Northeast Bank (NBN) Earnings Call Transcript & Summary

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 reference 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. [Operator Instructions] 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 -- 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 linked quarter. I'd 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 linked quarter, which is December 31, '24. I'll refer to it as the linked quarter sometimes. We had ROE of 16.47%, ROA of 1.86% and our tangible book value grew to a shade under $55 at $54.84. It 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 linked quarter. And I want to just point out some things that caused that to happen, which -- 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 linked quarter. Now these are pretax numbers I'm talking about now. And there are really 2 reasons for it. One, we had less accelerated income from loan payoffs on our purchased loan book. That's lumpy. That number could be in any couple of quarters go up and go -- it's go up or go up more or maybe not as much. But 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 a difference of about $800,000. So I pointed out that net interest income was down $2.5 million, and we've identified $2.3 million of it. Noninterest 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 is increasing. I'll talk about it a little bit more in a few minutes. And on the noninterest expense side, for the third quarter, unlike the first and the second, we booked $1.3 million of incentive comp, cash incentive comp, which we true up at this time. So that was something in the third quarter that was not in the linked quarter, offset by -- to the positive by a few other items. I also want 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 law goes in effect July 1, our mass tax liability is going to go down. But in the meantime, this number gets adjusted. The other is we are in -- we filed tax returns in 35 states. And we trued up the state tax liability later in the year in this quarter for a cost another $300,000. And finally, there was because the incentive comp included some [ $162 million ] 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 linked quarter, but there's 3 or 4 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 been -- have heard these calls for a while that when we started, we said we're going to build this with annuity. 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, I'm getting right now. Slide 14. This is a slide that shows the growth in various components of our SBA business going back 1 year. A year ago, Q3 '24, we originated for the quarter 330 loans, in 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 #1. If it's not #1, I don't want to overstate here, it's certainly in the top few. And our volume at $121 million is also one of the leaders, not the #1, 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, we -- 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 linked quarter. It was previously about [ 3.20% ] -- 3.2%. Now it's about 3.6%. So we 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 linked 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 $350,000 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 annuities 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 3 transactions with gross balances of $79 million and the purchase price of $75 million or $0.94. 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 buyer is 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 nonbank 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. Rick?

Pat, thank you. That was great. Now we'd like to take any questions that you might have.

[Operator Instructions] Our first question will come from the line of Damon DelMonte from KBW.

So first question I had was with regards to the loan yields that we saw this quarter. It looks like the yield on the SBA portfolio was down pretty substantially from last quarter and as well as like on the national originated and purchased -- the national originated loans. Just wondering if you could talk a little bit about what you're seeing, particularly on the SBA side and kind of what the outlook might look like for that and kind of how that would figure into your margin going forward?

Well, all of our SBA loans are priced currently at prime 2.75%. We're going to start taking a look at -- we were allowed to charge higher rates on some of the smaller loans, and we're going to take a look at doing some risk-based pricing on that. So that -- maybe we can -- Damon, which are the numbers exactly that you're talking about so we can be responsive to the rate that you're describing.

I think the yield on the SBA portfolio was like 9.93% this quarter versus 11.6% last quarter.

Also in the group was not introduced by the operator is our Director of Accounting, Rebecca Rand, who will answer that question for you, Damon, thank you.

Yes. So as Rick mentioned, these loans are tied to prime, and we saw rate cuts in September, November and December, totaling 100 basis points. and these loans reset quarterly. So a lot of the impact of the rate cuts was not seen in Q2 from -- and we're seeing that more in Q3.

Got it. Okay. That's helpful. And then as far as like expenses go, was this quarter kind of a catch-up on the comp accruals? And should we expect a similar level north of $20 million kind of going forward here? Or do you think that there's kind of a onetime catch-up and it will kind of go back to what we saw for the first couple of quarters of your fiscal year?

Well, we had -- the comp is half of a catch-up. We -- in the third -- because this is all now in the incentive, the basic comp theory of the bank is we don't pay bonuses once the bank does well. And we need to see how the bank does to figure out kind of what the bonus will be, the comp committee does. And so that $1.3 million was a catch-up in the third quarter, and we would expect there -- which estimates roughly where we think 75% of the incentive comp will be, and then there'll be another one in the fourth quarter coming up. So those occur as they were in the past, Damon, there's a catch-up in the third and the fourth -- our third and fourth fiscal quarter. I wouldn't expect -- you're probably not going to see that in the -- going into our next fiscal year.

Got it. Okay. And then I guess just lastly on loan growth and kind of the outlook there. It sounds like pipelines remain strong. And obviously, bulk purchases are kind of a wildcard. I can't really predict those. But as far as what your pipelines are showing, do you feel like you have good momentum going into the next quarter here and then through the summer months as well?

On the -- first, on the purchase side, there are some meaningful transactions out in the world. And so it's -- you heard the forward-looking statement. I'm not predicting anything on the large transaction, but that's certainly within the realm of possibility. And then on the origination side, I would say our pipeline is full. We will have to see, as Pat mentioned on this point, what all of the uncertainty in the economy does to the origination volume. We'll just have to see. So far, we've got a big pipeline, but there are so many unintended consequences as a result of these tariff and other changes going on, we'll just have to see. We're only interested in, of course, this sounds -- you probably hear this from every bank, but making good loans. We're not going to -- we won't feel under any pressure, 0, just to put loans on the balance sheet for the sake of volume.

