Welcome to the Northeast Bank Second Quarter FY 2023 Earnings Call. My name is Kevin, and I'll be your operator for today's call. This call is being recorded. With us from the bank is Rick Wayne, President and Chief Executive Officer, JP Lapointe, Chief Financial Officer, and Pat Dignan, Executive Vice President and Chief Operating Officer. Yesterday, an investor presentation was uploaded to the bank's website, which will be referenced in this morning's call. The presentation can be accessed at the investor relations section of northeastbank.com under the events and presentations. You may find it helpful to download this investor presentation and follow along during the call. 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.
During the question-and-answer session, if you have a question, please press star one one on your touch-tone phone. As a reminder, this conference is being recorded. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon current expectations of Northeast Bank's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements. I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.
Thank you. Good morning. I am Rick Wayne, and with me are JP Lapointe, our Chief Financial Officer, and Pat Dignan, our Executive Vice President and Chief Credit Officer. After our presentation, we would of course be happy to entertain any questions that you might have. I wanna refer to the slides in my comments, starting on Slide 3. The financial highlights for the quarter were net income of $11.3 million, earnings per share of $1.54, return on equity of 17.5%, return on assets of 2.1%.
Of course, the big news, which was included in our earnings release, last quarter was that, after September 30th, meaning in this quarter, we purchased loans with a UPB of $1.15 billion at a price of $998.5 million , which was an 86.6% investment on the purchase price. We also, in the quarter, we originated $174 million of loans. The weighted average yield on the originations was 8.72%, and we earned 8.48% on the entire book. On the purchase loans, we had a return of 8.69%.
you know, when you look at all this compared to the prior quarter, you know, I would note that a year ago, we had $6 million of correspondent fee income and only $600,000 in the current quarter, which is great because we're looking for ways to grow our loan book and replace the correspondent fee income, which we've done well. Finally, if that wasn't enough, and it was a busy quarter, we had approved an at-the-market offering, for up to $50 million. We were quite busy. I wanna now turn to Slides 4 and 5 and make a few comments on the loan purchases in the quarter. On Slide 4, we provide detail based on collateral type.
The largest collateral types were multifamily, which was $320 million out of the $1.1 billion, retail of $312 million, you can see the detail there as other collateral types. Really noteworthy that the weighted average Loan-to-Value of the $1.1 billion of loans that we purchased was 33.5%. I should repeat that number. Pretty low. 33.5%, weighted average Loan-to-Value on our purchases. Always focusing on credit quality, we do that. On page 5 shows the geography of it. We can see that the largest piece of it was in California with $570 million of UPB.
Next, New York, $216 million, and Washington State of $89 million. You can see the rest of the UPB on that slide. If we go to Slide 9, I wanna focus for a second on the investment side, thinking about concentration risk by dollars. Our total capital was $270 million. You know, you can see that on the very largest size, we only have 12% of our portfolio with loans that are $15 million or greater. 10% between $10 million and $15 million, you can see the rest. We do not have a concentration limit on dollars. We're very careful about that. Below that, you can see the collateral types.
Our portfolio now is the largest state is New York, with 33% followed by California with 31% of our portfolio. This is our national lending portfolio, of course. The rest in another 42 states. If we move now to Slide 19. I want to talk about the cost of our deposits for a couple minutes. The average cost of deposits, which is what the green line depicts, increased by 141 basis points from 87.87 in Q1 to 2.28% at the end of December 31. I want to point out that that was primarily the result of funding for our loan purchases, where we funded that with broker deposits and some loans from the Federal Home Loan Bank.
We had a lot of new dollars. In terms of the rate on our existing deposits, that went up by 30 basis points. You can see most of it was a result of adding new deposits and expensive deposits, more expensive. You can see our spot rate, which was 3.03 on the last day of December, was up from the spot rate on September 30, which is 146 basis points. That again primarily was due to the funding of the loans that we purchased and really primarily with brokered CDs. The brokered CD cost for all that was 4.43. Those CDs will mature between June and December of this year. We expect to replace that with funding at about 4%.
