Northeast Bank

Welcome to the Northeast Bank first quarter fiscal year 2026 earnings call. My name is James 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, Santino Del Molino, Corporate Controller, and Pat Dignan, Chief Operating Officer and Chief Credit 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. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star one one. To remove yourself from the queue, press star one one 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, everyone. As I go through this presentation, as we go through it, I want to just outline what the agenda will be for this morning. I'm going to first go over some highlights for the quarter and dig a little bit deeper in some of the material that we had put out yesterday. And after that, Pat will discuss the lending activity, and Santino will go over the financial results for the quarter. Finally, I want to make a few comments on Richard Cohen, is moving on after tomorrow, after almost two great years at the bank. So first, as to the highlights, we considered the quarter very strong. We had net income of $22.5 million, a NIM of 4.59%, return on equity of 17.64%, a return on assets of 2.13%, and diluted earnings per share of $2.67. And finally, within a whisker, if that's a technical term, I don't think it is actually, of $60 of tangible book value at 59.98 cents. I want to comment first on loan activity purchases were strong we bought loans with upb of 152.7 million dollars at a invested amount of 144.6 million now as you know in our past we have had two very large quarters where we purchased large transactions the first in the second quarter of our fiscal year 23 and the second one in the first quarter of fiscal year 25. If you exclude those very large purchases, this would have been our second largest purchase quarter going back three years and probably longer. I just looked at the material for three years for this. One of the things that we are frequently asked in investor calls and otherwise is what does the purchase pipeline look like? And with all of the caveats in the forward-looking statements specifically, we may buy a lot or we may not buy any, it's transactional. I would say that the purchase pipeline is as large now as we have seen in quite some time. A lot of it triggered by M&A activity and some balance sheet repositioning by other holders of commercial real estate loans. We have both the capital and the human resources to do the appropriate diligence on the amount that's out there. And we will look at virtually every opportunity that is within our parameters. On originations, we did $134 million with a little rounding this quarter. I would point out that there is some seasonality to the origination business. We went back and looked four years ago, and we only had one first quarter in our fiscal year, which was in Q1 of 23, that had a higher amount of originations, 182 million. That meant, obviously, that for out of the last four years, three of the quarters, we did not do as much origination volume as we have done this quarter. And our origination pipeline is also quite robust. I now want to comment briefly on the SBA activity. This quarter, we funded $42 million and we sold $53 million of loans that, of course, include some that were originated prior to this quarter. As we discussed in the July call, there were changes made to the SBA rules which suggested and we indicated that we would have lower volumes in some number of quarters to come. Because we had less closings, we had less sales, and because we had less sales, we had less gains. The gain in the link quarter was $8.2 million compared to $4.1 million for the current quarter, and that difference of $4.1 million amounted to 34 cents diluted EPS. I think it's very helpful to understand that. We expect a few things to happen. Of course, one, at some point the government will reopen. Pat may touch on the impact of that for us, and we now have Absent the government closing, we have been seeing a ramping up of the volume that was temporarily diminished for the reasons that I described. Finally, a few comments on asset quality, which Santino will expand on relative to our balance sheet size. Overall, our loan book was pretty flat. our purchase loan book increased by 31 million, and our originated loan book decreased by 39 million. Because for purchases, the allowance comes out of the purchase price typically, rather than booking a provision, and because our originated loan book decreased, as I mentioned before, the amount of the allowance also decreased. And finally, I want to make a point on the timing of transactions. As I said, our loan book was mostly flat, but our average loan balances were down 92 million compared to the link quarter because much of the activity around purchasing and some originations occurred late in September. So that had an impact on interest income in the quarter. But for the reasons I described, it bodes well for the future because our average loan balances were higher. And with that, I will now ask Pat to talk about our loan activity. Pat?

