Northeast Bank Common Stock Q4 2026 Earnings Call

Welcome to the Northeast Bank fourth quarter FY 2026 earnings call. My name is Michelle, 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, 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 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 further 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 on your telephone. To remove yourself from the queue, please 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. Welcome all to the call. During my comments, I will provide an overview of our fourth fiscal quarter and annual results. After my comments, Santino will discuss our financial results, and Pat will review our loan activity. At the conclusion of our comments, we will be happy to answer any questions. For the quarter, we earned $34.3 million or $4.05 per share, fully diluted with a return on equity of 23.5% and a return on assets of 2.7%. For the year, we earned record net income of $107.5 million, a $24 million or 29% increase over fiscal year net income of $83.4 million. It is also a record. Per share fully diluted earnings was $12.74, with a return on equity of 19.7% and a return on assets of 2.3%. Tangible book value per share increased by $12.60 or 22% to $70.58 compared to June 30, 2025.

Loan volume was strong both in the quarter and the year. Loan volume for the quarter was $389.8 million, including record-breaking national lending originations of $257.3 million and purchases of $94.4 million. Loan volume for the year was $1.95 billion, including national lending originations of $897.4 million and purchases of $797.3 million. At year-end, total loans, including loans held for sale, increased by $802 million or 21% from June 30, 2025. Slide seven has annual loan volumes in our national lending division. Loan volumes in both FY 2025 and FY 2026 was $1.754 billion. This is a coincidence, not an error. NIM remains strong, 4.8% for the quarter and the year. As a reminder, CECL changed the accounting for allowance recovery on purchased loans such that it now runs through the provision and not interest income anymore.

Allowance recovery in the quarter was $4.7 million, which would have contributed 37 basis points to NIM pre-CECL. In previous calls, we have discussed our Insured Small Business Loan Product. The product was originally structured with 10% insurance and a deductible of approximately 4%. We had the intention of selling the loans. During FY 2026, we originated $102 million of Insured Small Business Loans, but have not been able to sell the loans at attractive enough pricing. We have recently increased the insurance protection to 25% with a higher deductible since we are going to keep these loans on our books longer than we had anticipated. I will turn the call over to Santino.

Awesome. Thanks, Rick. As Rick mentioned, we finished fiscal year 2026 with exceptional results. I'll walk you through the quarterly results beginning on slide 13. As Rick mentioned, we recorded net income of $34.3 million, or $4.05 for diluted share for the quarter, up from $29.9 million or $3.53 in the linked quarter. For the fiscal year, net income totaled $107.5 million or $12.74 for diluted share. Return on average assets improved quarter-over-quarter to 2.71%, while return on equity increased to 23.5%. These results reflect continued balance sheet growth, strong loan performance, and disciplined expense management. Total assets ended the quarter at $5.2 billion, up from $5.0 billion at March 31st. While total loans, including loans held for sale, increased to $4.59 billion.

During the quarter, we generated $390 million of loan volume, up from $345 million in the linked quarter, driven by record national lending originations of $257 million and purchased loan activity of $94 million. Moving to slides 14 and 15, net interest income before provision totaled $60.3 million during the quarter. While this is modestly below the linked quarter's exceptionally strong $63.1 million, the decline is primarily driven by lower accelerate accretion on the purchased loan book. We did, however, see higher transactional income related to the release of allowance for credit losses this quarter, which you see played through in the negative provision for credit losses. Net interest margin remains strong at 4.8%, down slightly from 5.15% in the linked quarter. The largest contributor to the strength here continues to be the purchase loan portfolio, which had a total return of 9.3% and a yield of 8.6%.

Despite the modest decline, returns on purchase loans continued to benefit from strong credit performance, accelerated payoffs, and allowance releases. Meanwhile, the growth in our originated portfolio continues to bolster interest income while posting a yield on the portfolio of around SOFR plus 400 basis points. Looking at slide 21, cost of funds improved during the quarter, declining to 3.59% from 3.62% the prior quarter. While spot rates are below our deposit costs during the quarter, I wouldn't anticipate much further relief on the cost of funds side given the current rate environment. Over the next 40 months, we have approximately $300 million in brokered CDs as well as another $300 million in retail CDs that should be maturing and rolling over.

On the brokered CD front, rates are up slightly from what is currently on the books, we would anticipate a little bit of increase in interest expense on that front, though we should see an offsetting relief on the retail side. Ideally, cost of funds should stay pretty flat over the coming period. Moving to slide 18, we talk about the Small Business division. As Pat's going to discuss, volume remains relatively slow on the SBA front, though we continue to see strong yields in the portfolios and favorable pricing when selling the guaranteed portion of SBA loans. Within the SBA division, gain on sale income remained consistent at approximately $2.9 million. In addition, you'll see this quarter we recognized a $1.6 million gain on the recovery of insured credit losses associated with the insured small balance business loans that Rick mentioned.