That should come down. Next, I want to move to Slide 23, which takes a look at our non-interest expense. You may recall from prior calls, we said that we expected we would be about $52 million for the year. You can see that we're higher in this quarter, but we were lower in the last quarter. For the six months, we're pretty close to that, pretty close to $26 million, which would be what you would expect for half a year. I will say, though, as we added $1 billion of in our loan book, we will see an increase in expenses in the third fiscal quarter and fourth fiscal quarter, as we're going to be adding more people to service the loan book.
It'll still be highly profitable, net purchase, we're gonna have some increase in non-interest expense. On Slide 25, you can see that our loan discount combined is now $189.6 million, which is an increase of $150 million from where we were at the end of September as a result of buying the loans at a good discount this quarter. Finally, before we take questions, I wanna ask you to look at Slide 31, which is the last slide. I just want to make a few points on that. You know, as I mentioned in the very beginning of this, one of our goals was to replace correspondent fee income with more net interest income.
If we look at the net interest income for the December 31 quarter was at $28.7 million, which is the highest. That's up from $20 million, one year ago. Also it's important to note that a big chunk of the purchases what we're reporting here is multiple pools, but the largest one we did not close until about December 23rd. Am I right?
First.
21st. Thank you, JP. We only had 10 days of interest income from that. Of course, going forward, we will have that will be included. All that will be included. I went through that reasonably quickly, you know, we've provided all this information, assuming that, you know, you have read it. Of course, if there's anything we can clarify, we will. With that, be happy to take questions.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star one one on your touchtone phone. If you wish to be removed from the queue, please press star one one again. If you're using a speakerphone, you may need to pick up the handset first before pressing any numbers. Once again, if you have a question, please press star one one on your touchtone phone. We'll pause for a moment while we compile our Q&A roster. One moment for our first question. Our first question comes from Alex Twerdahl with Piper Sandler. Your line is open.
Hey, good morning, guys.
Morning, Alex.
First off, you know, obviously a lot of, a lot going on here. Can you give us a little bit more in terms of the characteristics or duration, I guess, that we should be expecting for some of these purchase loans? Just trying to get a sense for, you know, what kind of amortization we might see on an annual basis, as well as trying to get a sense for how to think about the, I guess, the regularly scheduled or regularly accretable yields that we should be using or potentially could be using for, you know, to think about modeling for 2023.
I think I can. We can give you some direction. We don't, for competitive and other reasons, we don't publicly disclose on a particular pool or pools in the quarter, you know, what the WAC is, what the WAM is, you know, what we expect. We do report it, of course, as when we look back at what happened in the quarter and the year, we report what happened for the overall portfolio. I think I can give Alex some helpful information on these assets that we bought. One is that these are longer-term assets. You know, you know, the WAM on it could be more than 10 years, and it had, you know, lower coupon rates. That's why we got, you know, the big discount that we did.
It wasn't obviously a credit issue given how low the LTVs are. You know, we would there's some things we know about this and others we don't. You know, we would expect the general returns on this to look like other loans that we purchase, a little bit higher. You know, the really big variable is, you know, when the loans pay off, as to how much discount we're going to recognize. I'd say comfortably, you know, we will earn more than eight on this, you know, perhaps meaningfully more than that. You know, it depends on the prepayment speed on it.
Okay. An eight is, you know, over the lifetime of these loans, right? That's not something that we'd expect to necessarily see immediately.
No, exactly right. You know, I mean, it may happen. I don't think it's, you know, crazy to think we're gonna report more than an eight currently and more. No, I don't mean and more. I mean, over time, you know, with prepayments and with what we call, you know, shadow interest when we, on some loans, you know, they're, you get like default interest and, late fees and things like that. I think, you know, we're, you know, I think this will look generally like what we've bought in the past.
