Northeast Bancorp Stock

Welcome to the Northeast Bank First Quarter Fiscal Year 2027 Earnings Call. My name is Towanda, 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 future use.

[Operator Instructions] 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 would now like to turn the call over to Rick Wayne. Mr. Wayne, you may begin.

Thank you. Good morning. And welcome to our investor call for the quarter ending September 30. I'm going to provide an overview of our -- this is our first fiscal quarter. And 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 your questions. I'm going to first make some comments on the financial highlights page, which is Page #3 in the investor deck that was posted last night.

Some of the highlights I want to mention are as follows: we had quarterly net income of $29 million, return on equity of 18.65%, return on assets of 2.21%. Tangible book value continues -- per share continues to rise, ended the quarter at $73.22, representing a 22% increase over a year ago and a 58% increase over the last 3 years. The total return on our purchased loans in the first quarter was 9.11% or $62 million, which includes $5.9 million of recovery on credit discount on loans we purchased.

Let me just pause on this point for a second and just briefly talk about our purchase loan business, which is a very, very large part of our business. We purchased loans at a discount either because there is an interest rate mark, that is to say the coupon that the customer is paying is less than what the current market rates are for interest. Think of this as bond math. And then we also buy loans where we pay a discount because it may turn out that we won't collect everything, the entire unpaid principal balance from the customer.

And the credit mark is interesting because of the required accounting for it and it's not as obvious as to how much that is as it was before CECL. I know that's a lot to understand. So I'll just try and put some numbers to it as it occurred in the current quarter. In the current quarter, we had about $6 million of discount due to a credit mark that were loans that wound up paying off in the quarter.

It is primarily 4 loans, which accounted for most of it. So with respect to these 4 loans, we had $6 million of a credit mark, which we didn't accrete into income and the loans paid off in full, and we earned $6 million. The way the accounting for that is now under CECL is that it runs through the allowance. And so it's not obvious -- so obvious on the financial statements because it runs through the allowance along with a bunch of other matters.

But that's a core part of our business. And I think it's worth highlighting that number, and I want to do that by turning to page -- I'm getting there, still getting there. If you could turn to Page 32, which is the last page in the deck, you can see that -- the total return, I mentioned that it was 9.11% on the total portfolio, but there is a line there that says release of allowance for credit losses on purchased loans, $5.921 million.

Previously, that would have been reported in interest rate, meaning before CECL, that would have been included in our interest income, but now it goes to the allowance. So I did want to highlight that. I think Tino is going to provide a little more granularity on that point. For the quarter, it was our fourth consecutive quarter of record originations in our national lending business, $258.6 million.

Our pipeline was very large during the quarter. It continues to be very large, and we're seeing a lot of traction in that business line. We also highlight on Page 3 that we have $1.58 billion of loan capacity, and this is without doing any capital raise. It's just what's available to us with our existing capital. So we consider that to be very valuable to us. Let me now just make a few more points as I turn. If we take a look at the -- I want to talk about the asset quality next of our purchased and originated loan book. With the loan portfolio of $4.650 billion, that's excluding any loans that we're holding for sale.

It represents 97% of that number, $4.51 billion are national lending loans, that's purchased and originated. And of that, at the quarter end, only $22.5 million were on nonaccrual, representing 48 basis points of total loans. So it's really a remarkably low number for our loan portfolio, as you can see that. And just for purposes of the full picture, we had some OREO on the balance sheet as well.

And with those comments, I'd like to turn it over to Tino, please. Santino.

Awesome. Thanks, Rick. As Rick mentioned, this quarter was a good start to the year and created strong momentum heading into Q2. Net income for the quarter was $29 million or $3.42 per diluted share compared to $34.3 million or $4.05 per diluted share in the linked quarter. Return on average assets was 2.21% and return on average equity was 18.65%. Total assets ended the quarter at $5.35 billion, an increase of $125 million or 2.4% from June 30. The loan portfolio, including loans held for sale, grew $163 million or 3.6% during the quarter.

Loan generation totaling $534 million was split between $237 million of National Lending purchased loans, $258 million of originated loans and $35 million of SBA loans. It's worth pointing out that most of the purchase loan activity occurred at the tail end of the quarter. Therefore, there is limited impact on the current quarter's earnings. Net interest income for the quarter was $58.9 million compared to $60.3 million in the linked quarter and $48.2 million in the prior year quarter.

Net interest margin was 4.57% compared to 4.8% in the linked quarter and 4.59% in the prior year quarter. The decrease in margin is largely attributable to yields on the purchased loans, which can be volatile, as we know, due to timing of prepays, which caused accelerated accretion, i.e., transactional income. While we did have a fair number of prepayments, both in [ this ] quarter and the current quarter, which caused yields to decrease a little bit, the current quarter prepays were largely on loans that did not have significant rate mark discounts.

