Northeast Bank

Welcome to the Northeast Bank Third 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 Dignans, Chief Operating Officer and Chief Credit Officer. Prior to the call, an investor presentation was uploaded to the bank's website, which we'll reference in this morning's call. The presentation can be accessed at the Investors Relations sections of northeastbank.com under Events and Presentation. 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 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 11 to ask the question. To remove yourself from the queue, please press star 11 again. As a reminder, the conference is being recorded. Please note this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon current expectations of Northeast Bank's management and are subject to risk and uncertainties. Actual results may differ materially from those discussed in forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements. I'll now turn the call over to Wick Wayne. Mr. Wayne, you may begin.

Thank you very much, and welcome, everybody. With me this morning are Pat Dignan, our Chief Operating Officer and Chief Credit Officer, Santino Del Molino, our Chief Financial Officer, and Rebecca Rand, our Director of Accounting. The plan for this morning is I will provide an overview of the quarter. And following my presentation, Santino will provide some more granular analysis on our financial statements. And Pat will provide or generate a discussion on our loan activity for the quarter. And after all of that, we welcome any questions that you might have. Let me start off by saying it was a great quarter. It really was a great quarter. And including breaking some records in the bank's long history going back to 1872. First, originated loans for the quarter were $254 million. Incidentally, on the financial highlights page number three of the material uploaded. And that's a record beating last quarter's previous record. So, you know, that is, we were very busy. Except for the third quarter of fiscal year 21, when we had a significant amount of gains from the sale of Triple P loans, this is a record earnings quarter in the history of the bank. And along those same lines, it is a record for the most net interest income in the bank's history. And we're very proud of those records that were broken. Taking a look now at some of the other items in the financial highlights, we had a total loan volume in all areas of $345 million. I'd also point out for the year to date, which is nine months of our fiscal year, $1.56 billion, and which is an increase, and they're now going back to the quarter, an increase in loans for the quarter of $121.5 million. I want to just comment briefly on purchase loan activity, but I'm not going to say that much because Pat's going to cover this in more detail. As you are aware, no doubt, at our last call we talked about how active the market was in loan purchase activity, how much was on the market, a lot of it coming from M&A activity. And, you know, with that, you might say, well, if it is so robust, why did you only invest $25 million in the quarter? And it wasn't for a lack of work. We looked at in excess of a billion dollars. We've been in excess of a billion dollars, and unfortunately, didn't win that much compared to what we look at. So you might say that's a bad thing. A contrary view to that is that we're disciplined bidders, both in terms of asset quality and yield requirements. And some quarters we buy more than others, but we're never going to buy loans that don't meet our metrics just so we can have volume on the balance sheet. And now this is a good time to just to take a look at what's happened for nine months. For nine months on the purchase side, we've invested over $700 million. And so this was a slower quarter. And we'll keep at it every quarter there. And I don't want to say anything more about that because Pat will have a lot more to say. The margin numbers were very, very solid. The NIM was 5.15%. And the total return on purchased loans for the quarter was 9.51%, which has been, that's significantly higher than we have seen. And one thing I want to bring your attention to is on page 31 of the slide deck, which is a slide that shows how much discount we have on our balance sheet that comes in at different paces sometimes. But at the end of the Q3, for March 31, we had $154 million of interest rate discount, which typically comes in over the life of the loan. unless the loan gets paid off early, and then you recognize that earlier, and $46 million of credit mark, which doesn't run through the net interest income anymore under the new CECL rules, but that's $200 million of discount. We're confident that the $154 million will come in, and we always get a pretty good chunk of the credit mark as well that runs through the We saw that this quarter, and that's why the yield on purchase loan was so high, because we have so much transactional income, which Santino will talk about as well. We mentioned that we had $29.9 million of net income, and looking at these numbers also, very large. EPS basic of $3.59 a share and fully diluted of $3.53 for the quarter. Return on equity was 21.67%. And return on assets was 2.43%. And tangible book value per share

