NBN - NASDAQ

Hello, and welcome to the Northeast Bank Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce CEO, Rick Wayne.

Thank you, and good afternoon to all of you that are listening to this call. With me Pat Dignan, our Chief Operating Officer and Head of Commercial Credit for the Bank; and Richard Cohen, our CFO. After I make some comments, Pat will follow up a lively conversation about our loan book, both about commercial real estate loans and the SBA and some very helpful information about our multifamily portfolio in New York City. 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. Let me start by looking at Page #1 of the investor deck that was uploaded yesterday. My opening comment and headline for the quarter, it was a great quarter. 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. So it's a big quarter and also a year-end for the quarter. First, net income was $25.2 million. Now as indicated in the earnings release, if we exclude the quarter in which we had a large sale of PPP loans, this was a record $25.2 million, excluding the kind of onetime or 2 time it may have been during the year. Sale of this of PPP loans, $25.2 million was a record. It's something we're very, very proud of. If I 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. The breakout of the loan volume for the quarter was $41.7 million invested in the purchase loan book purchases of $44.4 million of UPB at a purchase price of 93.8%. 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%. For the year, we originated $807.9 million. On the SBA front, very strong. We originated $107.3 million for the quarter or $408.5 million for the year. We sold $107.6 million for the quarter, which you may be asking how could that be if we originated $107.3 million or a slightly smaller number. And the answer to that is that some of the sales in Q4 related to loans that were originated in the preceding quarter. And the gain on the sale of those loans sold was $8.2 million. All in, counting everything, our net interest market -- margin was a very strong 5.1% and the return on our purchased loans was 8.76%. We did not issue any shares under the at-the-market offering, which had availability at the end of June of $65.4 million. And our loan capacity, something we pay a lot of attention to at the end of June was $1.1 million. Earnings per share basic was $3.06 and fully diluted was $3. Return on equity was a strong 20.73%. Return on assets was a very strong 2.38%, intangible book value per share at the end of June was $57.98 or $58 of tangible book value per share with a little bit of rounding. 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% at the end of June, which is up slightly from March 31 at 1.23% and up very substantially compared to 2 years ago at June 30, '23, when the allowance was 0.29%. On Page 20 is a slide that shows our revenue for the quarter our noninterest expense. And I would want to point out that total revenue includes net interest income before provision and noninterest income. So you can see in the group of bars at the far right in the quarter level Q4 FY '25, the revenue for the quarter was $62.7 million. And again, if we look back at preceding quarters and carve out the gain from the sale of PPP loans, that was also a record revenue and noninterest expense for the quarter was $21.5 million, which you can see on here is higher than in the preceding Q3, Q2, Q1 and Q4 of FY '24. 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 pretax net interest income, which was $41.2 million, I should be more specific. Total revenue, as I've described, minus noninterest expense of $41.2 million. And again, excluding the quarter in which we had PPP was a record. If we now go to Slide 21, I want to point out that our NIM was 5.1%, substantially higher than the preceding quarter and primarily due to the fact that we generated a fair amount of transactional income in the quarter. And if you look to 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 linked quarter at $3.650 billion. If we go to Slide 22, I just want to highlight that in the last quarter, we have $216 million of discount for the quarter ending June 30, 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, have not separate many dollars in credit losses in this portfolio. And on Slide 25, we take a look at net income for the trailing 5 quarters. And you can see that at $25.2 million for the June 30 quarter, we are substantially ahead of the proceeding for trailing 5 quarters. And I think with that, I will ask Pat to talk to you about our real estate, our portfolio or SBA business. Pat?

Thanks, Rick. It was a strong finish to the year. The loan portfolio grew by 36% overall with purchased loan growth of 43%, originated growth of 27% and SBA growth at over 200%. For purchases this quarter, we bought 14 loans in 4 transactions, which brought purchased loan volume to $863 million for the year. 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 the space, more capital, cheaper leverage and with larger pools being the most competitive. Having said that, the purchased loan market is large, and we will continue to look at every opportunity, be active but disciplined bidders and expect to win our share. 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%. Like last quarter, most of these loans were in our lender finance product, which continues to show strong demand from nonbank lenders who are being squeezed on yield with all new capital entering the market and then more and more desiring of leverage. 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 linked quarter. On last quarter's call, we discussed that the SBA had tightened their eligibility requirements effective June 1. So the impact from those changes on volume this quarter is somewhat muted. Recall, we anticipate a temporary dip in SBA lending volume over the next quarter or 2 due to a smaller strike zone at the top of the funnel and more required documentation and longer processing times for new loans. 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 and believe we will continue to be a national leader in small business lending. 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 controlled and rent-stabilized multifamily properties. So we thought we'd share some detail on our multifamily exposure in New York City. Referencing Slide 11, we had $676 million of total multifamily exposure in New York City as of 6/30. Of that, $378 million has no rent controlled or rent-stabilized units. We've divided the remaining $297 million into 2 buckets. First, $214 million, where there is some exposure, but where we believe it could be very low risk, given the collateral's ability to continue demonstrating strong debt service coverage even in the event of a rent freeze. And second, $44 million, which excludes $39 million that paid off in early July, spread across 7 loans where our rent freeze could impact debt service coverage, if in place for an extended period of time. 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 multifamily markets in the country and provide a lot of opportunity for us going forward. Back to you, Rick.