Great. And the discount, I think you had said you paid $0.94 or 94% of par on these purchases this quarter, which is kind of up a little bit from what we've seen. Is that just a shift in the market dynamics and kind of what the level of opportunities are presenting themselves at? Or is there something unique to this quarter?

No. The discount, you can't always compare. It's not apples-to-apples. The discount, which very often is now is interest rate related. If you have a higher coupon, then you're going to have a lower discount and vice versa. So I wouldn't read anything into that at all.

[Operator Instructions] Our next question will come from the line of Mark Fitzgibbon from Piper Sandler.

Just a real quick clarification. I think I may have missed this. Just to be clear, the 43 basis point drop in loan yields on a sequential quarter basis was primarily due to less accretion income, which you think will sort of flow back in, maybe normalize a bit in the next quarter. Is that fair?

Well, I want to be explicit about it. Rebecca, can you help me with this on the differences?

Yes. So yes, we had about $1.5 million lower of accelerated income compared to the linked quarter. And as Rick mentioned, that is lumpy and difficult to predict based on payoffs. So that's the primary driver. And then the other was the 2 fewer days in the quarter, which was about $800,000 or so of the difference.

And we had some lower rates.

And some lower rates.

It wasn't the bigger driver. The biggest drivers are the ones that Rebecca just mentioned, but there was also some rate reduction also.

Okay. So when you're thinking about your margin going forward, you think it sort of comes back to what in the next quarter, 480-ish? Would that be a good guesstimate?

I think that's probably a good number within -- obviously, give or take some. Yes, I would think so.

Okay. And then next, I was curious if you could share with us what you feel like you have in terms of balance sheet capacity for loan pool purchases.

We know that. It's probably in the highlights section.

$870 million.

Yes, $870 million through March '25. I'd point out that -- I was going to say, Mark, you know this, of course, but for some of the other listeners, that number gets bigger as we earn more money. And it could also get bigger if we wound up selling stock under the ATM as well. So we feel like we're in pretty good shape for opportunities.

Okay. Great. And Pat, I heard your comments about the SBA business. And now that it's humming on all 8 cylinders, I know you'll have maybe a little short-term decline in origination volume because of the changes at the SBA. But longer term, how should we think about volume ramping up in this business? Is this the kind of thing that volumes could double a couple of quarters out or triple? Or can you help us think about sort of the -- how much of that volume you think you can do?

Well, the market demand is massive. I don't think there's going to be any impact on -- or much impact on the top of the funnel. It's just with more documentation and more collateral requirements. It's going to take longer to close some of these loans than it's going to be. So there could be some period of time before we ramp back up to where we're currently at. But -- and there are other SBA products that we're looking into. So I think long term, we're very, very positive and bullish about this program. And I just -- the reason I point that out is we had $82 million in 2 quarters ago and $100 million, $120 million. And I just want to point it out, that would have been a trajectory we would have been comfortable with. But just wanted to point out that because of these rule changes, there could be a slight lag in that growth.

It'd be reluctant to put out a number, Mark, because other than saying what Pat is, the market is enormous. And we have -- with annuity, we have some advantages, big head start on great technology to process. There haven't been a lot of banks that want to do these small balance loans, a lot of -- is to dot and Ts to cross to do it. And if you're not doing it in real volume, it's very hard to make money doing a $25,000 7(a) SBA loan. But in volume, of course, you can. So I think it's -- without putting any number on it, it's possible that this could grow very significantly -- and I would point out, but if it doesn't, we're now kind of on a run rate, making $25 million of fee income from this, which is pretty good from where we started.

And we continue to refine the technology. So every quarter, some of this growth is not just market demand, but our increasing refinement of our processes and technology to be more efficient.

Okay. And then my last question is, do you have an internal limit on brokered deposits? I think it's 50% now of total deposits. Is there a limit you go to?

50% of our assets is our limit.

Before you go, Mark, just one point on that related to that. One of the things we've been focusing on is having a lot more on and off-balance sheet liquidity. So kind of in very round numbers, we -- very round. We have about $400 million of cash and very liquid agency securities. And on top of that, we have about -- how much capacity, Richard, with the -- or anyone with the -- with the Federal Home Loan Bank, we have available capacity of $800 million -- almost $900 million and with the Federal Reserve around $300 million, somewhere about $1.6 billion of on-balance sheet and off-balance sheet liquidity.

So -- and maybe just to add to that, Mark, we've spoken on a number of the other calls about the use of broker CDs. And we've been -- as you would know from previous calls, we've been on a path of reducing our FHLB so as to increase the capacity there and bring in broker CDs because, of course, we like the fact that we can term it out and it gives us predictable financing. So we're quite conscious of not only staying within the limits on the broker fees, which we have a fair amount of still, but we're also trying to balance that as best as we can very deliberately to keep spare capacity and to have available capacity to add to our broker fees if and when we need to. So we're fairly comfortable from those -- from that perspective.

And I'm not showing any further questions at this time. Now I'll turn the call over to Rick Wayne for any closing remarks.

Thank you for dialing in. Thank you, Damon and Mark, for some excellent questions. And we look forward to talking to you in July to discuss our quarter and year-end numbers and other things of interest. And with all of that, I would say goodbye to you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.