is now up to 66.35 a remarkable quarter and with that i will ask tino to um go over the financials awesome thanks rick as rick mentioned this was another great quarter for the bank uh we reported income of 29.9 million of three dollars and 53 cents per diluted share for the quarter and 73 $8.67 per diluted share for the year to date. As Rick mentioned, ROA came in at 2.43% for the quarter and 2.15% for the year to date, while return on equity was 21.7% for the quarter and 18.4% for the year to date. Total assets ended the quarter for the first time just above $5 billion, and loans ended the quarter at $4.4 billion, which is up about $100 million or 2% from the linked quarter. Growth this quarter was focused on our originated book. As Rick mentioned, we had record originations in that portfolio, and the portfolio itself saw growth quarter over quarter of $145 million or 11%, which is offset slightly by a decrease in our purchase portfolio of $46 million or 2%. Net interest margin was really strong this quarter, coming in at 5.15%, which is up from $4.49 in the prior quarter, resulting in net interest income of $63.1 million for the quarter to date and $160 million for the year to date. Saw great expansion in the yield on our purchase portfolio this quarter, which is driven by a combination of both accelerated accretion, $7.3 million, the certain loans within the portfolio paid down or paid off, as well as increased quarter yield expansion as a result of recent purchase activity and existing loans repricing. We also continue to see relief on the funding side of the balance sheet with our average cost of funds coming down seven basis points quarter over quarter as higher priced CDs mature and are replaced by cheaper funding. Asset quality remains strong with delinquencies, non-accruals, and classified loans all remaining relatively flat quarter over quarter. But you will note that we took two non-performing loans into Oreo during the quarter. So total NPAs stayed flat, NPLs are down a bit. The allowance for credit losses decreased this quarter from 63.8 million or a coverage ratio of 147 as of 12-31 to 60.3 million or a coverage ratio of 136 at 3-31. as performance of our PCD portfolio continued to trend positively, and we were able to release some reserves on that portfolio. This was offset by an increase in the coverage ratio on our SBA book. Net charge-offs for the quarter were $3.4 million, up slightly from $2.9 million in the linked quarter. On the expense side, we continue to be disciplined while strategically investing in our people and in technologies that will set the bank up for long-term success. Non-interest expense for the quarter was $23.6 million, up from $20.8 million in the linked quarter. This is due to increased compensation costs as we trued up our year-end bonus accrual during the period, as well as increased loan expense in relation to our small balance insured loan product with increased insurance costs there. Tax expense for the quarter came in at $13.3 million, representing an ETR of 30.9% compared to $9.4 million, or an ETR of 31% in the linked quarter. Capital remains strong. Tier 1 leverage ratio at 11.4%. Intangible book is $66.35 a share, giving us plenty of loan capacity coming into the final quarter of the fiscal year. Now I'll hand it over to Pat to talk through our loan activity during the period.

Thanks, Tino. This was a solid quarter for loan volume. Purchases were 25 million, comprised of eight loans and three transactions, with all but one loan from bank sellers. As Rick pointed out, we bid on well over a billion dollars of loans, and this included two large pools where we were competitive but ultimately unsuccessful. While disappointing, there's still a lot in the pipeline currently. And our contacts are all confident of a lot more coming over the next one to three years. This continues to be a very good environment for us, and we're confident there'll be a lot more loan pools and that we'll win our share while also remaining disciplined. The origination business continues to grow. As pointed out, we closed $254 million this quarter, another record, increasing that book by over 10%. This included 33 loans with an average balance of $7 million, LTVs just over 50%, and an average interest rate of around 7.2. Like last quarter, two-thirds of this volume was lender finance loans. Demand remains very strong for both direct and lender finance opportunities, especially in the middle market space where there are fewer competitors. We have a great niche in this market and remain well positioned for a continuation of this volume. Finally, in our small balance loan program, we originated 422 loans for $65 million. SBA loans accounted for about $38 million of that. Once again, more rule changes slowed us down a bit, but absent more of those, we're confident we can get to a consistent volume of around $20 million a month. The SBA recently announced a 90% loan guarantee for 7 loans in the grocery and manufacturing sectors beginning May 1st. This should be good for us. We're working with Nuiti to stand up a program to participate in that and should have more to report next quarter. We also closed $27 million of small balance insured loans. As a reminder, there's a significant demand for this product, and we have intentionally slowed originations until we're confident in our ability to sell them. We're actively negotiating with several groups and can increase volume significantly once a predictable forward flow process is finalized. That's it for loans from last quarter. The current quarter is already going very strong. And we hope to continue the good news in our July call. Rick?

Thank you, Pat. Thank you, Santino. Operator, we're now ready to answer any questions that the group may have.

Thank you. We will now begin the question and answer session. If you have a question, please press star 1 1 on your touchtone phone. If you wish to be removed from the queue, please press star 1 1. 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 1 1 on your touchtone phone. Please stand by while we compile the Q&A roster. And our first question comes from the line of Damon Devante of KVW. The line is now open.