Explain the accounting here in a little more detail because it's kind of wonky the way this works. We have $96 million in insured small balance business loans, including held for sale on the balance sheet. There is about $1.6 million that previously was classified as held for sale that has been transferred into the loan portfolio as of June 30th, given the delinquent status of the loans. We don't anticipate being able to sell those and have a full allowance booked against those loans. The way the accounting works here is you essentially gross up both the balance sheet and the P&L. There's a $1.6 million allowance and corresponding $1.6 million insurance receivable. Then on the P&L, we have a $1.6 million provision with an offsetting $1.6 million gain.

At the end of the day, everything washes, we should get our money back on these, but just wanted to highlight the way the accounting's working here. Moving on to slide 19, you'll see credit performance remained strong. We recorded a $679,000 credit provision compared to a $218 credit provision in the linked quarter. Non-performing assets improved to 67 basis points from 78 basis points in the prior quarter. Past due loans declined to 54 basis points of total loans from 64 basis points in the prior quarter. Looking at non-interest expense on slide 22, you'll see expenses are relatively flat compared to the linked quarter, coming in at $23.5 million, as we continue to invest in our personnel, technology, and loan production capabilities. Development of our technology platform picked up in earnest this past quarter, and we should begin harvesting efficiencies on this in FY 2027.

We go live with our data warehouse and begin developing various automation capabilities. As a result, our efficiency ratio remains excellent at 36%, closely aligned with the prior quarter's 35.5%. Tax expense this quarter is $8.1 million, resulting in an effective tax rate of 19.1% for the quarter and 27% for the year. The decline here is primarily driven by the purchase of just under $40 million in transferable production tax credits, which was completed during the quarter. It reduced tax expense by $2.8 million. We also had some benefit from reduced state taxes that were recognized this quarter. On a go-forward basis, we will continue to evaluate opportunities to purchase production tax credits as a way of lowering our federal tax liability. Capital levels remain strong despite continued balance sheet growth.

Total shareholders' equity increased to $604 million from $568 million in the prior quarter, while tangible book value per share increased to $70.58 from $66.35, representing 6% growth during the quarter and more than 21% growth compared to the prior year. Tier 1 leverage ratio improved to 11.9% from 11.4%, and total risk-based capital increased to 14.7%, giving us loan capacity of about $1.5 billion. Overall, we enter fiscal year 2027 from a position of strength, generate record annual earnings, delivered our third consecutive quarter of record loan origination volume, saw improved asset quality metrics, expanded capital ratios, and increased tangible book value per share. Now I'll pass it over to Pat to talk through the loan portfolio.

Thanks, Dino. This is a good quarter and capped off a very good year. On the purchase front, we closed around $100 million, including eight transactions from a combination of banks and debt funds at a weighted average purchase price of $0.93. This brings the yearly total to around $850 million, resulting in 16% net growth in the purchase portfolio year-over-year, while maintaining low LTVs and strong credit performance. To give you a sense of market activity, we looked at 37 pools this quarter for $4.4 billion and bid on 14 of them, totaling $1.9 billion, ultimately winning eight of these for a total of $100 million. Within those 37 available pools, eight totaling $3.7 billion, had balances of $100 million or more.

These were evenly split between multifamily pools that ultimately traded at very thin yields for large credit funds seeking fodder for the securitizations, and pools with undesirable collateral such as vacant office and rent-controlled multifamily. Reviewing similar data over the past couple of years, where we've been most competitive are pools with diversity of collateral and geographies. Pipeline for loan sales remains very active, and we're excited for the coming year, confident we'll be competitive. The origination business really took off this year. We closed $257 million for the quarter, a third record in a row, and ended the year with just under $900 million of originations, growing that portfolio by 27% year-over-year. This included 33 loans with an average balance of $7 million, LTVs just over 50%, and an average interest rate of around 7.25%. Once again, lender finance represented about two-thirds of the balances.

For the year, we saw 450 loan opportunities totaling about $5 billion. We closed 125 of those for just under $900 million, with an average loan amount of $8 million. Closed loans demonstrate a variety of asset classes, with industrial, retail, and multifamily most prevalent, and collateral in Metro N.Y. and California representing about half of closed loans. The loan mix demonstrates again where we are competitive. Despite increasing competition, we've been able to maintain a competitive edge in the middle market space through our ability to close efficiently and on a variety of asset classes and locations. Our current pipeline shows no indication of slowing down, and we're confident we can maintain this level of volume without compromising credit quality. Finally, our small balance loan program has been a bit challenging.