Okay. Can you talk a little bit about what drove the volume? Is this coming from several banks or is it a handful? You know, is it an indication of the overall broad market? Maybe just a little bit more on sort of the characteristics of what drove this opportunity.
These were, I think we had seven transactions in the quarter purchases. You know, the ones that we're referring to here, you know, two of them were in four of them or edit of them maybe. The biggest one came out of an M&A transaction that the seller needed to and wanted to sell loans.
Okay. I mean, does this kind of keep your sort of hands full for the time being or, you know, I know you've talked about the market being pretty solid. Is there a possibility to continue seeing purchases or net over the next couple of quarters?
I think we will. You know, you know, sort of general we've been, you know, normally we buy excluding these big transactions, you know, kind of normally we buy $150 million-$200 million a quarter. Certainly at that level, we would expect that, and it's entirely possible that we could see some larger ones. Oh, I said a quarter, Pat. Thank you. A year. This is why I have everyone here, Alex, to help me with these. No, a year. We don't know whether we're gonna see, you know, you know, another or big transactions. It's certainly within the realm of possibility.
Okay.
I'm not predicting that. I'm not predicting that, to be clear. Just set expectations.
Right. Then, you know, you I know you got the ATM going on, but what sort of constraints would there be on the balance sheet with respect to funding or capital that would be considerations for thinking about future purchases?
Well, I just wanna find this. At 12/31, after we, you know, we took our loan book, you know, it worked at $2.5 billion at the end of December, which is obviously up a lot. At the end of December, our loan capacity to look at our capital ratios, you know, it was $150 million. That came back down from like a year ago. It was $1 billion of capacity. It was $150 million. You know, as you know, Alex, that our loan capacity will increase as we earn money, and we have the ATM, which is, you know, if we need to sell more shares to raise capital, we can do that as well. That's all in place.
In fact, I didn't note that in here, but it's in our earnings release. How much did we sell in?
34,000 shares.
We haven't done much of it yet. It was approved kinda late in December, but we-- o r not very late, maybe mid-December. We sold those 33,000 shares, so we can sell more shares to raise more capital. I don't see us as capital constrained if we have opportunity, which we assume we're gonna keep it on the balance sheet.
Great. You talked about the some brokered CDs going from, I thought you said 4.43, maturing between June and December of this year, finally going down to four. Can you just walk through the amount of that again and the actual numbers?
Sure, Alex. During the quarter, broker deposits went up about a little over $500 million, with the weighted average rate on that being about 4.43%. That was more for immediate funding, not our long-term funding strategy of this. You know, our plan is to pledge the loans that we purchase from the FHLB and take out some longer-term advances to better match the structure of the loans. Right now, where rates are from the FHLB advances, we think we can, you know, borrow money around 4%, you know, to match some of the maturity of the loan pool. We do expect the funding costs to come down once we can deploy that strategy as these broker deposits mature.
Okay. You talked about the increase in expenses and, you know, can you give us maybe just a sense for how many people you might have to hire or, you know, an efficiency ratio or some sort of guideposts to sort of give us a good, like, some sort of sense for how much expenses might go up as a result of meaningfully increasing the size of the balance sheet?
I think we could give you a better answer when we reconvene at the next call. I'm not trying to dodge your question at all, but I don't want to put out a bad number. We'll have a much, much better idea then. I did want to make it clear that, you know, we have a lot of operating leverage in the bank, and it's gonna be a relatively small number relative to our expenses and our the size of our loan book. I'd rather, if it's okay with you, I'd rather put that out when we talk next time. We can give you a much tighter number.
Okay. No problem. I think that's all my questions for now. Thank you for for providing some clarification here.
Thank you. Thank you, Alex.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your touchtone phone. We have no further questions at this time. I'd like to turn the call back over to Rick Wayne for any closing remarks.
Thank you. Those on the call, thank you very much for your participation. Alex, thank you for your questions. Good ones. Excellent ones. You know, we look forward to talking again at the end of the current quarter, where we can provide some tighter answers to the questions that Alex asked. With all of that, I say thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.