Northeast Bank Q2 FY2026 Earnings Call - Nearly $900M of Loan Adds Set Up NII Lift Next Quarter

Marvin, Conference Call Operator, 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 Delmolino, 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 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 a re-podcast on the website for future use. At this time, all participants are in 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 ask the question. 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 management and are subject to risk 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 Rick Wayne. Mr. Wayne, you may begin.

Rick Wayne, President and Chief Executive Officer, Northeast Bank: 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, it 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, it 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 purchased commercial real estate, which 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, 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 PPP, 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 7(a) 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 of 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. While we present quarterly numbers and get judged on a quarterly basis, this quarter, our operating results were a little bit lower than they have been in the previous quarters. I want you to consider kind of 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 for the quarter, just a little bit under $900 million of loans, total loans we put on our balance sheet, consisting of purchased loans with a UPB of $575 million at a basis of $532 million, or we bought them for 92.6% discount, mostly, maybe all, called 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 was a record quarter for us, $252 million of originated loans at a weighted average rate of origination of 7.6%.

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 $2.1 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. 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 originate.

We could only originate loans that we had previously gotten an SBA number for and had a tax return transcript 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 31. And I also want to make the 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 $0.50. 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 billion or $4.4 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 December 31 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%. In terms of just some other numbers, EPS diluted was $2.49, return on equity was 15.6%, return on assets were 1.87%. 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. Then Pat will discuss our commercial real estate originations and purchases, and we’ll probably touch on our SBA and insured loan business. Then after all of that, we would be very happy to answer any questions that you might have. Tino.

Santino Delmolino, Chief Financial Officer, Northeast Bank: 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 1.87% for the quarter and 2% 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 a 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 brokered CDs as well as borrowings from the FHLB and 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 4.49%, down from 4.59% 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 linked 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 and appears to be on a favorable trajectory going forward. During the quarter, we originated $40 million SBA 7(a) loans and 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 remained 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, they’re going to set the bank for long-term success. Non-interest expense for the quarter was down from the linked 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 million in the linked quarter. Capital remained strong with our Tier 1 leverage ratio coming in at 12.2% and tangible book value of $62.65 a share.

This strong capital position provides us with just under $1 billion of loan capacity as of December 31st. Pat, over to you.

Pat Dignan, Chief Operating Officer and Chief Credit Officer, Northeast Bank: Thanks, Tino. Yeah, this was 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% and with weighted average yield to maturity of 10.8%. These were geographically diverse portfolios but with significant concentrations in New York and New Jersey. Three of the 5 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 2024, and 2026 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 financed, 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 can 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 originate, but carry 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?

Rick Wayne, President and Chief Executive Officer, Northeast Bank: Thank you, Pat. Marvin, we’re ready for any questions out there.

Marvin, Conference Call Operator, Northeast Bank: 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. 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 one, one on your touch-tone phone. Our first question comes from the line of Mark Fitzgibbon of Piper Sandler. Your line is now open.

Mark Fitzgibbon, Analyst, Piper Sandler: Hey, guys. Good morning.

Rick Wayne, President and Chief Executive Officer, Northeast Bank: Good morning, Mark.

Mark Fitzgibbon, Analyst, Piper Sandler: 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?

Santino Delmolino, Chief Financial Officer, Northeast Bank: 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.

Mark Fitzgibbon, Analyst, Piper Sandler: Okay. But you didn’t exercise the ATM at all? Is that correct?

Santino Delmolino, Chief Financial Officer, Northeast Bank: We did not utilize the ATM, no. No share activity this quarter besides stock compensation.

Mark Fitzgibbon, Analyst, Piper Sandler: Okay. 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?

Santino Delmolino, Chief Financial Officer, Northeast Bank: Yeah, I think that’d be fair to say.

Mark Fitzgibbon, Analyst, Piper Sandler: Okay. And then next, I wondered if 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?

Rick Wayne, President and Chief Executive Officer, Northeast Bank: I would think so. We’re making a real effort to grow our deposits in Maine, which tend to be less expensive than brokered and generally stickier. 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 at such a great pace, that in order to fund that, we’ll probably be looking at brokered deposits to do a lot of that. I would also add that brokered deposits, you would know Mark better than I would, but for a while had a bad name. But I don’t think it’s really the case anymore 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 it’s a—I know that it’s not—investors tend to love 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, brokered deposits work well.

