NBN

• Overall Financial Results

  • Q4 FY26 net income was $34.3 million ($4.05 diluted EPS), up from $29.9 million ($3.53 diluted EPS) in the prior linked quarter. Full year FY26 net income reached a record $107.5 million ($12.74 diluted EPS), a 29% increase over the prior year's record $83.4 million.
  • Return on equity was 23.5% for Q4 and 19.7% for full year FY26; return on assets was 2.7% for Q4 and 2.3% for full year. Tangible book value per share grew 6% quarter-over-quarter and 22% year-over-year to $70.58.
  • Total assets at quarter end were $5.2 billion, with total loans (including held for sale) reaching $4.59 billion, a 21% year-over-year increase. Net interest margin (NIM) remained strong at 4.8% for both Q4 and full year.

• Loan Operations

  • Total Q4 loan volume was $389.8 million ($1.95 billion for full year FY26), marking the third consecutive quarter of record national origination volume.
  • The purchase loan business is most competitive on geographically and collateral-diverse pools that do not fit large credit funds' standardized securitization requirements; large >$100 million homogeneous multifamily pools face extremely fierce competition from large credit funds that bid thinner yields.
  • Small business lending faced headwinds from six SBA rule changes in 12 months that narrowed eligibility and increased underwriting requirements. The insured small business loan program was originally structured for sale, but management has increased insurance coverage to 25% (from 10%) to hold the loans longer, as attractive sale pricing has not been available.

• Capital and Operational Performance

  • Capital levels remain strong: Tier 1 leverage ratio improved to 11.9%, total risk-based capital reached 14.7%, providing ~$1.5 billion in additional loan capacity.
  • Credit quality improved quarter-over-quarter: non-performing assets fell to 67 bps from 78 bps, and past due loans fell to 54 bps from 64 bps. The efficiency ratio remained strong at 36%, aligned with the prior quarter's 35.5%.
  • Technology platform development accelerated in Q4, with the new data warehouse expected to go live in FY27, enabling automation and scalable growth without proportional headcount increases.
  • The bank purchased ~$40 million in transferable production tax credits in Q4, reducing Q4 tax expense by $2.8 million and bringing the full year effective tax rate to 27%.

• Cost of funds is expected to remain relatively flat in the coming quarter: brokered CD maturities will bring a slight interest expense increase that will be offset by lower rates on maturing retail CDs.
• NIM is expected to remain relatively stable, with asset yields expected to stay within 10 bps of current levels; reallocation of on-balance sheet cash to higher-yielding investments will offset any modest declines in new origination yields.
• SBA origination volume is expected to reach a $20 million per month run rate absent additional regulatory changes, after adaptation to recent rule changes.
• Expenses are projected to increase by ~$1 million in the next quarter, then stabilize at a steady run rate; technology investments will enable operating leverage, allowing balance sheet growth without proportional increases in headcount or expenses.
• The full year FY27 effective tax rate is expected to be between 28% and 29%, as the bank has capacity for additional tax credit purchases to reduce tax liability.
• National lending origination volume is expected to continue growing, though management did not commit to maintaining the 27% year-over-year growth pace seen in FY26. The current origination pipeline remains strong with no signs of slowing.

1. Purchase Loan Portfolio: Q4 FY26 purchase volume was $94.4 million, bringing full year FY26 purchase volume to $797.3 million. The portfolio delivered a 16% net year-over-year growth, with a total return of 9.3% and a portfolio yield of 8.6%. It contributes ~44% of total annual loan volume.
2. National Lending Originations: Q4 FY26 origination volume hit a record $257.3 million, with full year volume reaching $897.4 million. The portfolio grew 27% year-over-year, accounting for ~46% of total annual loan volume. Originations have an average LTV of ~50% and average interest rate of ~7.25%, with an overall portfolio yield of ~7.7%.
3. Small Business Lending (SBA + Insured Product): Q4 FY26 SBA origination volume was ~$35 million, bringing full year volume to ~$150 million. Full year FY26 insured small business loan originations totaled $102 million. Gain on sale income for SBA loans was a consistent ~$2.9 million in Q4. This segment contributes ~10% of total annual loan volume.

• Large homogeneous loan pools face extremely fierce competition from large credit funds that can bid thinner yields, making it harder for Northeast Bank to win these large transactions.
• The insured small business loan program cannot currently be sold at attractive pricing, forcing the bank to hold more of these assets on balance sheet than originally planned, though the portfolio has strong yields and credit protection.
• SBA lending growth has been weaker than expected due to six consecutive regulatory rule changes in 12 months that narrowed eligibility and increased underwriting requirements. Future rule changes could further suppress growth.

Q: Can you share additional color on the competitive environment for large >$100 million loan purchase pools, and are purchase opportunities still primarily M&A/credit fund driven?

A: Eight large pools were available this quarter, four of which were homogeneous multifamily pools and four had undesirable collateral like vacant office or rent-controlled multifamily. Large credit funds outbid Northeast Bank on the attractive multifamily pools, offering thinner yields than the bank can accept. Northeast Bank remains most competitive on mixed-collateral, mixed-geography pools that do not fit large funds' standardized portfolios. Large pools remain primarily driven by credit fund wind-downs and M&A activity, matching prior market dynamics.

Q: What is your outlook for net interest margin moving forward, after accounting for one-off transactional impacts?

A: After backing out one-time items, margin should stay relatively steady. The purchase loan book yield will hover around 8%, and the originated book yield is currently around 7.7% with new originations slightly lower. Yields on the overall asset base should stay within 10 bps of current levels. Reallocation of on-balance sheet cash to higher-yielding investments will offset any modest downward pressure from lower new origination yields, keeping NIM stable.

Q: Why did you adjust insurance coverage on the insured small business loan product, and how will this impact future volume for this segment?

A: The bank originally planned to originate these loans and sell them, but attractive sale pricing has not materialized, so originations were paused to allow existing loans to be moved to the held portfolio. The 25% insurance coverage increase was implemented to support holding the loans longer term. If the bank can secure attractive sale pricing in the future, there is strong market demand that will allow large volume growth; if not, the bank is comfortable holding the loans as they generate strong net yields (~7%) with significant credit protection, but does not plan to hold hundreds of millions of these assets long-term. Further details will be available on the next quarterly call.

Q: Can 27% year-over-year growth in national lending originations be sustained into FY27, and what is the outlook for expenses?

A: The national origination business has consistently grown and will continue to grow, though management would not confirm it will maintain the 27% pace. Expenses will increase by ~$1 million next quarter then stabilize. Technology investments will enable operating leverage, allowing the bank to scale without adding proportional headcount, rather than cutting existing staff.

Q: What is the outlook for the provision for credit losses and the loan loss reserve level going forward?

A: Provision levels will largely depend on loan volume. Reserve levels peaked in Q2 FY26 after a large purchase with higher individual loan reserves; reserve releases over the past two quarters came from successful resolution of those loans with no major charge-offs. There are still additional individually reserved loans that could be resolved, leading to further releases. New originations carry a very small 45 bps general allowance, and new purchase loan reserves are priced into the purchase price with no provision impact. Barring additional large reserve releases, provision will return to more normal levels.