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

[Operator Instructions] And our first question comes from the line of Mark Fitzgibbon with Piper Sandler.

Just first, a couple of clarification questions. Pat, regarding your comments on the SBA declining by potentially as much as 50% in the third quarter. When does that snap back do you think? 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?

It's hard to say exactly. I believe we will climb back both from -- in this particular product, and we're also looking at adding new verticals to our table. 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. So that excludes a lot of borrowers right there. They also increased the credit -- minimum credit scores for borrowers, which excludes a lot of other borrowers 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. 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. And then on the processing side, there's new collateral requirements and new capital requirements, which requires a lot more documentation and information collection from borrowers and verification, and that's just going to take longer. So you've got some adjustment at the top of the funnel and not a longer processing period, and it will take some time before we catch up to that slowdown. So we don't want to overstate or understate what we'll be able to do. But again, this is an enormous market. And we -- the same issue is affecting every other lender, and we're pretty confident that we'll be able to navigate through it.

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. How does that maybe stack up versus this time last quarter?

There's a lot of activity out there. And we -- while we purchased $41 million. We bid on a lot more than that in the June 30 quarter. 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 lower. 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 -- these are big transactions I'm describing. They're buying in securitizing. In the field, we mostly play in, there's a lot for us to look at and underwrite and bid. And so we are optimistic about it. Maybe a little bit before your time, Mark, when Alex was at Piper Sandler. But for a lot of years, our purchase volume was in the range of $150 million to $2 million. And in fact, our origination business was greater. No guarantee on this. I won't bore you by reading the forward- looking statement. But we're expecting kind of the base business that I just described will continue. And if we're able to buy a large transaction sometimes referred to as a whale, then we'll -- it will look more like it did in the preceding years were in September of '24, we bought $700 million in December of '22, we bought $1 billion. 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.

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, how much it impacted the margin?

I can tell you that. I'm now looking at Slide #11. And you can see there was a -- for originated loans, there was a total of $4.094 million of transactional income, which is pretty high for the originated book. It stem from a loan we had made 6 or 7 years ago that had been on nonaccrual for quite a while and we got paid in full on that loan, which generated a lot of interest income, which we're categorizing as transactional.

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?

Yes. Well, that was worth what I just described was worth 1.4% on the return. And so if that came out, it would be 8.55%. But I don't think it's the right way to think about it is going to 0 because we always have some. That just happened to be a loan that has been around for a while and shout out to our brilliant asset manager, Chris Hickey, resolved that credit really thoughtfully and creatively.

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. Should we read into that, that the loans that are either classified or may sort of migrate to nonaccrual or be potentially problematic or not necessarily?

Not necessarily. There are loans that given the -- they're in Northern Manhattan where rent increases have not kept up with expense increases. And all the $2.5 million of those are performing -- most of the $2.5 million is performing as a loan where it's really not a cash flow issue. It's the borrowers fighting with each other. But the -- 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 control or in stabilized units for more -- for an extended period of time, these are properties that are vulnerable to compression on cash flow, and we're going to keep an eye on it. But right now, there's nothing -- no concern at all.

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

No, it's a good question. So there have been 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. Massachusetts tax rate for us was favorable. The moving to one factor. And in California, the movement to one factor was increased our tax. Those 2 were relatively offset, we think as it stands, 33% to 34% seems expected.

[Operator Instructions] Our next question comes from the line of Matt Renck with KBW.

Matt Renck filling in for Damon DelMonte. 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? Or what you have to do on the back end of the new processes kind of outweigh any reduction in volume?

I'm happy to take that. So a fairly significant amount of the cost would be variable. In other words, if the income was to reduce. So as the cost -- 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 for example, in the payroll line, and that clearly would not change.

Okay. Great. And then just a follow-up. I mean, you guys are pretty efficiently run bank. 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?

It's a timely question. We're going to do that and going to in the current year in a fairly major way.

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 at all kind of work itself out in the efficiency ratio?

I think our expenses will increase. We just have made a very significant hire in the role of innovation chief or Chief of Innovation so that we're going to be able to take a look at the workflow in all areas of the bank. And I would expect that we'll have some more hires in that area as well as some investments in technology. As we have a better handle on what that might be, we will cover that in a subsequent call, not necessarily the next one, but we'll have disclosure around that.

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.

Thank you, Mark and Matt, for your thoughtful questions and others for dialing in and those that listened to the call on our website after today, thank you as well. We look forward to talking again at our next meeting, which would be in October -- towards the end of October. And on that note, I wish you all stay cool. We're in New York City today. It's very warm. And I wish you a nice week and a nice weekend as when it approaches. Thank you very much. And operator, we are all set.