Mark Fitzgibbon, Analyst, Piper Sandler: Okay. And then lastly for me, can you give us a sense for what percentage of the purchase loans you have that typically sort of you retain at maturity?

Rick Wayne, President and Chief Executive Officer, Northeast Bank: You know what, Mark? We don’t have that number right offhand. I mean, it’s knowable somewhere, but the three in this room don’t have that. We can get that and provide that information on another call for the next call. But I could say to you anecdotally, we try and keep a lot of the loans when we have them. The case we make to the borrower is that they can extend it without any friction, with no cost, really, essentially signing an agreement that’s three pages long or so. It’s easy. I would say also it’s easier 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, the runoff may be greater because you have a lot of local banks that would be chasing these borrowers.

It’s kind of good and bad news. The bad news is you lose the loan. The good news is 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.

Mark Fitzgibbon, Analyst, Piper Sandler: Thank you.

Rick Wayne, President and Chief Executive Officer, Northeast Bank: I know you’re not in that camp, Mark. I know you do.

Santino Delmolino, Chief Financial Officer, Northeast Bank: Thanks, Rick.

Marvin, Conference Call Operator, Northeast Bank: Thank you. One moment for our next question. Our next question comes from the line of Matt Renck of KBW. Your line is now open.

Matt Renck, Analyst, KBW: Hey, guys. Matt Renck filling in for Damon DelMonte. Hope everybody’s doing well today. My first question.

Santino Delmolino, Chief Financial Officer, Northeast Bank: Thanks, Matt.

Mark Fitzgibbon, Analyst, Piper Sandler: Thanks. My first question, just with 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 to return to normal fee income levels?

Santino Delmolino, Chief Financial Officer, Northeast Bank: One clarification. That’s $20 million a month, so roughly in the ballpark of $50 million-$60 million a quarter.

Matt Renck, Analyst, KBW: Okay. Got it. And you did $40 million this quarter, right?

Santino Delmolino, Chief Financial Officer, Northeast Bank: Yeah. Correct.

Matt Renck, Analyst, KBW: Okay.

Santino Delmolino, Chief Financial Officer, Northeast Bank: We expect it to increase next quarter. In terms of the—you’re asking about the percentage gain on sale?

Matt Renck, Analyst, KBW: Yep. Yep.

Santino Delmolino, Chief Financial Officer, Northeast Bank: Yeah. We anticipate that to stay somewhere in the realm of 8%-9% compared to the balance of guaranteed balance being sold.

Matt Renck, Analyst, KBW: 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?

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

Matt Renck, Analyst, KBW: Okay. But even when you guys do start to get to sell them, it should be lower than that 8%-9% gain you’re seeing on the SBAs?

Rick Wayne, President and Chief Executive Officer, Northeast Bank: No, because these are different. The SBA loans are—it’s agency paper that that’s just the market for selling them. These loans would be sold to a private buyer. And the economics of how much is the premium, if any, or there’d be some, but premium on the sale is 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 NEWITY, 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 it could be we wind up making 2%-2.5% while the loans are on the outstanding balance when we don’t have the loans on our balance sheet. I mean, that’s our share. NEWITY the same.

It’s a different kind. Economics are different on this. If we’re able to sell these, the economics will be terrific.

Santino Delmolino, Chief Financial Officer, Northeast Bank: 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 it’ll be some sort of spread income that’s recognized over time.

Pat Dignan, Chief Operating Officer and Chief Credit Officer, Northeast Bank: We have to go through a couple of loan sales first. And on loan volume, we have, it’s been, we’ve kind of described it as a firehose, as Rick pointed out, but we’ve got to intentionally kink in that firehose. 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.

Matt Renck, Analyst, KBW: Gotcha. Thank you so much, everybody, for the clarification. That’s all for me.

Rick Wayne, President and Chief Executive Officer, Northeast Bank: Thank you, Matt.

Marvin, Conference Call Operator, Northeast Bank: Thank you. We have no further questions at this time. I’ll now turn the call over to Rick Wayne for closing remarks.

Rick Wayne, President and Chief Executive Officer, Northeast Bank: Thank you, Marvin. Thank all of you for calling in and listening. I know we get a lot of listeners after the call. We’ll go on our website to hear a replay. To those, I thank you as well. 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 or the tri-state area, so you probably have a lot as well. Thank you. Thank you, Marvin.

Marvin, Conference Call Operator, Northeast Bank: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.