Northeast Bank

Welcome to the Northeast Bank third quarter fiscal year 2025 earnings call. My name is Victor, and I will be your operator for today's call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer, Richard Cohen, Chief Financial Officer, and Pat Dignan, Executive Vice President and Chief Operating Officer. Prior to the call, an investor presentation was uploaded to the bank's website, which we will referenced 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. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session During this question and answer session, if you have a question, please press star 11 to ask a question. To remove yourself from the queue, please press star 11 again. As a reminder, the conference is being recorded. 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. I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Thank you, and good morning to all of you. I first want to make an observation about the quarter, which is, we think it was a very strong quarter. We did 400, and I'll do a little bit of rounding for this, $414 million. of loan volume, of which $74.6 million was purchased, $218 million were originated loans, which was the second best quarter for commercial real estate loan originations that we have had, the highest being the preceding quarter. And the SBA volume was $121. 3 million, which is up from about 100 million in the link quarter. I point out that our net income of $18.7 million is 4.8 million higher than the quarter a year ago and 3.7 million lower than the link quarter, which is December 31, 24. I'll refer to it as the link quarter sometimes. We had ROE of 16.47%, ROE of 1.86%, and our tangible book value grew to shade under $55 at $54.84. Seems kind of... Funny that I would say that this was a really good quarter, given that we were $3.7 million less of income compared to the link quarter. And I want to just point out some things that caused that to happen, some of which, a lot of which, are just related to the quarter for reasons that you will hear as I go through this. First one is net interest income is down $2.5 million from the link quarter. Now, these are pre-tax numbers I'm talking about now. And there are really two reasons for it. One, we had less accelerated income from loan payoffs on our purchase loan book. That's lumpy. That number could be you know, in any couple of quarters go up and go, well, it's never close to zero, but go up or go up more or maybe not as much. But, you know, whatever doesn't get accelerated is income that we'll recognize as we hold the loans. And this is one you may not have thought of, but in the quarter that just ended, it was 90 days in the quarter as compared to 92 days in the prior quarter. And that's the difference of about $800,000. So I pointed out that net interest income was out $2.5 million, and we've identified $2.3 million of it. Non-interest income was $6.6 million in the current quarter, or $700,000 higher than the linked quarter. primarily due to SBA gains. The SBA business has been, the volume's increasing. I'll talk about it a little bit more in a few minutes. And on the non-interest expense side, for the third quarter, unlike the first and the second, we booked a million three of incentive comp, cash incentive comp, which we drew up at this time. So that was something in the third quarter that was not in the link quarter, offset to deposit by a few other items. I also wanted to take a look at the tax expense of which we had some charges this quarter that were not recurring. Our tax rate went to 36.7% compared to 33% in the prior quarter and probably year to date through December 31. There were a few items in there that are not recurring items. We booked $400,000 of expense due to the change in the Massachusetts tax law. We discussed this in previous calls, but once that's fully enacted, the mass tax, those that affect July 1, our mass tax liability is going to go down. But in the meantime, this number gets adjusted. The other is, you know, we are in, we file tax returns in 35 states. We trued up the state tax liability later in the year, in this quarter, for it cost another $300,000. And finally, there was, because the incentive comp included some 162M and other items, there was another $250,000 for that. That's a lot of numbers that I put out, so let me just put a headline on that. The income was down compared to the late quarter, but there's three or four reasons that none of which go to the quality of our core business. There are items that to a large extent just occurred in the third quarter for the reasons that I described. I do want to make a comment on our SBA business. You may recall those of you that have heard these calls for a while, that when we started, we said we're going to build this with Nuiti. We don't know whether there'll be customers that will be interested in this. And so we're not setting expectations at all was our intention. And then it started to increase significantly. If we take a look at slide 14 in the deck, which I am getting right now. Slide 14, this is a slide that shows the growth in various components of our SBA business going back one year. A year ago, Q3 24, we originated for the quarter 330 loans, and the quarter that just ended, we originated 1,069 loans. We are one of the highest, if not the highest, SBA lenders by units. I'm not saying by dollars, but 1,069, I believe, makes us number one. If it's not number one, I want to overstate here, it's really in the top few. And our volume at 121 million is also one of the leaders, not the number one, but I want to say within the top 10 or so. And the volume in dollars went from $29 million to $121 million. And the loans that we sold, you can see, went from in dollars $18.9 million to $73.6 million. So we have seen very, very substantial growth in that activity. In terms of our provision, A significant part of the $2.9 million was attributable to the SBA, where we increased the allowance by 40 basis points compared to the link quarter. It was previously about 320. Yeah, 3.2%. Now it's about 3.6%. provided some more cushion in there. And for those reasons, we think even though the dollars are less in terms of earnings, it was a very, very strong quarter that we will continue to build on. And with that, Pat has some great things to say about our loan book.

Thanks, Rick. This was a very good quarter for lending with solid purchase and origination volume and another record for our SBA vertical. where, as Rick pointed out, we closed just over 121 million of loans, up from 100 million in the link quarter. The SBA has recently revised their regulations returning to those in place prior to 2023. These changes include a cap for small balance loans of 350 rather than 500,000, increasing minimum credit scores, and adding new requirements for collateral and loan documentation. We view most of these changes as positive from a credit perspective, but recognize that they will require some adjustment on our annuity's technology and processes. This could mean a bit of time for us to adjust, but we feel very strongly about the growth looking forward. We remain very positive about this line of business, both in the existing loan program and with potential new small business loan products. For purchase loans, We bought 52 loans in three transactions with growth balances of $79 million and a purchase price of $75 million, or $0.94, excuse me. The weighted average LTV on these loans was around 56% at our price and were mostly small balance with a variety of collateral types and located along the East Coast. Beyond these purchases, we saw several opportunities that ultimately did not trade and a few others that did, but at very thin yields and the buyers moving them into securitizations. We're hopeful that the current pause in the securitization markets, continued M&A activity and liquidity among some banks will create opportunities for us over the next few months. But as we always say, this is a lumpy business and you never know. In our origination business, we closed $218 million for the quarter. These included 24 loans with an average balance of $9 million, secured with a variety of collateral types, LTVs just over 50%, and an average interest rate of $8.25. Like last quarter, most of these loans were in our lender finance product, which continues to show strong demand from non-bank lenders. Looking forward, we have a full pipeline. We are seeing some fear and cautious optimism in the real estate markets. Some investors on the sidelines and others viewing real estate as a good inflation hedge. We don't have any more insight than others about where the real estate or lending markets will be over the next few months or how they will impact specific markets or collateral types. But we're patient investors and confident in our ability to source good loans, assess risk, and stick to real estate with low LTVs. Also, while we don't celebrate the current market uncertainty, we're aware that opportunities often present themselves in such times, and we're prepared to take advantage of them in the event they do.