Hey, good morning, everyone. Hope you're all doing well today. Thanks for taking my question. So first question on the deposit growth this quarter. You know, I think brokered and CDs were up over $700 million, which significantly improved the loan-to-deposit ratio. Just kind of curious on the thought behind that and the strategy of adding more so much extra liquidity. Is that in anticipation of, you know, more purchase activity happening here in the coming quarter? Or I guess it's a little color on the thought behind that. Thanks.

Yeah, Damon, question for you on where you're seeing those numbers. Deposits are up. Actually, deposits might be down quarter over quarter if you're looking at the linked quarter.

168?

Yeah, deposits are down 168 quarter over quarter.

So relatively flat. What we did have from a deposit standpoint, you'll see we had some brokerage CDs mature in the month of March that we ended up rolling into FHLB borrowings given favorable rate, a bit of a rate disconnect between FHLB and the brokerage market.

Gotcha. Okay, so I apologize. I must have pulled the wrong number off the release then. Okay, maybe on the expense side of things, I know you commented there was some true-up on bonuses and whatnot, but could you give a little color on kind of expectations here in the coming quarters?

Yeah, so from a compensation standpoint, I'd say 1231, the quarter ended 1231 is a good run rate and then add an additional roughly like 800,000 or so for additional bonus expense for Q4. So somewhere in the realm of probably 13 and a half million from a comp standpoint for Q4. From a loan, for other non-interest expense lines for next quarter, I'd expect most of those to be pretty flat, maybe a little bit of incremental data processing fees, as we have been working on building out a more modern technology stack at the company since we hired our chief innovation officer back in September of this past year. But it shouldn't be any material pickup and expense there.

Got it. Okay, great. And then I guess, lastly, on the outlook for loans, you guys seem pretty positive on the purchase side that you have a good look at things here in the next quarter. How about on the origination side? Still feel like trends from this quarter are doable going forward, or was this just an exceptionally strong quarter?

No, I think we're positioned pretty well in the markets. You know, there's a lot of, you know, the niche that we're in is obviously in the bridge loan and lender finance space. And a lot of the larger non-banks that have lower costs of capital from warehouse lines, they don't really play in the middle market space, kind of under $50 million. So our competition in that space is mostly smaller funds with much higher costs of capital. So it's a pretty good niche for us, and I don't see this pipeline slowing down at all.

Got it. Okay, great. That's all that I have for now. I'll step back. Thanks. Thank you, David. Thanks, Damon.

Thank you. One moment for our next question. Our next question comes from the line of Justin Crawley of Harper Sandler. Your line is now open.

Hey, good morning, everyone. I just want to start out on the margin. Obviously, a lot of accelerated accretion running through, which I know is tough to predict. But I was just wondering if you could help us out on how to think about just where the NIM could settle in assuming flat rates and just how much of a tailwind you've got left on the funding side with just any broker that's left mature over the next quarter.

Yeah, sure. So looking at the income side of it, I mean, back out transactional income. I'd expect the income side to be pretty consistent, quarter over quarter in a flat rate environment. On the funding side, you might see in the investor deck, I think our spot cost of funds was down probably like seven basis points compared to actual costs incurred during the quarter.

Yeah.

Cost of funds, spot cost was 355 at end of the quarter versus 362 incurred over the course of the quarter. So we will have a little bit of pickup there. And in terms of remaining CDs to be rolled over, I wouldn't expect a lot of savings on that front, given kind of where the brokered market is right now. Brokers are pretty expensive comparatively. So given kind of everything happening in the macro environment, we do have over the next three months, $550 million maturing, most of that coming towards the tail end of June. So hopefully we see some price relief between now and then. And then on the retail side, we've got $200 million maturing. Those should reprice down a little bit. So maybe a few basis points of savings, additional savings compared to the spot rate at the end of the month.

Okay, that's helpful. And then for what's in the purchase book, do you have, I'm not sure if you're able to share, but the remaining average life left on that portfolio just as we try to get a sense of the cadence and just level of that accretion that hits NII?

Eight years?

Yeah, we had average maturity on that around eight years. So there's a bit of runway left on that portfolio. One thing to note there is a lot of those loans, it's kind of a mixed bag between loans that are fixed rate and have pretty high rate marks that'll be recognized over the duration of those eight years versus loans that are fixed to floating where they have a period of fixed interest and are going to reset to, a lot of them reset to a five-year treasury plus some sort of margin. So the rate marks on those get recognized a little bit faster.

