Northeast Bank

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 11 again. 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 are 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, in 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 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 number one 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. And I'm going to just highlight a few things about the quarter and perhaps a few other items about the year because our fiscal year ended June 30th. 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 Triple P loans, this was a record, $25.2 million, excluding the kind of one time or two time it may have been during the year sale of Triple P loans, $25.2 million was a record. and something we're very, very proud of. If I take a look at the loan activity for the quarter, all originations and purchases total $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 on purchases of 44.4 million of UPV 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 margin was a very strong 5.1%. And the return on our purchase 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 $3.00. Return on equity was a strong 20.73%. Return on assets was a very strong 2.38%. And tangible book value per share at the end of June was $57.50. and 98 cents 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 two 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 non-interest expense. And I would want to point out that total revenue includes net interest income before provision and non-interest income. So you can see in the group of bars at the far right in the quarter labeled Q4 FY25, the revenue for the quarter was $62.7 million. And again, if we look back at preceding quarters and part of the gain from the sale of PPP loans, that was also a record revenue. And non-interest 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 FY24. 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. Why should it be more specific? total revenue, as I've described, minus non-interest expenses, $41.2 million, and again, excluding the quarter in which we had triple P, 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 chart on the right, you can see that our average loan balance for the June 30 quarter was $3,767,000. of comparing favorably with the link quarter at $3,650,000. If we 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, 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 suffered many dollars in credit losses in this portfolio. And on slide 25, We take a look at net income for the trailing five quarters, and you can see that at $25.2 million for the June 30 quarter, we are substantially ahead of the preceding four trailing five quarters. And I think with that, I will ask Pat to talk to you about our real estate, our portfolio, our SBA business. Pat?

Thanks, Rick. It was a strong finish to the year. The loan portfolio grew by 36% overall, with purchase loan growth at 40%, originated growth at 27%, and SBA growth at over 200%. For purchases this quarter, we bought 14 loans and four transactions. which brought purchase 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 this space, more capital, cheaper leverage, and with larger pools being the most competitive. Having said that, the purchase loan market is large, and we will continue to look at every opportunity, be active, but discipline 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 non-bank lenders who are being squeezed on yield, low in 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 1st, so the impact from those changes on volume this quarter is somewhat muted. Recall that we anticipate 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 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 two buckets. First, $214 million, where there is some exposure, but where we believe 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. 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. 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. If there are any questions, we would be happy to entertain them.

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. And our first question comes from the line of Mark Fitzgibbon with Piper Sandler.

Hey, guys. Good afternoon.

Hi, Mark. Hello, Mike and Mark.

Just first a couple of clarification questions. Pat, regarding your comments on the SBA, you know, 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, you know, 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 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 decreased the cap from $500,000 to $350,000, so that excludes a lot of borrowers right there. They also increased the 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 gonna 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 then a longer processing period, and it'll 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're The same issue is affecting every other lender. 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-force the pool of loans that you're looking at today for loan purchases. How does that maybe stack up versus this time last quarter?

Pretty good. Go ahead, Rick. There is a lot of activity out there, and we – Well, 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 slower. 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 and 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 You know, for a lot of years, our purchase volume was in the range of $150 to $2 million, and in fact, our origination business was greater. What, no guarantee on this, and I won't bore you by reading the forward-looking statement, but we're expecting kind of the base business that I've just described will continue, and if we're able to, you know, buy a large transaction, sometimes referred to as a whale, then it'll look more like it did in the preceding years where in September of 24 we bought $700 million and December of 22 we bought a billion. And so we will wait and see. But that's the only 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 number 11. And you can see there was a For originated loans, there was a total of $4,094,000 of transactional income, which is pretty high for the originated book. It stemmed from a loan we had 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, 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 the right way to think about it is going to zero because we always have some. That just happened to be a loan that had been around for quite a while. And a 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 those are loans that are either classified or may sort of migrate to non-accrual or be potentially problematic or not necessarily?

Not necessarily. There are loans that, you know, given they're in They're in northern Manhattan where rent increases have not kept up with expense increases. And all but $2.5 million of those are performing. And most of the $2.5 million is performing as a loan where there's really not a cash flow issue. It's the borrowers fighting with each other. But, 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 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 no concern at all.

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?

No, that'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, moving to one factor. And in California, the movement to unfactor increased our tax rates. Those two were relatively offset. We think as it stands, 33% to 34% seems expected.

Great. Thank you very much.

Thank you, Mark. Thanks, Mark. Thank you. And as a reminder, to ask a question, please press star 11 on your telephone. Our next question comes from the line of Matt Rank with KBW. Hey, guys.

Matt Rank filling in for Damon Del Monte. I 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? Or will what you have to do on the back end with the new processes kind of outweigh any reduction in volumes?

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 would 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 to follow up, I mean, you guys are pretty efficiently run bank. I'm 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, you know, additional efficiency gains over the coming years.

You know, 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 and it'll 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 and chief or chief of innovation so that we're going to be able to take a look at workflow AI 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 fall. Not necessarily the next one. But we'll have disclosure around that.

Okay, great. That's all for me. Thanks, guys.

Thank you very much. Thanks, Matt. 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.

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. Look forward to talking again at our next meeting, which would be 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 weekend. A nice weekend is when it approaches. Thank you very much. Operator, we are all set.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.