We originated 203 SBA loans for just under $35 million this quarter, bringing the annual total to about $150 million. We keep saying we're on track for $20 million per month, but there have been six new rule changes in the past 12 months, each of which further narrowed the eligibility window and increased underwriting requirements. Together with Newity, we're adapting. Absent more changes, we are optimistic that we'll hit the $20 million-a-month run rate. Despite weaker than expected SBA loan growth, our core real estate business shows no signs of slowing. The current quarter is already very active in both verticals. This is about as busy a July as I can remember. We're excited for the coming year. Back to you, Rick. Thank you, Pat.

Thank you, Santino. Those are great presentations. Now we'll be happy to open it up to any questions.

Thank you. We will 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 remove from the queue, press star one one. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you would like to ask a question, please press star one one. One moment for our first question. Our first question is going to come from the line of Justin Crowley with Piper Sandler. Your line is open. Please go ahead.

Hey, good morning, everyone. Morning.

Morning, Justin. To start out on the purchase business, Pat, you touched on it a little, but was wondering if you could comment just a bit further on the environment for some of these larger-size pools.

What the opportunity looks like there and the level of competition you're seeing. I know you hit on it a little, but I think last quarter you talked about being within basis points of some of the business that you bid on. Just kind of curious for a little more color there.

Sure. We refer to them as whales, which are the pools that have over $100 million of balances. There were eight of them as I pointed out, and four of them were pools that we bid on that were mostly homogenous, multifamily clean pools. One of them was very large and had a big rent-stabilized component, and we bid on a portion of that pool. In all cases in those four deals, we were close, but no cigar. The competition was fierce. We were up against mostly very large credit funds who ultimately bid it thinner than we could. The rest of those eight pools had collateral types that we weren't interested in. Mostly rent controlled and vacant office or NPLs. I don't know if you have any more specific questions than that, but we're going to continue getting up to bat.

We're confident that we'll win our share. Again, the types of pools where we are just reviewing our own data, where we really compete well is when it's mixed. When it doesn't really fit cleanly into anyone's portfolio. If it's commercial real estate and it's performing, we can adapt and be much more competitive given our platform.

Justin, this is Rick. I would add the following thought to that question. Of course, we report quarterly, so we need to look at this stuff, and investors do on a quarterly basis. It's always good to step back a little bit and look on an annual basis, though. Starting in 2022, we've had, in almost every year, one large transaction. We don't have them every quarter. We look at them every quarter. Including this year as well, we had a large transaction of loan purchases early in the year, and then last quarter was much smaller and this quarter was pretty solid at a little bit under $100 million. Just to provide some context for your thoughtful question.

Sure. Yeah, we did this year close one large pool earlier in the year.

Got it. That's helpful. No, I appreciate that. I guess kind of on that topic, for even just a little more color, I think previously you talked about a lot of the opportunities that you are seeing have been somewhat M&A-driven. Is that still the case, or are you seeing that shift at all?

No, it seems to be. The big sources have been large credit funds who are winding down a particular fund and selling off the tail or M&A activity.

Got it. I guess secondly, maybe a question for you, Tino, just on how to think about the margin from here. If we back out the transactional income, the margin of about, call it 4.44% was down 10 or 11 basis points. I know there can be a lot of noise with the movement in loan yields, but what's the right way to think about how that should trend moving forward here, just kind of given your commentary on maybe funding costs, leverage having largely played out?

Yeah, I would think the margin should stay relatively steady after you back out transactional income. The purchase book should hover right around the 8% range. On the originated front, yield right now, I think right around 7.70%. We're originating maybe a little bit lower than that if you look at originations during the year or during the quarter. I'd say on the asset side, should be within 10 basis points of yield is kind of where we're at. I think the other thing that should help offset anything happening with lower origination yields would be kind of we've been reallocating cash to higher-yielding investments for our on-balance sheet liquidity. We will see a little bit more of a pickup there as well.

Okay. Got it. Just pivoting again, I was wondering if we could go back a little bit to the small balance insured product. You mentioned having to adjust the protection there. Curious if you could talk a bit more about what informed that change. I guess there's probably the demand out there, obviously, but maybe it's too early to say, but just how you think that might impact the potential volume possible in this business.

Well, we always, from the beginning, mentioned we were going to originate them and then see what we could sell them for. We slowed down the amount of originations almost to a grinding halt over the last month or month and a half, because we want to be able to move them up the balance sheet. It's not generally our view to load up our balance sheet with these. Notwithstanding the good credit enhancement we have with the insurance, which is now, as I mentioned, 25% of the loss. We're hoping that we'll be able to sell these. If we're able to sell them, there is a lot of demand for the product, and we will do a lot of volume. That's one point. I'd also mention that, and Tino may actually covered this, but the yields on these are pretty good.

We've got a yield of around 11 and less four points of expenses with it, which go away. The deductible, now we'll pay for the deductible over two years, which comes out of the yield. We don't regret that at all that we tried it, that we have these on our balance sheet, that we're earning good yields, and we have plenty of credit protection on it. It's not our business to hold hundreds of millions of dollars of this kind of asset on our balance sheet. It's a long answer, but the shorter version will be if we can sell them, we'll do more.

