Northeast Bank ($NBN)

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 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 future use. [Operator Instructions] 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 risks 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 Rick 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 Delmolino, our Chief Financial Officer; and Rebecca Rand, our Director of Accounting. Planned 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 #3 of the material uploaded, and that's a record beating last quarter's previous record. So 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 PPP loans. This is a record earnings quarter in the history of the bank. And along those same lines, is a record for the most net interest income in the bank's history. We're very proud of those records that we're broking, taking a look now at some of the other items in the financial highlights. We had a total low volume in all areas of $345 million. I'd also point out for the year, to date, which is 9 months of our fiscal year, $1.56 billion and which is an increase that they're now going back to the quarter, an increase in the 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 is 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 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 look we looked at in excess of $1 billion -- we did in excess of $1 billion. And unfortunately, we 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 this 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 we -- 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 take a look at what's happened for 9 months. For 9 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 March -- the Q3 from 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 allowance. We saw that this quarter, and that's why the yield on purchase loan was so high because we have so much of 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, we had 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 and tangible book value per share is now up to 66.35, a remarkable quarter. And with that, I will ask Tino to go over the financials.

Awesome. Thanks, Rick. As Rick mentioned, this was another great quarter for the bank. We reported income of $29.9 million, $3.53 per diluted share for the quarter and $73.1 million or $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 in 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%. And was 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 5.5%, 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. We saw a great expansion in the yield on our purchase portfolio this quarter is driven by a combination of both accelerated accretion, $7.3 million at certain loans within the portfolio paid down or paid off as well as increased core 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 7 basis points quarter-over-quarter as higher-priced CDs mature and are replaced by cheaper funding. Asset quality remains strong with delinquencies, nonaccruals and classified loans, all remaining relatively flat quarter-over-quarter. You will note that we took 2 nonperforming loans into [indiscernible] 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 1.47 as of 12/31 to $60.3 million for a coverage ratio of 1.36 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. Noninterest 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% in tangible book at $66.35 a share, giving us with 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 8 loans and 3 transactions with all but one loan from bank sellers. As Rick pointed out, we bid on well over $1 billion of loans, and this included 2 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 1 to 3 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 point out, we closed $254 million this quarter, another record, increasing net book by over 10%. This included 33 loans with an average balance of $7 million. LTV is just over 50% and an average interest rate of around 7.2%. Like last quarter, 2/3 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 at some 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(a) loans in the grocery and manufacturing sectors beginning May 1. This should be good for us. We're working with annuity 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 increase -- 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.

[Operator Instructions] And our first question comes from the line of Damon DelMonte of KBW.

So first question on the deposit growth this quarter. 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 so much extra liquidity. Is that in anticipation of more purchase activity happening here in this coming quarter? Or I guess a little color on the thought behind that.

Yes. Yes. 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.

Yes. Deposits are down 168 quarter-over-quarter. So relatively flat. What we did have, from a deposit standpoint, you'll see -- we had some brokered 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.

Got you. Okay. So I apologize, I must have pulled the wrong number up the release then. Okay. Maybe on the on the expense side of things, I know that 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?

Yes. So from a compensation standpoint, I'd say 12/31, the quarter ended 12/31 is a good, 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 $13.5 million from a comp standpoint for Q4. From a loan -- for other noninterest 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 shouldn't be any material pickup in 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? I 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 market. There's a lot of -- the niche that we're in is obviously in the bridge loan and lender finance space, and a lot of the larger nonbanks that are -- that have lower cost 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 cost of capital. So it's a pretty good niche for us, and I don't see this pipeline slowing down at all.

Our next question comes from the line of Justin Crowley of Piper Sandler.

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 to mature over the next quarter?

Yes, 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 7 basis points compared to actual costs incurred during the quarter. Yes. Cost of funds, spot costs was $355 million at the end of the quarter versus $362 million 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 broker 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 3 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 comparatively. 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 hit NII.

Yes. Weighted average maturity on that around 8 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 will be recognized over the duration of those 8 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 5-year treasury plus some sort of margin. So the rate marks on those get recognized a little bit faster.

Just [indiscernible], if it's 8 years -- if the [indiscernible] is 8 years, the actual life will be shorter for sure. Those have a higher CPR, and they tend to pay off. We have in this slide at a bridge Rebecca on the purchase loans that shows the amount of...

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 the stick, but it shows the -- it shows on this Page 17, it shows the purchase write-off 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 just -- I guess, just one last one on this topic and what goes into -- what factors into margin. But how much of the -- 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 flat or factor in floors that are in place in that book?