That's right. TAB, Mark McIntyre, We had a solid loan activity this quarter, especially for the summer months as required out the real estate and financing markets are very active, and while this is fueling more loan payoffs than we'd like it's also creating a lot of opportunity. TAB, Mark McIntyre, First, another note on the SBA business on the 42 million clothes is comprised of 286 loans at an average rate of 11.7%. Mike SanClements, Although we saw increasing volume in each of the three months of the quarter and felt like we were making real progress toward our volume targets the government shutdown. Mike SanClements, Essentially halted any new origination since October 1 we continue processing loans in the hopes of funding soon after the government is reopening so we won't be wasting any time with that, but obviously it's out of our control. Mike SanClements, Meanwhile we're very optimistic about our new insured small business loan product with nudity. which is off to a great start since launching on October 1st, with about $10 million closed since then. In our purchase business, we bought 522 loans in seven transactions, with $153 million of principal balance and a purchase price of $145 million, or just under $0.95. These were mostly smaller balance loans with no real concentrations of note. Five of the seven transactions were from loan funds, one from a small bank, and one from a national insurance company. As Rick pointed out, over the last few weeks, we've seen a significant uptick in purchased opportunities, mostly from M&A activity, which is likely to continue for some time. This is a lumpy business, and no guarantees we'll win it all, or any of it, but the sheer volume of new opportunities is very encouraging for the next several quarters. In our origination business, we closed $134 million, which included 22 loans with an average balance of $6 million, LTVs just over 50%, and an average interest rate of just under 8%. While lender-financed product continues to dominate the origination business, direct loan opportunities have picked up significantly. The belief from borrowers that interest rates will come down over the next year is fueling new transactions and at the same time creating an aversion to traditional debt which typically includes significant prepayment protection. Our pipeline is as full as it's ever been, and we expect that we can remain disciplined in credit and still show strong growth going forward. Back to you, Rick.

Santino.

Thanks, Rick. As Rick mentioned, this is another good quarter for the bank. We had earnings of $22.5 million or $2.67 per diluted share. ROA was 2.1% and ROE 17.6%. Total assets ended the quarter at $4.17 billion, which is down slightly from $4.28 billion at June 30th. Loans were flat as purchases of $145 million and originations of $134 million were offset largely by paydowns and payoffs. Much of these purchases and originations occurred at the tail end of the quarter, so you'll see our average balances are down quarter over quarter, which is partially impacting our lower NII for the quarter. The excess cash we carried on the balance sheet at June 30th was put to use during the quarter to pay down our broker TDs, so you'll see some shrinkage in the deposit portfolio as well. Capital remains strong with Tier 1 leverage at 12.21% tangible book value came in just under $60 a share. Switching focus to the P&L, NIM was strong this quarter, coming in at 4.6%, resulting in pre-provision net interest income of $48.2 million, down from NIM of 5.1% in the prior quarter and pre-provision net interest income of $59.4 million. Decrease here is largely a result of heightened transactional income that we saw in Q4 fiscal year 25. Additionally impacting that is the higher average cash balances we carried during the quarter, which, while accretive to net interest income, did compress MIM a little bit. Provision for loan losses was a credit this quarter of $435,000, as Rick mentioned, due to a few things, one being less loans put on the balance sheet that required a provision, as well as a slight decrease in the allowance coverage ratio. This is largely a factor of our continued strong asset quality, particularly in the originated loan business. From an SBA front, we had gains on sales of 4.2 million on sales of 58 million, compared to 8.2 million in gains on sales of 108 million last quarter. As Rick and Pat previously mentioned, this is largely due to rule changes at the SBA back in May, which we previously disclosed the projected impact on this, on earnings. On the expense side, we continue to be disciplined while strategically investing in our people and in technologies that are going to set up the bank for long-term success. Rick, back to you.

Thank you, Santino. And now we would welcome any questions that you might have.

Thank you. We will now begin the question and answer session. If you have a question, please press star one one on your touch tone phone. If you wish to be removed from the queue, please press star one one again. If you are using a speakerphone, you may need to pick up the headset first before pressing the numbers. Once again, if you have a question, please press star one one on your touch tone phone. We will now begin the queue. Our first question comes from Mark Fitzgibbon from Piper Chandler. Mark, the line is now open.

Hey, guys. Good morning. Morning, Mark. Rick, I wondered if you could share with us, I noticed in the press release you said there was a change in the cost structure arrangement with annuity, I assume over the SBA stuff. Could you share with us how that structure changed?