Okay. Is it too early to say kind of what the economics could look like if and when you're able to sell these? Do you have enough information at this point to triangulate that?

I think it would be premature to tell you. It depends on who the buyer is for these to know at that point. We've had conversations with a lot of buyers. It depends. I think we can provide better information on our next call.

Understood. Great. I will leave it there. Thank you guys so much.

Thank you. Thank you. Thank you.

One moment for our next question. Our next question is going to come from the line of Damon DelMonte with KBW. Your line is open. Please go ahead.

Hey, good morning, everyone. Hope you're all doing well today.

Good morning. Morning. First question, just wanted to start off on the national lending originated portfolio.

Obviously, a couple of good years of really strong growth here. Is it realistic to think you can kind of keep a plus 20% pace as we go into the next fiscal year here?

Well, the 20% included both purchase and origination, in terms of the $800 million loan growth.

27%. I am being corrected on the origination.

Thank you. Yeah, the origination, I think, was like 27% this year, like 28%.

I see it. It keeps improving. We keep doing deals. We are increasing the number of borrowers that we have, including on the portfolio finance business, which Pat mentioned is a big portion of that. I don't want to predict how much more that'll grow from where it is, but I would say it will keep growing.

Okay, fair enough. Of course, the net growth on that also is what the runoff looks like.

Right. Okay. Maybe on the expense side for Tino. I think you talked about some efficiencies from investments that you made recently. Can you help us think a little bit about how the kind of the growth rate off of this year would be or maybe like a quarterly expectation going forward?

Yeah. I would say expenses for the coming year, I would expect to kick up probably like somewhere around $1 million in the coming quarter. Probably a steady run rate from there on out. In terms of efficiency, with what we're building from a technology standpoint, it's not like we're going to be laying folks off or anything like that once we get this up and running. It's really to help us scale the business without having to add significant additional headcount. I think you should see in the operating leverage, as we continue to grow the bank, that we're not having to increase spend on the expense side to be able to do that.

Got it. Okay. That's helpful. Makes sense. I guess on the tax rate going forward, the tax credits this quarter, kind of a one-time, like a one-quarter impact. Is that correct? Then we should maybe go back to a 20%, 25%, 26% level? Maybe higher than that going forward?

Yeah. I would say think about the tax rate on an annual basis. I think for the year, we came in at 20%, what did I say? 27%.

I'd say go forward, the way the tax credits work, we purchase tax credits that are leveraged for our current year tax liability, and then we're carried back to fiscal year 2023 and part of fiscal year 2024. We have capacity from a tax credit standpoint to still carry back to part of fiscal year 2024 and all of fiscal year 2025, as well as utilizing them through fiscal year 2027. We can probably do another tax credit deal of a similar size to what we did this year in the coming year. I would think about our tax rate for the year probably in the realm of 28%-29% for fiscal year 2027.

Got it. Okay, that's helpful. Thank you. I guess just lastly, if I squeeze one more in here on the provision outlook. For the year, obviously you had release for the year of around a half a million. I guess how do we think about the provision going forward, and how does that factor into the loan loss reserve? Is there a level that you're comfortable letting it run down to? I think it peaked at 147 basis points in the fiscal Q2 and the end of the year at 130. Does it kind of hold it at 130 range or could we see that go lower?

It's largely going to depend on loan volume. It peaked in Q2 when we had that large purchase. Some of what we had purchased there carried higher individual reserves on individual loans. What we've seen over the past couple quarters is we've been able to resolve some of those loans without having to take any significant level of charge-offs. We've been able to release allowance on individually evaluated loans. There is still a fair number of those loans out there that could be resolved in the coming quarters. That's kind of TBD at this point. I'd say right now we're appropriately reserved for. If you think about new volume, the national lending originations, we're putting an allowance, a general allowance on those in the realm of 45 basis points, I think. Pretty nominal allowance being added on that front that runs through the provision.

Any purchases we have going forward, the allowance on those comes out of the purchase price, so there's no impact to provision there. I would say I would expect provision to pick back up into a normal provision barring any payoffs on purchased loans that are carrying larger individual reserves.

Got it. Okay, that's great. That's all that I had. Thanks a lot. Appreciate it.

Thanks, Damon. Thanks, Damon. Thank you.

Showing no more questions, I would now like to hand the conference back over to Rick Wayne for his closing remarks.

Thank you. Thank you all for listening and supporting us. We look forward to talking to you at the following end of our next quarter. Wishing you all a happy summer. Enjoy the rest of it. Thank you. Thank you, ladies and gentlemen.

This concludes today's conference call. Thank you for participating and you may now disconnect.