Northeast Bancorp Q4 2025 Earnings Call Transcript

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July 29, 2025

Key Takeaways

  • Positive Sentiment: Fourth quarter net income hit a record $25.2 million (excluding a one-time PPP loan sale), driving a 20.7% ROE and 2.38% ROA.
  • Positive Sentiment: The bank originated and purchased $362.6 million of loans in Q4 ($2.1 billion for the fiscal year), with a weighted average loan yield near 8% and SBA originations of $107.3 million.
  • Negative Sentiment: New SBA eligibility rules effective June 1 are expected to cause up to a 50% volume decline in SBA lending next quarter, despite management’s confidence in long-term opportunity.
  • Negative Sentiment: Allowance for credit losses rose to 1.28% of gross loans (from 0.29% two years ago), and $44 million of NYC multifamily loans could face cash-flow pressure under potential rent freezes.
  • Neutral Sentiment: The bank is investing in technology and innovation—hiring a chief of innovation and planning increased IT spending—to drive long-term efficiency improvements.
AI Generated. May Contain Errors.
Earnings Conference Call
Northeast Bancorp Q4 2025
00:00 / 00:00

There are 7 speakers on the call.

Speaker 3

Hello, and welcome to the Northeast Bank Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. 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 *11 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press *11 again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce CEO Rick Wayne.

Speaker 6

Thank you. Good afternoon to all of you that are listening to this call. With me are Patrick 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 of that quite interesting. 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.

Speaker 6

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 30, 2023. It's a big quarter and also a year-end for the quarter. First, net income was $25.2 million. 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 one-time or two-time it may have been during the year, sale of PPP 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 totaled $362.6 million for the quarter and $2.1 billion for the fiscal year.

Speaker 6

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? The answer to that is that some of the sales in Q4 related to loans that were originated in the preceding quarter. The gain on the sale of those loans sold was $8.2 million.

Speaker 6

All in, counting everything, our net interest 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. Our loan capacity, something we pay a lot of attention to, at the end of June was $1.1 billion. 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%. Tangible 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.

Speaker 6

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, 2023, when the allowance was 0.29%. On page 20 is a slide that shows our revenue for the quarter, our non-interest expense. I would want to point out that total revenue includes net interest income before provision and non-interest income. 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. If we look back at preceding quarters and carve out the gain from the sale of PPP loans, that was also a record revenue.

Speaker 6

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. I should be more specific. Total revenue, as I've described, minus non-interest expense was $41.2 million. 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.

Speaker 6

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 billion, comparing favorably with the link quarter at $3.650 billion. 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 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, or historically, have not suffered many dollars in credit losses in this portfolio. 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 or trailing five quarters.

Speaker 6

I think with that, I will ask Pat to talk to you about our real estate, our portfolio, or SBA business. Pat?

Speaker 4

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 in four transactions. This 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, 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 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 LTV is 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, loan, and capital entering the market, and are 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 link quarter. On last quarter's call, we discussed that the SBA had tightened their eligibility requirements effective June 1st. 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 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. 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.

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 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. 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.

Speaker 6

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

Speaker 3

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. Our first question comes from the line of Mark Fitzgibbon with Piper Sandler.

Speaker 3

Hey, guys. Good afternoon.

Speaker 4

Mark.

Speaker 2

Oh, my name is Mark.

Speaker 2

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 till next year where you see SBA volumes come back and you sort of adjust to the new process?

Speaker 4

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. There are 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. They've added, and there's been some deterioration of credit generally in certain sectors due to the tariffs and other economic factors. That is 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 4

Keep in mind that this market is enormous, and 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. 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, and that's just going to take longer. You have 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. We don't want to overstate or understate what we'll be able to do. This is an enormous market, and the same issue is affecting every other lender. We're pretty confident that we'll be able to navigate through it.

Speaker 4

Okay. Great. 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?

Speaker 4

Pretty good. Go ahead, Rick.

Speaker 6

There is a lot of activity out there. 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. We are optimistic about it. Maybe a little bit before your time, Mark, when Alex was at Piper Sandler. For a lot of years, our purchase volume was in the range of $150 million to $200 million.

Speaker 6

In fact, our origination business was greater. No guarantee on this, and I won't bore you by reading the forward-looking statement. We're expecting kind of the base business that I've just described will continue. If we're able to 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 2024, we bought $700 million. In December 2022, we bought $1 billion. We will wait and see. That's a long answer to your question, which is there's a lot of volume, a lot of activity out there now.

Speaker 6

Fair enough. 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?

Speaker 6

I can tell you that. I'm now looking at slide number 11. You can see there was, for originated loans, 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. We got paid in full on that loan, which generated a lot of interest income, which we're categorizing as transactional.

Speaker 6

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 6

That was worth what I just described, was worth 1.4% on the return. If that came out, it would be 8.55%. I don't think it's the right way to think about it as going to zero because we always have some. That just happened to be a loan that had been around for quite a while. A shout-out to our brilliant Asset Manager, Chris Hickey, resolved that credit really thoughtfully and creatively.

Speaker 6

Okay. Great. 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?

Speaker 4

Not necessarily. There are loans that, you know, given they're in Northern Manhattan, where rent increases have not kept up with expense increases. All the $2.5 million of those are performing. Most of the $2.5 million that's performing is a loan where it's really not a cash flow issue. It's the borrowers fighting with each other. 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 more than an extended period of time, these are properties that are vulnerable to compression on cash flow. We're going to keep an eye on it. Right now, there's nothing, no concern at all.

Speaker 4

Okay. 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 5

That's a good question. There have been a few moving parts on the effective tax rate, mainly about state taxes. There have been some changes in both California as well as Massachusetts. Massachusetts' tax rate for us was favorable, moving to one factor. In California, the movement to one factor increased our tax rate. Those two were relatively offset. We think, as it stands, 33% to 34% seems expected.

Speaker 5

Great. Thank you very much.

Speaker 6

Thank you, Mark.

Speaker 5

Thanks, Mark.

Speaker 3

Thank you. As a reminder, to ask a question, please press *11 on your telephone. Our next question comes from the line of Matt Renk with Keefe, Bruyette & Woods.

Operator

Hey, guys. Matt Renk filling in for Damon DelMonte. 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 volume?

Speaker 5

I'm happy to take that. A fairly significant amount of the cost would be variable. In other words, if the income was to reduce, so would the cost. 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.

Operator

Okay. Great. Just to follow up, you guys are a 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 additional efficiency gains over the coming years.

Speaker 6

Yeah, it's a timely question. We're going to do that in the current year in a fairly major way.

Operator

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 6

I think our expenses will increase. We just have made a very significant hire in the role of Chief of Innovation so that 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. 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.

Operator

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

Speaker 6

Thank you very much.

Speaker 5

Thanks, Matt.

Speaker 3

Thank you. I'm showing no further questions. With that, I'll hand the call back over to CEO Rick Wayne for any closing remarks.

Speaker 6

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

Speaker 3

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

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