Yeah, so we put out an 8K on this back in last October. So beginning October 1st of last year, the cost structure changed where instead of a split in the gain on sale annuity, they're charging us a flat fee on a per loan submitted basis. So that structure has been consistent for the past four quarters now. It's really just comparing to the quarter on September 30th, 2024. It was different.

Got it. Thank you. And then just how do you think we should be thinking about gain on SBA loans for the fourth quarter? I mean, assuming the government opens up maybe halfway through the quarter, can you kind of get back on track and get to a volume level that looks something akin to what you had in the third quarter?

A little bit hard to say that. Mark, because there's a bunch of variables. I could say that starting in that we were seeing, and Pat mentioned this, we were seeing a ramp up in SBA activity each month in the past quarter, which is what we expected to happen as both from a technology perspective and retraining You know those annuity that are doing the first cut of underwriting and then our team as well. And I think if absent the government shutting down any of those things that happened, we probably would have been reasonably comfortable saying that by the end of this calendar year we would have been up to where we were. But the reason there's less certainty about saying it now is what will the ramp up one? How long will the government be shut down? But now it's essentially, other than doing as much as we can do, there are critical things that we cannot do while the government's shut down. We can't get an SBA number. And we can't get tax transcripts. And, you know, we just can't get the loan to close. And how long that will, that ramp up will take, it's hard to say. I would say this reasonably comfortably. that once the government is reopened, you know, over some number of months, let's say six months, this is really an estimate because I don't know this for sure. We would expect we would get back. There's no reason to believe there won't continually continue to be large demand for that product. But there are a bunch of variables that would would would impact that.

OK, fair enough. And then it looked like there was a decent link quarter increase in professional fees. Anything unique in there?

A couple of things impacting that one is just some temporary employees for folks that we've had out on leave during the period, so that that aspect of it shouldn't continue on a go forward basis. We've also seen we had some heightened legal fees in relation to the new growth term loan product, the insured loan product, as well as just general increases in professional fees period over period.

You know, I want to just use that as a jumping off point if I can, Mark and others on the call, because I want to. I want to comment about Richard before you know the I don't want anyone to leave the Q&A before I've had a chance to. Say this. And the triggering thought to that was what Santino just said, because we had hired, you know, a highly experienced. Auditor to come in and help us as we got through getting our financials. That's why that was. More expensive, but as everyone knows, a while ago we announced that. Richard would be leaving the bank at the end of this month. This will be the last time you'll hear him. In this room, I suspect he may, because he's still a stockholder, may call up and be a really aggressive questioner. But we'll have to see about that. But I want to make a few points clear on this. One, Richard left on his own. I tried to talk him out of it. Almost every day, but unsuccessfully Richard came to came to us. He can move this family boldly from South Africa. He was formerly a partner at KPMG. You know we came here without a job and not knowing much other than visiting from time to time. The states not knowing exactly what he would do. We were lucky that we were able. First we hired him as a consultant and then in this role. He's really done an extraordinary job for us. He grew a lot in the job, and this sounds like cliche, because this is what people always say when someone leaves. In this case, it happens to be very true. You know, he's really liked by everybody. He's respected by everybody. He added a lot of value to us, and he will be missed. I just want to add one other thing, because two things can be true, as I suggested to the board yesterday. Richard can be all of those things, but we're lucky we have a deep enough bench that Santino, who was our controller, could step right up. And Rebecca Jones, now Rand, married name, sorry, Rebecca, who was our director of accounting, will be here. And we've hired a new controller. So we still continue to have a very, very, and lots of other people in the accounting and finance roles. We have a very, very deep bench. But I just wanted to be clear about Richard that he's going out to start some businesses figuring out. And I suspect at some point, I would bet that he'll be wildly successful. I say bet, I'm not going to invest in it, but I believe he will be. Richard, do you want to say anything before we... I really do.

Thank you, Rick. I mean, it's been a very difficult decision to leave the bank. I'm immensely privileged to be part of this fantastic organization. I'm equally immensely grateful for the relationships that I have with all of you, the investors, with the board, with the leadership of the bank, with my team, and with the incredible staff here. so thoroughly enjoy the culture. It's an amazing place to work. The bank's solution-oriented, it's focused, it's a warm place to work, and it's a very open environment. Maybe the last thing I'd like to say is a very special thanks to Rick and to Pat and to the board for their faith in me, for the close relationship that I have with them personally, which will continue into the future, and my very best wishes to Tino and to my fantastic team in whom I have immense confidence. I leave you in very, very capable hands, and I intend to stay very close and in contact with the bank over here.