But just a, William, if it's eight years, If the whim is eight years, the actual life will be shorter for sure. Yeah. You know, those have a higher CPR and, you know, they tend to pay off. Do we have in this slide that a bridge, Rebecca, on the purchase loans that shows the amount?

We have a bridge on slide 17, the whole national lending portfolio.

If you want to look at that for a second, it's not just purchase loans.

We don't have that in this deck, but it shows on this page 17, it shows the purchase runoff in this quarter, the third fiscal quarter of $71 million.

which I don't have the, how much of that is prepaid, but it's not insignificant. Which has the effect of generating transactional income into our yield, and also has the effect obviously of reducing the purchase loan portfolio.

Okay, got it. And then I guess just one last one on this topic and what factors into margin, but do you have how much of the total loan book is floating rate? I know most of the originated portfolio floats, but what does that exposure look like if you factor in floors that are in place in that book?

Good question. I don't have that right at my fingertips.

Is that a public number somewhere? So the national lending originated portfolio on slide nine, the current weighted average floor is 7.23% as of March 31st. And just for context, that's roughly the rate that we originated, our national lending originated nations this quarter, 7.2%.

Yeah, I think a lot of, I don't have exact numbers in front of me, but I can speak kind of high level. a fair amount of the originated portfolio is hovering hovering around the floors. So and a lot of that's based on either tied either so far or prime. So depending on what happens to the Fed, if they do come in and cut rates, you could see more of that portfolio sitting on the floor while Fed funds come pricing comes down.

OK, got it.

And then just shifting a little bit back to the purchase business more broadly, you talked a lot about the pipeline activity being in large part, I guess, M&A driven. And so just curious, the slower start to the year here on transactions impacts the activity levels you think you could see and if that's being made up for from other sources, just given some of the commentary you made on the amount that you took a look at this quarter.

clarify that a little bit one more time. We'll make sure we're giving you a responsive answer to your question.

Sure. Yeah. Just as far as the pipeline, I think you've talked a lot in the past how a lot of it's been M&A driven and just year to date here with slower level of transaction announcements and deal activity with some of the uncertainty out there. Just wondering if you think that's to be all impactful um you know to to the activity in the pipeline and just the opportunities that that you're seeing um and you know if you're seeing that made up for um you know elsewhere just from other sources for these purchases this mna is certainly a large part of it and um you know we're seeing um more and more of that uh but it's certainly not the only uh i mean there's there's um

some significant activity we've seen over the last year and continue to see from large, very large credit funds who are at the tail of a particular purchase from several years ago and are looking to get out of that. There's balance sheet management. There's other large banks that just do regular sales And in good markets and bad, they just routinely sell loans as a matter of course. But those are all sources that we've experienced for years. M&A is a little bit more, a larger percentage of the pie now than it has been traditionally. And from everything we're seeing, it will continue as such into the foreseeable future. Like we pointed out on the call, You know, this quarter, although we only bought $25 million, you know, it was a very, very busy quarter for our underwriters. We looked at a lot, and we were very competitive. It's just a lumpy business, as we pointed out many times, and, you know, we were unlucky.

Sometimes, Justin, also loans come back. You know, you bid on a big pool, seller has it, and they decide they want to unload some of that, and, you know, we see it again. We'll see if that will happen, but that has happened in the past.

Did that answer your question?

Yeah, no, it does. And I guess just the divergence between what you took a look at and what was actually purchased in the corridor, is that a How would you frame a competition? Is it a function of some increased competition, you know, in this business? Or is it more just, you know, on pricing and not being able to, you know, get to the same place with the seller? You know, how would you describe that dynamic?

There's a lot of competition. I mean, there's large credit funds, mostly large credit funds who are competing with on the larger transactions. And like the originated point I made that you know, when you write a check over 100 million, you know, a lot of these big funds come out and they have, you know, insurance, CMBS exits, insurance platforms they can place these loans. They have a lot of things they can do with these loans. But having said that, you know, we've been successful bidding against these groups in the past and have won loans, you know, with them. And in this past quarter, you know, the ones that we did not win, it was basis points. You know, it's not like we were uncompetitive. It's just, you know, we put our best foot forward and it wasn't quite enough. But from our perspective, they were very strong bids and we're not going to, as Rick pointed out, we're not going to bid volumes just for volume's sake. We're going to put our best foot forward and I'm confident we're going to win our share.

Okay, great.

And then just a final question for me, just On the SBA business, you know, you saw the pickup after the shutdown last quarter, but, you know, obviously still well off of levels seen last year. And you talked before about, you know, some of the structural changes that have slowed activity and getting your arms around that. So just sort of curious how we should think about that business looking out here. I know you made the comment on, you know, monthly volume, but just a little more detail surrounding that business.

