Q4 2025 Northeast Bank Earnings Call

Speaker #2: Hello, and welcome to the Northeast Bank fourth quarter and fiscal year 2025 earnings conference call. At this time, all participants are in listen-only mode.

Speaker #2: After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *11 on your telephone.

Speaker #2: You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded.

Speaker #2: It is now my pleasure to introduce CEO Rick Wayne.

Speaker #3: Thank you, and good afternoon. To all of you that are listening to this call, with me are Pat Dignan, our Chief Operating Officer and Head of Commercial Credit.

Speaker #3: For the bank and Richard Cohen, our CFO. After I make some comments, Pat will follow up, and we will have a lively conversation about our loan book, both regarding commercial real estate loans and the SBA, along with some very helpful information about our multi-family portfolio in New York City.

Speaker #3: I think you'll find all of that quite interesting. And after Pat's comments, Richard, Pat, and I are available for any questions that you might have.

Speaker #3: Let me start by looking at page number one of the investor deck that was uploaded yesterday. My opening comment and headline for the quarter is that it was a great quarter.

Speaker #3: On all cylinders, it was a great quarter. I’m going to highlight a few things about the quarter and perhaps a few other items about the year, because our fiscal year ended June 30.

Speaker #3: So it's a big quarter and also a year-end for the quarter. First, net income was 25 point 2 million dollars. Now, as indicated in the earnings release, if we exclude the quarter in which we had a large sale of triple P loans, this was a record, 25 point 2 million excluding the kind of one-time or two-time, it may have been during the year sale of S of triple P loans, 25 point 2 million dollars was a record.

Speaker #3: And something we're very, very, very proud of. If you take a look at the loan activity for the quarter, all originations and purchases totaled $362.6 million for the quarter, and $2.1 billion for the fiscal year.

Speaker #3: The breakout of the loan volume for the quarter was $41.7 million invested in the purchase loan book on purchases of $44.4 million of UPV at a purchase price of 93.8%.

Speaker #3: So that's $41.7 million. On the originated side, very substantially, we had $216.6 million. The weighted average rate as of March 31 for the loan book was 7.99%, or we can call that 8.

Speaker #3: For the year, we originated 870 point 9 million dollars. On the SBA front, very strong. We originated 107 point 3 million dollars for the quarter or 48.5 million dollars for the year.

Speaker #3: We sold 107 point 6 million dollars for the quarter which you may be asking, how could that be if we originated 107 point 3 million dollars or a slightly smaller number?

Speaker #3: And the answer to that is that some of the sales in Q4 related to loans that were originated in the preceding quarter.

Speaker #3: And the gain on the sale of those loans sold was $8.2 million. All in, counting everything, our net interest margin was a very strong 5.1 percent.

Speaker #3: And the return on our purchase loans was 8.7 6 percent. We did not issue any shares under the at the market offering. Which had availability at the end of June of 65 point 4 million dollars.

Speaker #3: And our loan capacity is something we pay a lot of attention to. At the end of June, it was $1.1 million. Earnings per share, basic, was $3.06, and fully diluted was $3.

Speaker #3: Return on equity was a strong 20 point 73 percent. Return on assets was a very strong 2.38 percent. And tangible book value per share at the end of June was 57 dollars and 98 cents or 58 dollars of tangible book value per share with a little bit of rounding.

Speaker #3: I now want to just talk about a few slides which I hope that you will find interesting. First, on the asset quality metrics, the allowance for credit losses over gross loans was 1.28%.

Speaker #3: At the end of June, the allowance was 1.23 percent, which is up slightly from March 31. This represents a substantial increase compared to two years ago, when the allowance was 0.29 percent at June 30, 2023.

Speaker #3: On page 20, there is a slide that shows our revenue for the quarter alongside our non-interest expense. I would like to point out that total revenue includes net interest income before provision and non-interest income.

Speaker #3: So you can see in the group of bars at the far right in the quarter labeled Q4 FY 25, the revenue for the quarter was $62.7 million.

Speaker #3: And again, if we look back at preceding quarters and carve out the gain from the sale of Triple P loans, that was also a record.

Speaker #3: Revenue and non-interest expense for the quarter was $21.5 million, which, as you can see here, is higher than in the preceding Q3, Q2, Q1, and Q4 of FY 24.

