Northeast Bank

Welcome to the Northeast Bank second quarter fiscal year 2026 earnings call. My name is Marvin and I'll 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, Santino de Molino, Chief Financial Officer, 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 will be referenced in this morning's call. The presentation can be accessed at the Investor Relations section of northbank.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 a rebroadcast on the website for future use. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press star 1-1 to ask the question. To remove yourself from the queue, press star 1-1 again. As a reminder, the conference is pre-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 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'll now turn the call over to Wayne. Mr. Wayne, you may begin.

Thank you, Marvin. Good morning. I want to start off with just an administrative matter as we're going through the material this morning. During the course of the year, and in fact years, we get input from shareholders and others about our slide deck, and we take that input very seriously and appreciate it. This slide deck is mostly the same format and information updated, of course, for the quarter as we've used in prior periods. But there are some differences. We have deleted a few slides. And to make it easier for you, we have taken some of the slides and moved them into the appendix. There's also a new slide, which I just want to start with on page five. that those of you familiar with our company, of course, will know this. But as we meet new investors, which we do and enjoy doing, this kind of explains a little bit about our bank, which has been around for 150 years, most of which time it was a traditional community bank. And then when... starting at the end of 2010, evolved into a national commercial real estate and small business lender. And on page five, you can see there are three pillars. One is the purchase commercial real estate, which is the, at this point, is the largest amount of our commercial real estate loans, those that have been purchased. Secondly, originated commercial real estate loans, which is about, with a lot of rounding here, about 25% of our loan book. And finally, we have started to do a couple, three years ago, or maybe even starting with Triple P, doing small business lending. Some of the stats over a three-year period are an average return on equity of 17.7%, and a return on assets of 2%. Our three-year loan growth has been 76%, and our three-year small business originations are over that time period of $653 million, of which Most of it has been SBA loans under the 7A program where we have sold $448 million. Two other points. One, our three-year average NIM is 4.9%. And in our seven branches in Maine, deposit growth over a three-year period has been 40.3%. I point this out for a couple reasons. One is I want to show you in a really understandable form exactly what we do. We're not a traditional community bank, as I mentioned, and I think it's helpful to see how these three pillars contribute to very strong returns for the bank. The second point is that we have a long history of achieving above-market returns, very much above market returns. And, you know, while we present quarterly numbers and get judged on a quarterly basis, you know, this quarter, our operating results were a little bit lower than they have been in the previous quarters. But I want you to consider kind of the – not thinking about us at a quarter at a time, but thinking over just a slightly – longer time frame and with that i want to turn to page three in the slide deck and point out that i would say the highlight of this quarter for us is the very significant loan volume that we put on our balance sheet which is um for the quarter Just a little bit under $900 million of loans, total loans, we put on our balance sheet. And consisting of purchase loans with a UPV of $575 million at a basis of $532 million. Or we bought them for 92.6% discount. Mostly, maybe all. Call it 95% as all an interest rate mark, not a credit mark that we took. And so that'll be income that will come in over time. On the originated loans, this is a record quarter for us. $252 million of originated loans at a weighted average rate of origination of 7.6%. And I want to just point out just a few other items. One, we originated $39.8 million of SBA loans, which we'll talk a little bit about more in this call, of which we sold 25 million. And we had gains of $2 million, $2.1 million on our sold SBA loans. And finally, in the small business space, we originated during the quarter $70.6 million of our insured loan product, which we have talked about in the past. The net income was $20.7 million. This I alluded to earlier about being a little bit lower than we have had in some past quarters, but I want to explain now what contributed to that, which was mostly the SBA activity. You know, as you all know, the SBA program, as part of the government shutdown from October 1 through November 12, during that time period, we were very limited in loans that we could we could only originate loans that we had previously gotten in SBA number four and had a tax return transcripts and a bunch of other things that we needed to be able to originate, fund those loans, and then sell them. So most of the loan activity took place between November 12th and December 31st. And I also want to make a point, which we've talked about in the past, that on July 1, the SBA restructured the small balance program such that underwriting a small balance loan took more time and more documentation than it previously had. And so if we compare the SBA gains for the quarter ending June 30th with the quarter that just ended, that's a $6 million difference in gains, $8 million for the June 30 quarter, and $2 million for this quarter. And if you convert that on an after-tax basis to earnings per share, it's 50 cents. So, and then one other point I want to make about our loan book, most of the purchases occurred at the very end of December. And as a result, our ending loan balance of $4.3 or $4 billion was about $500 million higher than the average loan balance in the December 31 quarter. What's the point? The point is, that we have some tailwinds going into the next quarter and subsequent quarters because we have a much higher loan book than we had for the 1231 quarter, which should, you heard Marvin read the forward-looking statement to you, so keep that in mind, but the arithmetic would say that we should have significantly more net interest income in the following quarters than we had in this quarter. I also want to point out that our NIM was 4.49. And in terms of just some other numbers, EPS diluted was 249. Return on equity was 15.6. Return on assets were 1.87. And if we're correct that we expect SBA loan originations to increase, and sales of loans to increase and more net interest income, we would expect those numbers to be higher in subsequent quarters. On that note, I'm going to turn it over to Tino, who's going to give you much more granularity on the financial numbers, and then Pat will discuss our commercial real estate originations and purchases, and we'll probably touch on our SBA and insured loan business. And then after all of that, we will be very happy to answer any questions that you might have. Tino.

