: John.
Speaker Change: Slide first.
Speaker Change: Earnings for the quarter might have been the 250 range or something like that.
Speaker Change: And that would stand to reason one.
Brian: Hi, Brian.
$10 a share so I guess.
Brian: Okay. So we'll see that as I was.
Brian: As things go forward.
Brian: Again projections, so I'm not going to ask you to comment on that.
Brian: Congratulations on a great quarter and looking forward to the business to continue.
Speaker Change: Yes, David before you go I would say you David before you go I would say you are alleging for your comments on the last call.
Yes.
Brian: Hello.
Brian: Is there anyone in the queue I have another quick story.
At the time.
Brian: We may have some others.
Brian: You can call me afterwards.
Speaker Change: Is that for another time, congratulations great quarter.
Speaker Change: Okay.
Speaker Change: Thank you Sir.
Speaker Change: Alright.
Speaker Change: Thank you.
Speaker Change: Our next caller is Adam Wilkie of Pacific Ridge Capital. Your line is now open.
Adam Wilkie: Yes. Good morning, I think I was one of those folks mentioned David's comments.
Speaker Change: Yeah, Good morning, Adam.
Speaker Change: Yes, yes.
Adam Wilkie: Great job guys.
Adam Wilkie: We are happy to see the loan purchase I was going to ask actually about the.
Speaker Change: That's 700 does now.
Speaker Change: 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.
Speaker Change: Charge off rate to be on the total originated loan balance on average through the cycle and then maybe at the peak.
Speaker Change: The.
Speaker Change: So just to remind everyone as you probably know that so the guaranteed portion has been roughly.
Speaker Change: On guaranteed portion has been roughly 18% and the reason for that is loans under 150000 have an 85% guarantee and over 150 is a 75% guarantee we're doing a lot of small ones and so.
Speaker Change: We have 18% on our on our.
Speaker Change: We wanted to have putting on our on our balance sheet.
Speaker Change: <unk>.
Speaker Change: <unk>.
From the business perspective.
Speaker Change: Very profitable because you can sell off the guaranteed portion.
Premiums now between 10, and a half and 11.
Speaker Change: Percent.
Speaker Change: Roughly we think that.
Speaker Change: And so therefore, I think we'll keep running with us on our balance sheet, our balance sheet is getting much bigger and it's not a lot that were.
Speaker Change: That were that were putting on I think the real.
Speaker Change: Question and answer to that is how comfortable are we with it with the with the credit quality around these.
Speaker Change: To put in to answer part of your question.
Speaker Change: There's a lot of data from the SBA about charge offs for these kinds of loans and we think that.
Speaker Change: If you look at historically over a lot of information in this category it would be about 3% on the guaranteed portion.
Speaker Change: But so far probably we may have a tighter credit box than those averages have been using.
Speaker Change: Everything we book, we've had something like $150000 of <unk>.
Speaker Change: Sure Josh.
Speaker Change: Couple of hundred million dollars.
Speaker Change: Sure.
Speaker Change: <unk>.
Speaker Change: Originations.
Speaker Change: That's all.
Speaker Change: $100000 not much much less than 3%, but we now have a 3% reserve.
Speaker Change: Against our SBA loans, we increased it by about $1 million or so this quarter. So now are on guaranteed.
Speaker Change: SBA portfolio is a little bit less than $50 million and we have 3% of that in the allowance, which we believe will be.
Speaker Change: As the appropriate coverage as to your question what are the peaks in.
It's knowable I don't know that off hand.
Speaker Change: Alright.
Speaker Change: That's fine.
Speaker Change: <unk>.
Speaker Change: And so if I understand correctly.
Speaker Change: On the purchase business.
Speaker Change: A lot of potential opportunities right now.
Speaker Change: <unk>.
Speaker Change: You might do something you might not and if you do the ATM, that's there to fund it and do it probably.
Speaker Change: R&D ATM is there for the capital that's necessary and then you would do probably again, some sort of ladder activity to help fund it.
Speaker Change: Possibilities come through is that fair to say.
Speaker Change: Yes.
Speaker Change: Well said.
Speaker Change: Alright.
Speaker Change: That's all I have and keep up the great work. Thank you.
Speaker Change: Thank you very much Adam.
Speaker Change: 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. Thank you all for listening and those that asked questions for your questions.
To be interesting when we have our next call.
Rick Wayne: See how some of these things play out that we've discussed.
Rick Wayne: Day.
Rick Wayne: If you have any suggestions on ways, we can provide more relevant information on our slides and the information we provide.
Rick Wayne: Let us know if we can do it we will.
Rick Wayne: And with that I. Thank you and we will sign off now.
Thank you ladies and gentlemen, this concludes today's conference. Thank you.
Rick Wayne: Goodbye.
Rick Wayne: Okay.
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