Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2022 Second Quarter Earnings Results Conference Call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer, JP Lapointe, Chief Financial Officer, and Patrick Dignan, Executive Vice President and Chief Credit Officer. Last night, 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 northeastbank.com under events and presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. The question and answer session for this call will be conducted electronically following the presentation. Please note that this presentation contains forward-looking statements about Northeast 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. At this time, I'd like to turn the call over to Rick Wayne. Please go ahead, sir.
Thank you. Good morning, and thank all of you for joining us today. With me, on this call are JP Lapointe, our Chief Financial Officer, and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments, JP, Pat, and I will be happy to answer your questions. Last night we uploaded an investor deck, and this morning I'm not gonna go through page by page on the assumption that, you know, we provided the information and I'm sure, those on the call have read it, but I do wanna amplify a few points. More than a few. First, let me just say, we thought it was a great quarter in almost every aspect. I will in my following comments explain why we think that is true.
First, just some earnings and key ratio highlights. We had net income of $11.4 million, which compared to $9.9 million in the linked quarter, 15%. Earnings per share were $1.42 diluted. Return on equity was 18.8%. Return on assets was 2.9%. NIM was 5.24%, and if we exclude PPP from the NIM calculation, the NIM would have been 6.44%. Obviously, those are really outstanding numbers. Let me first start with a discussion of the loan activity. To state the obvious, if you increase your loan balance and maintain high rates, we're gonna have an increase in net interest income, which is what occurred.
We had a record $261 million of purchases and originations. That's a record by a lot. The originations were $168.4 million, and the purchase loans were $92.1 million. Also, our rates in our portfolio remained high at 8.96% on our purchase portfolio and 6.48% on our originated portfolio. I'll remind you that most of our originated portfolio, well, virtually all of it, is tied to prime and floats, and so as rates go up, as they will, we're gonna be picking up additional interest income from that portfolio. Just to put this in context, our loan portfolio with national lending portfolio increased by $112 million or 11% from the linked quarter.
If we go back a year, it increased $207 million or 23% over the past year. Then the final point I wanna make on this is that our loan book grew and we've maintained our rates, our base net interest income, that is before transactional income, increased by $1.7 million from the linked quarter. You know, this is our plan is that as the correspondent fee over time goes down, we will make up for that and hopefully more, much more, by growing our loan book. With that, let me turn to the correspondent fee for a second. For this, I would ask you to go to slide four.
With the correspondent fee income, it went down from the linked quarter from $7.8 million- $6 million in this quarter. The reason that it went down is the biggest component of the correspondent fee income is on the line called our servicing interest, which is our share of the servicing income that is earned by Loan Source on the loans that they purchased. That one line item went down by $1.6 million from the linked quarter. The reason for that is that loans are being forgiven at a very fast clip now.
To describe that a little bit more, in total, The Loan Source purchased $11.2 billion of loans, and it was the balance at the end of December 31 was $4.6 billion, which is down $2 billion from September 30th. When those PPP loans get forgiven, there's obviously no servicing income on those, and therefore that number goes down. They're paying down at roughly the pace of $500 million per month. I suspect it'll continue at that pace for a while, and then there'll be some tail to it. We can expect that over time, the corresponding fee income will go down.
I say over time, I suspect most of it will be recognized, not all, but most of it, you know, through September thirtieth of this year. I wanna make a comment on our provision because we had a credit provision of $1.1 million, and that was due to the performance of the SBA portfolio. At the start of COVID, when we looked at the SBA portfolio, which by its nature has higher credit risk on the unguaranteed piece. When COVID started, we put in an additional $3 million on the unguaranteed portion of that SBA portfolio. Fortunately, that portfolio has performed remarkably well. This quarter, we reversed out about $1.1 million or so from the reserve against that portfolio.
It still has a healthy reserve on it at 5.2%, but it's not the 10% that we previously had. Non-interest expense decreased $2.1 million from the linked quarter to $11.2 million, primarily because the linked quarter had $1.6 million of non-recurring correspondent expenses associated with the wrap-up of the PPP. Our non-interest expense for the quarter was $11.2 million. Those that like to do the modeling, you know, I think that's a pretty good number. You know, you may think about $45 million for the year. On asset quality, you know, those slides are 10 through 12. Again, strong delinquencies were $14.6 million or 1.23% of total loans.
You know, as I said before, in the case of our business, particularly around the purchase loans, those delinquencies will look higher than a traditional community bank. The real question is to look at the charge-offs. You know, on our originated loan book where we've done, I don't know, $1.8 billion or so in that range, our charge-offs are ready? Zero. In the case of the purchase portfolio, where the returns are on a weighted average about 11.5% more or less, the weighted average charge-offs are eight or nine basis points. A really terrific asset quality. On the COVID deferrals, you know, they virtually all worked out. The ones that we provided a P&I deferral, 99% are current.