I don't have that right...

[indiscernible] number somewhere?

So the national lending originated portfolio on Slide 9, the current weighted average floor is 7.23% as of March 31. And just for context, that's roughly the rate that we originated our national lending originations this quarter, 7.2%.

I think a lot of -- I don't have the exact numbers in front of me, but I can speak kind of high level. A fair amount of the originated portfolio is hovering around the floors. So -- and a lot of that is based on either tied either SOFR or [indiscernible]. 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 pricing comes down.

Okay. 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 part -- in large part, I guess, M&A driven. So just curious at the slower start to the year here on transactions impacts the activity levels you think you could see and if there's -- if that's being made up from other sources, just given some of the commentary you made on the amount that you took a look at this quarter.

[indiscernible] you clarify that a little bit, a little more, we make sure we're giving you a responsive answer to your question.

Sure. Yes. Just -- yes. 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 a slower level of transaction announcements and deal activity with some of the uncertainty out there. Just wondering if you think that's going to be all impactful to the activity in the pipeline and just the opportunities that you're seeing and if you're seeing that made up for elsewhere just from other sources for these purchases.

M&A is certainly a large part of it, and we're seeing more and more of that, but it's certainly not the only -- I mean there's some significant activity we've seen over the last year and continue to see from large, very large credit funds who are the they're at the tail of a particular purchase from several years ago or -- and are looking to get out of that. There's balance sheet management. There's other large banks that just do regular sales, and they in good markets and bad. They just have a 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, this quarter, although we only bought $25 million, 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 we were unlucky.

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

Did that answer your question?

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

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

Okay. Great. And then just a final question for me. Just on the SBA business, you saw the pickup after the shutdown last quarter, but obviously, still well off of levels seen last year. And you talked before about 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 monthly volume, but just a little more detail turning that business.

Well, when we started this business, it was with a view towards a very tech-forward largely -- we're still looking at improving 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, it's -- we have to kind of retool 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 of $100 million a quarter. I think with this -- the current product we're in, I don't see us getting back to that point in the next -- 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 1 that for these loans under $350 million 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 we 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 requirements that we have to stand up and we continue to stand up. And so -- and once that's completed, I think we'll get back to that level and that should continue to -- and again, I think we may be able to do more if we're able to participate in this new -- I mean, 90% guarantee program, which were is very interesting.

Okay. And then I guess just like a quick follow-up, somewhat related, just in the small balance insured product. Do you have any updated thoughts there, just as you continue to generate some volume, how 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, it's going to have -- that has essentially 14% or 15% of credit protection on between the deductible and the insurance. It's a wonderful product for somebody to buy in pieces. We are also talking to a couple of larger funds about doing a transaction for everything on the balance sheet. But until we can move it, I wouldn't expect to have any material growth on that on our balance sheet.

Our next question the line of David Minkoff.

Congratulations on a wonderful quarter. I've been a shareholder for going back more than 10 years as CFO at the time was clear bean. So how many years ago back is the -- so -- and I listen to every conference call each quarter, I haven't missed one. So if you just took a 10 years, I've listened to 40 conference schools, more than that and kind of become accustomed to hearing good news is that's what you guys do. It's in your DNA. But this one kind of took the cake. I mean, some of the metrics, I don't want to repeat them all. You gave the ROI up 26%, tangible book value of 15%. I mean, if you're watching Wall Street, you can appreciate how good these numbers are. But I remember 2 years ago, in '24, I kind of commented yet another excellent all good quarters, but an excellent quarter, and I commented at that time, I think the stock was 72% at the time, and I commented how well you had done. And I asked Rick, I said, we, well, what are you going to do for an encore? But I said that with tongue-in-cheek, Rick, I guess you took it seriously. Thanks for the showing me what you're going to do for an encore. So rather than ask the question, I would just say finally, with these results, I would say there should be a national holiday named after Northeast Bank. I don't think we have a holiday came after a bank, yes, do we? I mean, National Bank -- Northeast Bank Day that has a good [indiscernible], I think, do you?

It's the best idea, we've heard recently. I like that.

Right. The schools will be closed, no postal delivering, on mail service. And maybe April 28 would be -- or the last Tuesday in April should be the day for this. I will recommend this to Congress. Anyway, congratulations on a great quarter. This was really stupendous.

Thank you, David. We appreciate it. 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. We have no further questions at this time. Now I'll turn the call over to Rick 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. And 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.