Northeast Bank Q2 FY2026 earnings call

Management Statement and Operational Highlights:

• Administrative: Northeast Bank takes shareholder input on slide decks seriously, making adjustments like deleting slides and moving others to the appendix.
• Loan Volume: The quarter had a significant loan volume with $900 million in total loans added to the balance sheet, including $533 million in purchased loans and $252 million in originated loans.
• SBA Activity: SBA loan origination was heavily impacted by the government shutdown, but rebounded in December. Originated $40 million in SBA 7(a) loans, sold $25 million for a $2.1 million gain. The shutdown also boosted the launch of the small balance insured business loan program, with $70 million originated.
• Financial Metrics: Net income was $20.7 million, EPS diluted was $2.49, ROE was 15.6%, and ROA was 1.87%. NIM was 4.49%, down from prior quarter due to liability repricing lag.
• Balance Sheet: Total assets ended the quarter at $4.95 billion, loans at $4.4 billion. Deposit growth in Maine branches over 3 years was 40.3%.
• Funding: Purchases were funded by brokered CDs and FHLB borrowings with a weighted average cost of funds of 3.8%.
• Asset Quality: Delinquencies, nonaccruals, and classified loans were flat quarter-over-quarter. The allowance for credit losses increased to $63.8 million.
• Expenses: Noninterest expense decreased to $20.8 million due to lower professional fees and loan acquisition/collection costs.

Segment Performance:

• Purchased Commercial Real Estate Loans: In the quarter, purchased loans had a UPB of $575 million at a cost of $532 million (92.6% discount), with a weighted average yield to maturity of 10.8%. These geographically diverse portfolios had significant concentrations in New York and New Jersey.
• Originated Commercial Real Estate Loans: The quarter saw $252 million in originated loans, which is about 25% of the loan book, with a weighted average origination rate of 7.6%.
• Small Business Lending: Over a 3-year period, small business originations totaled $653 million, with $448 million sold as SBA 7(a) loans. In the quarter, $40 million of SBA 7(a) loans were originated, $25 million were sold for a gain of $2.1 million, and $70.6 million of insured loan product was originated. Revenue contribution: Purchased commercial real estate loans are the largest segment, originated commercial real estate loans make up ~25% of the loan book, and small business lending includes SBA and insured products.

Guidance:

• Anticipate higher net interest income in subsequent quarters due to the larger loan book.
• Expect SBA loan originations and sales to increase, which should lead to higher EPS and ROE.
• The small balance insured business loan program has potential for growth, but focus on selling to manage the balance sheet.

Risks:

• Disruptions in the SBA program can impact loan originations and gains.
• Potential loan runoff as interest rates change, which could lead to loss of retained loans.
• Uncertainties in selling insured small business loans and the resulting economics of gain on sale, as accounting and sale structures are still being finalized.

Q: Share count decrease?

A: No stock buyback during the quarter; the decrease was purely due to stock compensation activity and cancellation of shares to cover taxes.

Q: NIM lift?

A: Yes, due to downward liability repricing anticipated over the next quarters.

Q: Funding mix?

A: Brokered deposits will continue to be a main source of funding for growth, with efforts to grow cheaper deposits in Maine.

Q: Purchase loans retention?

A: Anecdotally, Northeast Bank tries to retain loans, but runoff may occur with rate changes as other banks chase borrowers.

Q: SBA gain on sale?

A: Anticipate the gain on sale to stay in the realm of 8% to 9% compared to the guaranteed balance being sold, and expect an increase next quarter.

Q: Insured small business product growth?

A: Run rate is sustainable, but need to sell loans to avoid portfolio buildup; economics differ from SBA loans, with potential for spread income or mortgage servicing assets depending on sale structures.