In the case of interest only, they're also performing remarkably well. Now I wanna make a comment on deposits, which are slides 20 through 24. Over the last year and a half, we've made a conscious effort to reduce our reliance on higher cost brokered and ableBanking CD and money market deposits, with a focus of bringing down that cost by growing our deposits through our community banking division, which includes deposits in our footprint, of course, both consumer and business. Also, a meaningful number for deposits from municipalities and state and municipalities, which we're continuing to grow, as well as a focus on getting deposits from our national lending customers. That's really paid off.
Our average cost of deposits for the quarter were 36 basis points, which compared to a year ago, it was 103 basis points, and two years was 198 basis points. Now, of course, some of that, you know, a fair amount of that is rate driven, but if you look at the slides, you'll see how we have changed the composition of the deposits. Also on the share repurchase activity, I know this is near and dear to a bunch of our investors. For the quarter, we repurchased 340,000 shares at a weighted average price of just under $34. Finally, I wanna make a comment on our 7(a) program with NEWITY.
As you recall, we signed a five-year exclusive marketing agreement with NEWITY, which is formerly ACAP. The people are the same people, I should say more accurately. Starting to market SBA 7(a) loans to most of the 115,000 customers that Loan Source has from purchasing their loans. Our first foray is looking at small balance working capital loans under $25,000. We spent a lot of time, along with NEWITY, building out the technology, which is substantially complete. NEWITY's just started to invite existing Loan Source customers in a phase rollout to apply for these small balance working capital lines. As I said before, I don't wanna overpromise or underpromise. We'll see how this performs.
We're certainly optimistic, but we will see. We will have better numbers to report to you after the quarter we're in now when we meet again in April. With that, I would like to turn it over to you for questions.
Our first question on the line comes from Mr. Jeffrey Kitsis from Piper Sandler.
Good morning.
Good morning, Jeff.
Thanks for taking my questions. First, I wanted to start on the national origination business. You guys had a really nice quarter there. Can you talk about what factors drove the big growth and how sustainable that is over the next handful of quarters?
Of course. Well, we've hired, as I mentioned before, some outside business development officers, some additional ones, officers we have, and now two in New York, one in Miami, one in California. We have a lot of organic growth too, you know, customers that, you know, just are existing customers and have additional financing needs. We've done a lot to market our origination business. We have a very good niche, which is focusing on loans, particularly in the portfolio finance business, that the borrowers' borrowing needs are too small for the big banks and not what a traditional community bank would do. I think we have momentum with this.
I don't know if every quarter will be, you know, $168 million, but we do expect, you know, we're gonna have very good volume each quarter for this. Pat, do you wanna add anything to that?
Oh, that was a good summary. I would just add that we're able to float in a niche right below non-bank lenders with respect to pricing, and there seems to be growing demand for quick execution and our pricing advantage is paying off.
Thanks. Appreciate the color. Next up, I wanted to talk about the purchase market. Has something in the market for loan purchases changed, which could suggest that volume would pick up going forward, or was this quarter's strong volume more a function of seasonality?
I think it was, you know, this quarter, you know, we had a big purchase of $68 million or $70 million included in that number. You know, we often bid on pools that large. They're very competitive and so, you know, that was a big contributor to the large portfolio purchase for the quarter. You know, I expect we'll. I wouldn't predict that every quarter is gonna be as large as this one on the purchase side. You know, I would expect that we will get our fair share as we have in the past. I don't think anything has particularly changed in that market from the previous quarter or quarters.
Got it. Thanks. I wanted to ask a little more about the NEWITY deal. What is it about the small balance working capital loans under $25,000 that you guys really like as a lending product? What is it about that product that you think will particularly appeal to the customers that ACAP brought on?
You can get very good pricing on the product. It's you know prime plus 4.75. You know typically with SBA loans the maximum you can get is 2.75 over prime. You know there's a big underserved market that would benefit from this working capital loan. It's also you know if you wanna do it in a lot of volume not that it's simple but it's easier you know less i's and t's to cross than the larger SBA product so it can be highly automated. We think you know when you compare this product with some of the other commercial small balance loans for businesses you know this has a lot of benefit over those.
It's got a seven- or 10-year amortization, you know, as opposed to doing, you know, six months or a year or two or three years. You know, that's a big advantage. The rate is much better than, you know, typically what you see for some of the non-bank lenders doing, you know, these loans that they, you know, approve in a day. It's also a product that most banks are not doing and don't want to do, because unless you do it in volume, which is our expectation, it is pretty expensive to offer one of these $25,000 loans to a borrower. To kind of wrap that up, we don't think there's a lot of competition for this. We think there's a lot of need for it.