Speaker #3: The reason for that is that, in the quarter, we had a true-up of our compensation expense, which had a big impact. But we're still growing pre-tax net interest income, which was $41.2 million.

Speaker #3: Why should it be more specific? Total revenue, as I've described, minus non-interest expense was $41.2 million. And again, excluding the quarter in which we had PPP, it was a record.

Speaker #3: If we now go to slide 21, I want to point out that our NIM was 5.1 percent, substantially higher than the preceding quarter, and primarily due to the fact that we generated a fair amount of transactional income in the quarter.

Speaker #3: And if you look at the charts on the right, you can see that our average loan balance for the June 30 quarter was $3.767 billion, comparing favorably with the prior quarter at $3.650 billion.

Speaker #3: If you go to slide 22, I just want to highlight that in the last bar we have $216 million of discount for the quarter ending June 30th.

Speaker #3: Of which $179.1 million is the interest rate mark and $36 million is the credit mark. I will remind you that we don't really suffer historically and have not suffered many dollars in credit losses in this portfolio.

Speaker #3: And on slide 25, we take a look at net income for the trailing five quarters. You can see that at $25.2 million for the June 30 quarter, we are substantially ahead of the preceding or trailing five quarters.

Speaker #3: And I think with that, I will ask Pat to talk to you about our real estate, our portfolio, and our SBA business. Pat?

Speaker #4: Thanks, Rick. It was a long finish to the year. The loan portfolio grew by 36% overall, with purchase loan growth at 40%.

Speaker #4: Originated growth at 27% and SBA growth at over 200%. For purchases this quarter, we bought 14 loans in four transactions. This brought purchase loan volume to $863 million for the year.

Speaker #4: There's a lot of purchase loan opportunities currently in the market, and we expect a lot more to come this year. There's also a lot more competition in this space.

Speaker #4: More capital, cheaper leverage, and larger pools being the most competitive. Having said that, the purchase loan market is large, and we will continue to look at every opportunity to be active but disciplined bidders, and expect to win our share.

Speaker #4: In our origination business, we closed 24 loans with an average balance of $9 million, secured with a variety of collateral types, and LTVs just over 50 percent.

Speaker #4: Like last quarter, most of these loans were in our lender finance product, which continues to show strong demand from non-bank lenders. We're being squeezed on yield with all the new capital entering the market and more and more desiring leverage.

Speaker #4: We expect lender finance to continue dominating our origination business into next quarter as competition for direct opportunities continues to heat up. In the SBA business, we originated $107 million of loans compared with $121 million in the lien quarter.

Speaker #4: On last quarter's call, we discussed that the SBA had tightened its eligibility requirements effective June 1st. So, the impact from those changes on volume this quarter is somewhat muted.

Speaker #4: Recall, we anticipated a temporary dip in SBA lending volume over the next quarter or two due to a smaller strike zone at the top of the funnel, more required documentation, and longer processing times for new loans.

Speaker #4: As we adjust to these changes, volume could dip as much as 50% this quarter. Fortunately, the market for small business loans is enormous, and we remain very positive about this line of business. We believe we will continue to be a national leader in small business lending.

Speaker #4: Finally, a quick note on asset quality. We've been watching the New York City mayoral race and are aware of its potential impact on rent controls and rent-stabilized multi-family properties.

Speaker #4: So we thought we'd share some detail on our multi-family exposure in New York City. Referencing slide 11, we had $676 million of total multi-family exposure in New York City as of 6:30.

Speaker #4: Of that, $378 million has no rent-controlled or rent-stabilized units. We've divided the remaining $297 million into two buckets. First, $214 million where there is some exposure, but where we believe it to be very low risk given the collateral's ability to continue demonstrating strong debt service coverage even in the event of a rent freeze.

Speaker #4: And second, $44 million, which excludes $39 million that paid off in early July, spread across seven loans where a rent freeze could impact debt service coverage if in place for an extended period of time.

Speaker #4: It's our view that our focus on low LTVs will provide a significant buffer against any headwinds from this issue. We also believe New York City will remain one of the strongest multi-family markets in the country and provide a lot of opportunity for us going forward.

Speaker #4: Back to you, Rick.

Speaker #3: Thank you, Pat. That was excellent. Now, if there are any questions, we would be happy to entertain them.

Speaker #2: Certainly. As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again.