Thank you for that, Richard. We're clapping. You can't hear us. Thank you, Richard. Mark, I apologize for jumping off on that, but I wanted to make sure those things were said and heard. No problem.

Well, thank you. And Richard, congratulations and best of luck in your new role. And Tino, to give you an opportunity to swing for the fences here, can you tell us what the margin is going to look like next quarter?

Almost. Almost. No, we generally don't give guidance on the margin. The real challenge, as you know, is

um with the transactional income it can it can be really lumpy just depending on which loans pay off during during the period you know here's a stat we don't mention often but um we have 207 million dollars of discount on our purchase loan book and you know what happened last for the link quarter you know we had more in primarily because of one big transaction. But and it's hard for us to know when there are going to be. Payoffs and some loans have very significant discount. Most of all, what I described is interest. Discount you know from loans that we bought at a discount because of interest rates, but that's always out there, so it's hard for us to say to predict what our margin will be, because that's the. really the piece of it that is unpredictable and can be significant. Thank you.

Thank you, Mark.

Our next question comes from Damon Del Monte from KBW. Damon, your line is now open.

Hey, good morning, everyone. Thanks for taking my questions. And Richard, good luck with your new endeavors. Thank you. Sure. Just a quick question on the, you know, NDFI lending has become kind of a hot topic in the industry in the last couple months. And, you know, you guys do a lot of similar financing in that regard. Just kind of curious how you're feeling about the quality of the people you're with and the underlying assets and if you're seeing any signs of stress or there's any concern from your seats.

All right.

I assume you're talking about the lender financing you do in general. I mean, the items in the news have been tied to subprime auto lending. But I think just overall, just kind of how do you feel about the health of your lender financing portfolio?

We've heard from a few investors concerned about that recent fraud issues that were in the news. specifically the case where a title policy was doctored to improve the lender's perception of a lien position, resulting in significant credit deterioration when the truth was revealed. And, you know, our approach is and has always been a trust but verify. You know, in the lender finance business, obviously our borrower is the lender, and they are collecting documents from their borrower. And so, you know, I think it's oftentimes that we're getting that documentation secondhand. And so we have developed over time of, you know, there's no way to 100% protect yourself from fraud, but we believe we're doing all we can to prevent this type of issue from happening. We do complete third-party background checks on all borrowers' funds and principles. We do independent verification of lien position and title insurance um we hold all the original loan documents in custody we do daily monitoring of all court and recording activity relating to our borrower the underlying borrower and the underlying collateral in fact it's fairly frequent that we will know that there's been a lien or some judgment on the underlying collateral news usually minor things before our before our borrower does because we monitor it so closely and we have very robust monthly reporting from our borrowers that show all activity, loan payments, and communications with the borrower. So I think the short answer is this is a business that you've just got to stay very, very closely on top of, and I think we do.

In addition to what Pat just said, apart from potential fraud risk, it's not really the same business we're in. I know it's loan on loan, and some people may consider that to be indirect financing, and maybe that's true in some sense. But in another sense, it's totally different. We underwrite every single loan. So, you know, virtually all of our transactions are structured into bankruptcy remote, special purpose entities with carve-out guarantees generally, you know, for any fraud or something, you know, that's specified in the documents. But it's a guidance line underscored, meaning, somebody comes in and they have a line with us and they want to take an advance under that line, we have to approve that advance and we underwrite that loan right next to them. And so it's very different, totally different than, you know, some kind of warehouse line where, you know, a borrower can borrow based on a borrowing-based certificate without the lender, you know, focusing on the actual credit like we do. It's totally different what we do. So to answer you in a word, we're very comfortable with our asset quality, and especially, as you know, from what we include in the material, the low LTVs throughout our whole book.