Thanks, Rick. As Rick mentioned, despite some headwinds we had this quarter, it was still a strong quarter for the bank. We reported net income of $20.7 million, or $2.47 per diluted share for the quarter, $43.3 million, or $5.14 per diluted share for the year to date. Return on average assets was 187 for the quarter and 2% per year to date. And return on average equity was 15.6% for the quarter and 16.6% year to date. As Rick mentioned, the story this quarter really was focused around balance sheet growth. Total assets ended the quarter shade under $5 billion at $4.95 billion. And loans ended the quarter at $4.4 billion, up from $3.7 billion as of September 30th. This incredible loan growth is attributable to both the purchase and originated side of the house, as Rick had mentioned. For the quarter, we had purchases of $533 million and originations of $252 million in our national lending division. Timing of this was heavily weighted towards the tail end of the quarter and had a muted impact on net interest income, but will be accretive to earnings on a go-forward basis. Purchases were funded through a combination of both broker CDs as well as borrowings from the FHLD, had a weighted average cost of funds of 3.8%. Our banking centers also continue to be a strong source of liquidity to fund our origination volume as we grow our deposit franchise in Maine. Net interest margin for the quarter was 449, down from 459 in the linked quarter, resulting in net interest income of $48.8 million for the quarter to date and $97 million year to date. The decrease in NIM is largely due to a lag in timing of liabilities repricing, as we have approximately $1.25 billion in CDs maturing over the next six months at a weighted average rate of 4.05%. Transactional income was flat quarter over quarter, coming in at $2.8 million for the current quarter compared to 2.7 million for the length quarter. As Rick mentioned, activity in our SBA business was heavily impacted by the government shutdown. However, we were happy to see it snap back a bit during the month of December. It appears to be on a favorable trajectory going forward. During the quarter, we originated 40 million SBA 7A loans, sold 25 million for a gain on sale of 2.1 million. The timing of the shutdown did, however, provide a tailwind for the launch of our new small balance insured business loan program, which saw originations of $70 million during the quarter. Despite this growth, asset quality remains strong, with delinquencies, non-accruals, and classified loans all remaining relatively flat quarter over quarter. The allowance for credit losses did increase during the quarter from $46.7 million, or a coverage ratio of 1.24%, at September 30th to 63.8 million or a coverage ratio of 1.47% at December 31st. This was largely provided for as part of the purchase loan activity during the period. Net charge offs during the quarter were up 2.9 million compared to 1.9 million in the linked quarter. This was largely due to a charge off on a single purchase loan of 1.2 million That loan was previously reserved for, so there was no impact of that in the provision during the quarter. So our provision came in at $875,000 for the quarter. 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. Non-interest expense for the quarter is down from the length quarter, coming in at $20.8 million compared to $21.9 million. This decrease was largely due to lower professional fees, as well as less loan acquisition and collection costs. Tax expense for the quarter was $9.4 million, representing an ETR of 31.1% compared to 8.9% 8.9 million in the linked quarter. Capital remains strong with our tier one leverage ratio coming in at 12.2% and tangible book value of $62.65, $62.65 a share. This strong capital position provides us with just under a billion dollars of loan capacity as of December 31st.