Speaker #2: In your first question comes from the line of Mark Fitzgibbon with Piper Sandler.

Speaker #5: Hey, guys. afternoon.

Speaker #6: Hi, Mark.

Speaker #3: Hello. My name's Mark.

Speaker #5: Just first, a couple of clarification questions. Pat, regarding your comments on the SBA, you know declining by potentially as much as 50 percent in the third quarter, when does that snap back, do you think?

Speaker #5: Is that a fourth quarter event, or is it not until next year where you see SBA volumes come back and you sort of adjust to the new process?

Speaker #6: It's hard to say exactly. I believe we will climb back, both from this particular product, and we're looking at adding new verticals to our table.

Speaker #6: But there's a number of factors involved in the top of the funnel. First of all, the SBA has decreased the cap from $500,000 to $350,000.

Speaker #6: So, that excludes a lot of borrowers right there. They also increased the minimum credit score requirements for borrowers, which excludes a lot of other borrowers.

Speaker #6: And they've added, and there's been some deterioration of credit generally in certain sectors due to the tariffs and other economic factors. So that's going to require us to change the annuity, to change the marketing efforts at the top of the funnel to be more surgical about attracting the right kinds of business.

Speaker #6: Keep in mind that this market is enormous. And so we have no doubt that we'll be able to do this. It's just a question of how quickly we can set this up.

Speaker #6: And then on the processing side, there are new collateral requirements and new capital requirements, which require a lot more documentation and information collection from borrowers and verification.

Speaker #6: And that's just going to take longer. So you've got some adjustment at the top of the funnel and then a longer processing period, and it'll take some time before we catch up to that slowdown.

Speaker #6: We don't want to overstate or understate what we'll be able to do. But again, this is an enormous market, and the same issue is affecting every other lender.

Speaker #6: And we're pretty confident that we'll be able to navigate through it.

Speaker #5: Okay, great. And then secondly, I was curious if you could sort of size for us the pool of loans that you're looking at today for loan purchases.

Speaker #5: How does that maybe stack up versus this time last quarter?

Speaker #6: Pretty good. Go ahead, Rick.

Speaker #3: There is a there is a lot of activity out there. And we while we purchased 41 million, we bid on a more than that in the June 30 quarter.

Speaker #3: We saw a lot of action, and we see a lot of action now, which is a good sign because a lot of times the summer is a little slower.

Speaker #3: We also see more competition now on some of the larger transactions that are out there from some of the bigger banks. That are buying you ow these are big transactions I'm describing.

Speaker #3: They're buying and securitizing you now in the field we mostly play in. You know there's a lot for us to look at, underwrite, and bid.

Speaker #3: And so we are optimistic about it. And maybe a little bit before your time, Mark, when Alex was at Piper Sandler. But you know, for a lot of years, our purchase volume was in the range of $150 million to $2 million.

Speaker #3: And in fact, our origination business was greater. While there is no guarantee on this, I won't bore you by reading the forward-looking statement. But we're expecting that the base business I've described will continue.

Speaker #3: And if we're able to you ow buy a large transaction, sometimes referred to as a whale, you know then it'll look more like it did in the preceding years where in September of '24 we bought 700 million in December of '22 we bought a billion.

Speaker #3: And so we will wait and see. But that's a long answer to your question, which is there's a lot of volume. A lot of activity out there now.

Speaker #5: Fair enough. And then, Rick, you had mentioned there was some transactional income in the net interest margin this quarter. Could you tell us how much that was and how much it impacted the margin?

Speaker #3: I can't I can tell you that. The I'm now looking slide number 11. And you can see there was a for originated loans, there was a total of 4 million 94 thousand dollars of transactional income which is pretty high for the originated book.

Speaker #3: It's sent from a loan we made six or seven years ago that had been on non-accrual for quite a while. And we got paid in full on that loan, which generated a lot of interest income.

Speaker #3: Which were categorizing as transactional.

Speaker #5: So, if we were to back most of that out of next quarter's numbers, we'd be in the ballpark for what you'd expect the margin to look like?

Speaker #3: Yes, well, what I just described was worth 1.4% on the return. And so if that came out, it would be 855%.

Speaker #3: But I don't think it's the right way to think about it going to zero because we always have some. That just happened to be a loan that had been around for quite a while.