The pricing is good for it. You know, our expectation is we will sell these off and hold. The guarantee is large on these. It's currently 90%. It's got a big guarantee on it. We think there'll be a lot of demand, but as I said, I don't want to overstate that until we can report what the actual numbers are. I would add, after we, you know, do this, then we'll take a look at other 7(a) products as well, but we're starting with this. One of the things, it's not only, you know, marketing to the existing Loan Source customers.
We're going to, you know, different states to talk to the economic development offices of those states to see where we can provide this, because as I said, there's a big underserved population for this kind of loan product. Also going to other banks and try and white label the product for them. You know, for example, on our website, you know, there's a link where customers can come. They click on it, and then they wind up on the NEWITY website to do it. Our hope is that we can, you know, do that with other banks as well.
Appreciate the color. Thanks. Did you say the intention is to sell off the guaranteed portion and hold the non-guaranteed portion on balance sheet?
Exactly.
Got it. Okay, thanks. Next, I wanted to talk about asset sensitivity. I know you mentioned earlier in the call most of the originated book is tied to prime and floats. Can you go through the rest of the portfolio, please, and remind us which buckets of the loan book are variable and what they reprice off of? Also, if any of the loans are sitting on floors.
JP?
Sure. Thanks, Jeff. It's around 92% of the national lending originated portfolio is variable, with just about all of those loans tied to prime. All of those loans primarily have floors built in, which is typically the rate at origination. I would say, you know, the majority of the originated book is variable. On the purchase portfolio, you know, that varies, based on the loans. Some of those are fixed, and some of those are variable. I don't have an accurate breakout of what that percentage is, but you know, there is a portion of those that do float. I don't know if Pat has any more color on the purchase portfolio and what percentage of those might be variable.
I don't. I think it's somewhere slightly more variable than fixed.
Thank you.
I would say on the purchase book, of course, you know, a big part of the income comes in from early payoff of those loans. I shouldn't say a big, I don't want to overstate it, but, you know, if we go to slide, let's just find this for a second.
It's slide 28, Rick, and that'll show the breakout between the coupon and the regularly scheduled accretion and then the accelerated-
Thank you.
Accretion from payoffs.
Yeah. Thank you. Thank you, JP. On this slide, the regularly scheduled interest and accretion on the purchase book was 664, but then we picked up another 2.3% from payoff of loans to get us to about 9%. That was an expansion of your question, Jeff, but I think the headline is all of the originated portfolio is tied, virtually all of it's tied to prime.
Thank you. Switching to capital, it was a nice quarter for buybacks. Was wondering if you could give us an update, please, on what remains on the program and how you're thinking about buybacks as an allocation of capital in 2022 in comparison with all the loan growth initiatives you have in place.
JP, can you just how many shares are left out of the?
We have about 396,000 shares left to buy back as part of our approved plan.
To answer your question on the, you know, the way we think about it, you know, for the longest time, we only bought stock under tangible book. To date, JP, how many shares have we bought back total? Then what's the weighted average price?
Give me one second here. To date, we have repurchased 3, almost 3.5 million shares at about $15 per share.
That's obviously been terrific, but the price was much lower. You know, we think about it, we take a look at you know, you know, what are our needs for capital. Of course, we do have all this. That is pointed out to me frequently. You know, we have a lot of capital, and what we need to do. The most profitable thing we could possibly do is leverage that capital, you know, and grow our earnings. We made you know, good progress this quarter. We take a look at how much capital we have, what we think we're gonna need, what do we think the opportunities are, and where is the stock price relative to tangible book.
This quarter, you know, as I mentioned earlier, we bought the shares at a little bit less than $34. I wanna say tangible book, JP, we ended up at $30.40. We're all in different places. That's obviously why we're talking, I think, having a conversation around this. Was it $30.40, JP?
It was, Rick. Yes, that's correct.
Yeah. You know, we bought at $34. You know, I think that's about as much as I can add. Obviously, I can't say at what price we would buy back stock. You know, those are the factors that we think about when we do it.
Thanks. Last question was on expenses. In your prepared remarks, you mentioned something about $45 million. Was that referring to historical expenses, or was that a forward-looking
Forward-looking. I think we were 11.2 this quarter, and I think that's a reasonably good number, you know, for the year.
If
At $45 million annualized.
If we get strong loan growth, does that mean that there would be that expenses would come in higher than that $45 million number? Or does that $45 million number contemplate the strong loan growth that you guys have delivered?
No, if we have very strong loan growth, you know, then that number could get higher.
Got it. Okay, thanks so much for taking my questions. Congrats on a great quarter.
They were excellent questions, Jeff. I'll have to tell Alex. Thank you.
Thank you. Once again, for any questions, hit star then one on your touchtone phone. I'm showing we have no further questions at this time. I will turn the call over to Rick Wayne for closing remarks.
Thank you. Thank you all for joining us and supporting us. We look forward to talking to you in April. Thank you very much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.