Pat, over to you. Thanks, Tino. Yeah, this is a big quarter for loan volume. We purchased 152 loans in five transactions with $576 million of balances at a purchase price of $533 million or 92.6 cents. and with weighted average yield and maturity of 10.8%. These were geographically diverse portfolios, but with significant concentrations in New York and New Jersey. Three of the five transactions were from banks, but 80% of the balances were from loan funds exiting previously purchased bank portfolios. The current pipeline is as full as we've ever seen, and we're aware of several large transactions that will be coming to the market soon fueled mostly by M&A. Interestingly, I learned from Sandler that bank M&A is up 45% in 2025, over 24, and 26 is shaping up to be even bigger. You never know in this business, but at least for the next several quarters, there appears to be a lot of opportunity brewing. In our origination business, we closed $252 million. This included 32 loans, of which two-thirds were lender finance, with an average balance of $7.5 million, LTVs just over 50%. and an average interest rate of just over 7.5%. There's a lot of inbound loan requests right now, despite increasing competition from private lenders. Given our funding costs, ability to close quickly, and sweet spot in the middle market space where there's less competition, we could still be picky on credit without sacrificing too much in yield. Hope that continues. Finally, with respect to our small balance program, we originated 537 loans for $111 million this quarter. SBA loans accounted for $40 million, as previously mentioned. We had some good momentum going into the quarter, but the government shutdown cost us. Looking forward, $20 million a month or so seems like a reasonable run rate for SBA loan volume before any consideration for new product offerings, which we are considering. We also closed $71 million of small balance insured loans during the quarter. As a reminder, these loans are very similar in most characteristics to SBA loans we originated but carried private insurance instead of an SBA guarantee and with higher rates. Our intention is to sell these loans into the secondary market while retaining residual economics. More to come on that. That's it for loans last quarter. We're already knee-deep into the current quarter, so we hope to keep it going. Rick?

Thank you, Pat. Marvin, we're ready for any questions out there.

Thank you. We will now begin the question and answer session. If you have a question, please press star 11 on your touchtone phone. If you wish to be removed from the queue, please press star 11. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star 11 on your touchtone phone. And our first question comes from the line of Mark Fitzgibbon of Piper Sandler. Your line is not open.

Hey, guys. Good morning.

Good morning, Mark.

First question, maybe for Tino. I guess I was surprised to see that the share count went down this quarter. Did you guys buy some stock back in the fourth quarter?

No, we did not buy any stock back during the quarter. That was purely a result of stock compensation activity and cancellation of shares to cover taxes.

Okay. But you didn't exercise the ATM at all? Is that correct?

We did not utilize the ATM, no. No share activity this quarter besides stock compensation.

Okay. And then based on your comments before, Tino, it sounds like we should see a bit of lift in the net interest margin going forward, given the downward liability repricing that you anticipate over the next two quarters. Is that fair? Yeah, I think that'd be fair to say. Okay. And then next, I wanted to strategically sort of, how do you think about evolving the funding mix over time as you grow, as the balance sheet continues to grow. Will brokered deposits continue to be the main source of growth?

I would think so. You know, we're making a real effort to grow our deposits in Maine, which, you know, tend to be less expensive than brokered and, you know, generally, And we've had great success in municipal deposits, which have grown meaningfully over the years. And we are also taking a look at other niche possibilities where we could grow deposits as well. But I just think our reality is because our loan growth is, you know, at such a great pace that in order to fund that, we'll probably be looking at brokered deposits, you know, to do a lot of that. I would also add that, you know, brokered deposits, I don't know, you would know Mark better than I would, but, you know, for a while had a bad name, but You know, I don't think it's really the case anyway that it deserves it now. It's a very efficient way of funding without all the costs of either an online presence and marketing or brick-and-mortar space. And so you pay a little bit more for it, but it's not a problem at all as long as you stay well capitalized, which we certainly do. We have very high capital ratios. You can get the money. You can get it efficiently. And so, you know, I know that investors tend to love, you know, cheap liabilities. We love that, too, if we can get it. But that's kind of a brick-by-brick building process. But in order to fund ourselves with the kind of growth we have had, broker deposits work well.

Okay. Okay. And then lastly for me, can you give us a sense for what percentage of the purchase loans you have typically so that you retain at maturity?