Speaker #3: And a shout-out to our brilliant asset manager, Chris Hickey, who resolved that credit really thoughtfully and creatively.

Speaker #5: Okay, great. And then thank you for the information on page 11. It was really helpful. Just one question on those elevated loans, the $44 million.

Speaker #6: Yep.

Speaker #5: Should we read into that, that those are loans that are either classified or may sort of migrate to non-accrual or be potentially problematic? Or not necessarily?

Speaker #6: Not necessarily. There are loans that you know given that they're in earnest Manhattan where rent increases have not kept up with expense increases.

Speaker #6: And all two and a half million of those are performing. And most of that—most of the two and a half million that are performing—is a loan where there’s really not a cash flow issue with the borrowers fighting with each other.

Speaker #6: But the you know right now, these loans are cash flowing and there's not an issue. I was simply pointing out that if there turns out to be a rent freeze on rent controlled or rent stabilized units for you know more than for an extended period of time, these are these are properties that are vulnerable to compression on on cash flow.

Speaker #6: And we're going to keep an eye on it. But right now, there's nothing concerning at all.

Speaker #5: Okay. And then just one last quick one. On the effective tax rate going forward, does it, Richard, does it kind of migrate back to sort of 36.5% on a go-forward basis, would you say?

Speaker #3: No, that's a odd question. So, there'll be a few moving parts on the effective tax rate, mainly about state taxes. And there have been some changes in both California as well as Massachusetts.

Speaker #3: Massachusetts tax rate for us was favorable. The moving to one factor. And in California, the moving to one factor was increased our tax rate.

Speaker #3: Those two were relatively offset, we think, as it stands. 33 to 34 percent seems expected.

Speaker #5: Great. Thank you very much.

Speaker #3: Thank you, Mark.

Speaker #6: Thanks, Mark.

Speaker #2: Thank you. And as a reminder, to ask a question, please press *11 on your telephone. Our next question comes from the line of Matt Rank with KBW.

Speaker #7: Hey, guys. Matt Rank filling in for David Del Mata. Hope everybody's doing well today. Just as a follow-up to the SBA income, I was just wondering, in the next couple of quarters, is there any offset on the expense side as volumes are lower?

Speaker #7: Or will what you have to do on the back end with the new processes kind of outweigh any reduction in volume?

Speaker #3: I'm happy to take that. So a fairly significant amount of the cost would be variable. In other words, if the income were to reduce, so would the cost.

Speaker #3: So the loan expense would fall if the volume in SBA were to fall. I think that's the short answer to your question. We've obviously got some fixed costs that relate to the SBA business.

Speaker #3: For example, in the payroll line, and that clearly would not change.

Speaker #7: Okay, great. And then just a follow-up. I mean, you guys are a pretty efficiently run bank. I was just kind of curious if you're investing in any new technologies, whether it be automation or different types of processes that you see driving additional efficiency gains over the coming years.

Speaker #3: Yeah, it's a timely question. We're we're going to redo that and going to in the in the current year and a fairly major way.

Speaker #7: Just as a follow-up, in a fairly major way, does that mean you expect a big uptick in expenses? Or do you think you'll be able to leverage it, and it'll kind of work itself out in the efficiency ratio?

Speaker #3: I think we'll our expenses will increase. We just have made a very significant hire in the role of innovation chief or chief of innovation.

Speaker #3: So, we're going to be able to take a look at workflow AI in all areas of the bank. I would expect that we'll have some more hires in that area, as well as some investments in technology.

Speaker #3: As we have a better handle on what that might be, we will let you know. We will cover that in a subsequent call—not necessarily the next one—but we'll have disclosure around that.

Speaker #7: Okay, great. That's all for me. Thanks, guys.

Speaker #3: Thank you very much, Matt.

Speaker #2: Thank you. And I'm showing no further questions. So with that, I'll hand the call back over to CEO Rick Wayne for any closing remarks.

Speaker #3: Thank you. Thank you, Mark and Matt, for your thoughtful questions. And thanks to others for dialing in, and to those who listen to the call on our website after today; thank you as well.

Speaker #3: Look forward to talking again. Our next meeting will be in October, towards the end of the month. On that note, I wish you all to stay cool; we're in New York City today.

Speaker #3: It's very warm, and I wish you a nice week and a nice weekend as it approaches. Thank you very much. Operator, we are all set.