Well, you know when we started this this business it was um with a view towards a very tech forward um largely not we're still looking at approving every loan but a lot of automation and process automation and so that we could do small balance loans at volume and every time there's a rule change there you know that's it's it we have to kind of re-retool the uh the process And there's been a lot of rule changes over the last year. And they have made the ability to process these loans in volume a little more difficult. So the volumes we were doing a year ago, $100 million a quarter, I think with the current product we're in, I don't see us getting back to that point anytime soon. But I do think that we should be able to get to a $20 million a month loan volume assuming there's no more rule changes. I mean, they changed the rule in March 1st that for these loans under 350, instead of relying on, for the purposes of the guarantee, from the credit piece of the guarantee, we used to be able to rely on the credit score, although we did a lot more work than that. But you could rely on that for the purposes of the guarantee. And that was changed to a debt service coverage analysis. So as you can imagine, that's a significantly different and more intense underwriting requirement that we have to stand up and we continue to stand up. And once that's completed, I think we'll get back to that level and should continue to. And again, I think we may be able to do more if we're able to participate in this new 90% guarantee program, which we're It's very interesting.

Okay, and then I guess just like a quick follow-up, somewhat related, just on the small balance insured product. Do you have any updated thoughts there just as you continue to generate some volume? How do you think about that eventually contributing to the gain-on-sale business and just what you think, how that market demand, the demand for that product could ultimately shake out?

Well, there is a lot of demand for the loan product And as Pat mentioned, we want to see that we can sell it. It's not our intention to load up our balance sheet with this product, even though it's a pretty good product. You know, it's going to have a – it has essentially 14 or 15 percent of credit protection on it between the deductible and the insurance. It's a wonderful product for somebody to buy in. In pieces, we are also talking to a couple larger funds about doing a transaction for everything on the balance sheet. But, you know, until we can move it, I wouldn't expect to have any material growth on that on our balance sheet.

Okay, great. I will leave it there. Thank you so much for taking the time. Appreciate it. Thank you, Justin.

Thank you. One moment for our next question. And our next question comes from the line of David Minkoff. Your line is now open.

Good morning, Rick, Pat, and Santino. Congratulations on a wonderful quarter. I've been a shareholder for going back more than 10 years. The CFO at the time was Claire Bean. So how many years ago back is that? Oh, yeah. And I've listened to every conference call each quarter. I haven't missed one. So if you just took it 10 years, I've listened to 40 conference calls, more than that. And kind of become accustomed to hearing good news. That's what you guys do. It's in your DNA. But this one kind of took the cake. I mean, you know, some of the metrics, I don't want to repeat them all. You gave them ROI up 26%, tangible book value, About 15%. I mean, you know, if you're watching Wall Street, you can appreciate how good these numbers are. But I remember two years ago in 24, I kind of commented the other, another excellent, they're all good quarters, but excellent quarter. And I commented at that time, I think the stock was 72 at the time. And I commented how well, you know, you had done. And I asked Rick, I said, Rick, well, what are you going to do for an encore? But I said that with tongue in cheek. Uh, Rick, I guess you, you took it seriously. Thanks for showing me. Thanks for showing me what you're going to do for an encore. So rather than ask the question, I would just say, finally, you know, with these results, I would say, uh, there should be a national holiday named after a Northeast bank. I don't think we have a holiday named after a bank yet. Do we? I mean, uh, National Bank, Northeast Bank Day, that has a good ring to it, I think, don't you? Oh, it's the best idea we've heard recently. I like that. Right. Digital schools will be closed, you know, no postal delivery, no mail service, you know. And maybe April 28th would be, or the last Tuesday in April, should be the day for this. I'll recommend this to Congress. Anyway, congratulations on a great quarter. This was really stupendous.

Thank you, David. We appreciate you. Of course, we've talked many times over the last 10 years, and you were there almost at the beginning, and you've offered us good suggestions over time, and you're a big supporter. And we're thrilled that we can deliver results that you like, we like, and other shareholders like. So thank you for your support and your kind words. Thank you.

Keep up the good work. Take care.

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

Thank you for that. Thank you all of you that have listened and those that have asked questions as well. David, thank you for the suggestion about the national holiday. I don't think we're quite ready for that yet though. I look forward to talking to you in July after our fiscal year end. And with that, I wish you all well. Thank you.

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