Right. Okay. That's great color. That's kind of what I was looking to hear. And then I guess just on the loan growth, obviously pipelines for both purchased and originated loans sound like they're pretty healthy and you have some strong optimism to close out this calendar year and going into next year. I'm just wondering if you have any visibility on the payoffs thus far this quarter to kind of help give us some perspective as to what the net growth could be for loans outstanding for the quarter.

I'll just make a general comment. I'm going to ask Tino to fill in if he has the information. He's saying no. This We had, I would say, a larger amount of payoffs than we typically have. And kind of something that is surprising is usually when you have large payoffs in the purchase space, you tend to have more transactional income. But in this quarter, we had larger payoffs, and we didn't have as much transactional income as I would have expected. estimated at the beginning of the quarter. We purchased $145 million. We can just think through this live, and Tina or Rebecca will correct me when I go wrong here. We purchased, invested $145 million, and our loan portfolio on purchase did what? What was the net change in it, Tina or Rebecca?

Purchase is up like 20, I don't know the number right in front of me, but on slide three.

So, $22 million. That would say we had $122 million of pay downs and amortization. That is high for that. And I think that in an interest rate environment that is declining, you know, we would expect payoffs to, increase when somebody didn't have a better offer on the table they wouldn't refinance just for the sport of it but you know historically we've seen in lower interest rate environments um we have seen more payoffs um and so i you know i would kind of i'm not saying it'll be more than 120 million we had this quarter this quarter was particularly high but we had some loans that we were You know, sometimes when you have pay downs on the purchase in particular, it's a good thing because you have loans that, you know, we think are teetering. Teetering may be too strong, but loans we would be happier if they were out of our portfolio. And we made an effort, and it was either last call or the one before, we took a look and we provided detail on where we thought there was risk in the New York multifamily portfolio based on rent stabilization and the possibility of an administration change going forward. And we've made a concerted effort to reduce our exposure in the area of rent stabilized or rent controlled portfolio for that reason. So I think that was kind of a big chunk of why the purchase The payoff around purchase book was a result of that. And just on that topic, as it relates to originated loan, one thing we're seeing is we're seeing borrowers now negotiate much more strongly for getting rid of floors or having a floor that is typically what we like to have is the floor set at the rate when we originate a loan. Robert Marlayson, But borrowers that's not market anymore so we're seeing some lowering of the floor also that sounds very pessimistic in terms of loan growth, but that's not my intention, because we would expect both our originated loan book based on what we know that's in the pipeline. Robert Marlayson, And with the caveat I said about purchase loans earlier you win or you don't win but there's an awful lot out there, we would expect. I got to give another caveat, but I won't. You get the point. That, you know, we would expect a fair amount of volume and opportunity in both of those spaces.

Got it. Okay. That's a good color. Thank you. I guess, I guess just lastly on the tax rate that came in lower this quarter, is that just a function of taxable income or is there something, you know, I know there's like some state law changes. Does that like carry through for the next year?

Yeah, a few things there that are impacting our tax rates this quarter. There were two state law changes that had pretty significant impact. One, Massachusetts, we're now paying very little taxes in the state of Mass because of their apportionment law changes. California also changed their apportionment laws, which offset the decrease in Massachusetts a little bit. We're paying more in California now. And the third piece is in Q1 of the fiscal year is when we have all of our stock vests and grants. So to the extent that the fair value of the vests exceeds what we've booked for book expense on that restricted stock, we get a tax benefit for that. So with where the stock price was at the date of vesting this quarter, we saw a pretty good tax pickup on that front as well. That won't be recurring through the rest of the year. So on a go forward, we're expecting the effective tax rate for the rest of the year to be somewhere in the realm of 31% to 32%.

Great. OK, perfect. That's all that I had. Thank you very much.

Thank you.

Thank you, Damon. We would like to invite you to ask any questions. If you have a question, please press star 1-1 on your touchtone phone. Thank you. Now I will turn the call over to Rick Wayne for closing remarks.

Thank you for those of you on the call. I'm sorry? No. Thank you for those, Damon and Mark, for very thoughtful questions. And again, thank you, Richard, for your Your work, your friendship, your professionalism, so much appreciated. And we will talk to you again at the end of January. Thank you all. With that note, we will say goodbye.

Thank you, ladies and gentlemen. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.