You know, we don't have that number right offhand. I mean, it's knowable somewhere, but the three in this room don't have that. And we can get that – and provide that information on another call, the next call. But I could say to you anecdotally, you know, we try and keep a lot of the loans when we have them. And the case we make to the borrower is that they can extend it without any friction, with no cost really, you know, essentially signing a, an agreement that's three pages long or so, and it's easy. And I would say also it's easy for us to keep them when rates are higher because their refinancing alternatives are not as great. When rates come down, as they're probably going to be now, you know, the runoff may be greater because you have a lot of local banks that would be chasing these borrowers. The kind of good and bad news. The bad news is you lose the loan. The good news is, you know, you accelerate the income that has not been recognized and you get back on the treadmill again. I guess that's the bad news for those of us who don't like to exercise.

Thank you.

I know you're not in that camp, Mark. I know you do.

Thanks, Rick.

Thank you. One moment for our next question. Our next question comes from the line of Matt Rank of ABW. Your line is now open.

Hey, guys. Matt Rank filling in for Damon Del Monte. Hope everybody's doing well today. My first question just with the SBA gain on sale income, it looks like you're projecting like $20 million more of SBA loans for the quarter. Is there any catch-up next quarter from the government shutdown in fee income? Will more things flow through, or is it more just a return to SBA? normal fee income levels.

One clarification, that's $20 million a month, so roughly in the ballpark of $50 to $60 million a quarter.

Okay, got it. And you did $40 million this quarter, right? Yeah, correct.

Okay. So we expect it to increase next quarter. In terms of the – you're asking about the percentage gain on sale?

Yep, yep.

Yeah, we anticipate that to stay somewhere in the realm of 8% to 9% compared to the balance of guaranteed balance being sold.

Okay, got it. And then just on the insured small business product, how do you see that growing over the course of the year? Was there any benefit, I think you mentioned, from the shutdown driving some outsized demand there, or is that run rate kind of sustainable into the future? Sure.

I think the run rate's sustainable. The demand for it is gigantic. The reality for us is we've got to be able to sell it. To date, we haven't sold what we have originated, and we don't want a portfolio, an uncomfortable level of these on our balance sheet, not because they're bad loans. They're good loans. With the insurance protection, you know, I said this in our last call, but I'll remind anybody who may have forgotten or those that don't know it, which is these, when they're insured, the loans have a 4% deductible and 10% of insurance. So the 14%, the deductible is funded. So there's 14% of protection on these loans, which is significantly higher than, you know, the losses on an SBA loan. with loans that are, you know, the profile is reasonably similar.

Okay. But even when you guys do start to get to sell them, it should be lower than that, like, 8% to 9% gain you're seeing on the SBAs?

No, because these are different. The SBA loans are, you know, it's agency paper that that's just the market, you know, for selling them. You know, these loans would be sold to a, you know, a private buyer, And the economics of how much is the premium, if any, would it be some, but premium on the sale, not going to be like the SBA. It's going to be much, much smaller than that. But the benefit is once we sell them, we're going to keep a spread, and we split this with annuity, but keep a spread on assets that we don't hold anymore. So it could be, These are very rough numbers. I'll reference again the forward-looking part of the presentation. But, you know, it could be, you know, we wind up making, you know, two or two and a half percent while the loans are on the outstanding balance when we don't have the loans on our balance sheet. And that's our share. Nobody's the same. So, it's a different kind. Economics are different on this. But if we're able to sell these, the economics will be terrific.

And one thing to note on the accounting side of the house here, it's largely going to depend on how the agreements are structured, but we may very well end up with mortgage servicing assets that get recorded on the balance sheet, and that'll flow through the gain line. So until we have the contract finalized and in front of us, it's hard to say what exactly to expect from a gain on sale versus how much will be some sort of spread income that's recognized over time.

We have to go through a loan sale, a couple of loan sales first. And on loan volume, you know, we have – it's been – we've kind of described it as a fire hose, as Rick pointed out, but we've got to intentionally kink in that fire hose. We're really slowing the incoming volume down until we can prove to ourselves that we can sell these loans and see what the real return will be.

Got you. Thank you so much, everybody, for the clarification. That's all for me.

Thank you, Matt. Thank you. We have no further questions at this time. I'll now turn the call over to Rick Wayne for closing remarks.

Thank you, Marvin. And thank all of you for calling in and listening. And I know we get a lot of listeners after the call go on our website. to hear a replay, and for those, I thank you as well. I wish you all a happy week in this snowy time of the year. As you know, we're in Boston. A lot of snow here. I assume most of you are in New England somewhere, the tri-state area, so you probably have a lot as well. Thank you. Thank you, Marvin.

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