As Rick mentioned, most of the prepays we saw this quarter were actually on loans that have credit marks. So we released just under $6 million of credit mark through the allowance within the purchase portfolio. I'll come back to this to discuss in a little more detail later. Yield on the total loan portfolio was 8.11% compared to 8.37% in the linked quarter. Within National Lending, the purchase portfolio yielded 8.24%, while the originated portfolio yielded 7.7%. We saw a little bit of a shift in portfolio mix this quarter with originated loans making up a higher percentage of the balance sheet. Given the yields here, that also put a little bit of pressure that we're seeing on NIM.

Turning over to funding. Total deposits increased $95 million or 2.6% during the quarter, largely driven by $152 million increase in brokered CDs, offset by seasonal runoff in our government banking portfolio. FHLB advances were relatively flat quarter-over-quarter, though average balances were up as we utilized short-term borrowings to fund growth between brokered CD issuances.

As you'll see on Slide 21 of our deck, cost of funds came down 1 basis point from the linked quarter and our spot rate is at the same level. We've made all rate changes that we anticipate making on our nonmaturity deposit portfolio, barring any further changes by the Fed. So the only real movement I'd expect in our cost of funds going forward is as CDs roll over.

On that front, we do have about $1.4 billion of CDs maturing within the next 3 months that we anticipate rolling over. The cost on that likely is going to go up somewhere in the realm of 50 basis points, depending on where rates are in the brokered market at that time. That's going to equate to somewhere around 15 basis points of increase in our cost of funds next quarter.

Now if we could take a look at Slide 30, I'd like to spend a little time on the nuts and bolts of the provision. So there's a lot to unpack here. First, I'll talk through kind of the typical components of the allowance for loan loss. So first is just your typical changes within the allowance, which is a result of loan originations as well as changes in the coverage ratio on the existing portfolio.

This accounts for about $1 million of provision during the quarter as we increased the coverage ratio on both our SBA and our purchase portfolios. The other side of this that you'll see in most banks is charge-offs and recoveries, whether it be on purchase or originating loans. Excluding the insured loans, we had about $3 million in charge-offs this quarter, which you can see are mostly within the SBA portfolio.

The 2 unique components to our provision are as follows: the first is, release of credit discount on purchased loans. So Rick got into this a little bit. But as you look at the allowance roll forward here, you'll see that we have a column for initial ACL on purchased loans. So when we're buying loans at a discount and there's a bit of uncertainty as to whether or not we will be able to fully collect the principal balance of those loans, we actually will set up an allowance that comes out of the purchase price on those.

So unlike your typical allowance that runs through the provision, there's no net income impact of that initial $4.4 million. Ultimately, as loans go through the process and if we're able to get those loans to pay off without having to take a charge-off or take a charge-off equal to that initial credit mark, we end up taking a release. So we end up recovering a good amount of that allowance. As you can see this quarter, Rick mentioned, we picked up $5.9 million that runs as a credit to the provision.

The other unique component to our allowance relates to the insured small balance business. The way -- all of the loans within this portfolio, we've got a little over $90 million of them right now. Part of them -- most of them are in held for sale and part of them are in the portfolio. The way the accounting works for this is you have to treat -- even though the insurance exists to cover us from a credit loss standpoint, and we believe it's more than ample to cover any expected credit losses within this portfolio.

The accounting standards require you to account for those 2 items completely separate and distinct. So what ends up happening is we book an allowance on the insured small business loans as if we did not have any sort of credit insurance. So that's what you can see here. You can see we booked $2.5 million of provision during the quarter in relation to these loans.

On the flip side of that, because we expect the insurance company to make us whole on any losses we incur here, we end up booking a gain in an insurance receivable and that gain runs through noninterest income. So there's a little bit of grossing up happening between our provision and noninterest income, which is a bit unique.

Switching over to noninterest income. I already discussed the gain on insurance recoveries. The other bigger component here is the gain on SBA sales. So we sold $23.7 million of SBA loans during the quarter. We also sold $9.9 million of small balance insured loans during the quarter. The combined gain on sale from both of those items was $2.7 million. I think where we're at right now from an SBA standpoint, probably is a good run rate for us to think about on a go-forward basis, somewhere in that $35 million a quarter range.

Looking at noninterest expense came in at $24.2 million compared to $23.5 million in the linked quarter. Quarter-over-quarter increase here is spread pretty evenly across the categories with employee and director compensation accounting for the largest dollar increases here as we adjust compensation in Q1 of each year.

Lastly, income tax expense came in at 10.3% (sic) [ $10.3 million ], representing an effective tax rate of 26.2% compared with an effective tax rate of 28.3% in the prior year quarter. The lower effective tax rate is primarily reflected as a result of a greater benefit that we get. So all of our stock vesting grants occur in Q1, and we recognize a tax benefit for that. On a run rate, I'd expect our ETR to be around 29% on a go-forward basis, assuming we do not buy any further tax credits, which is something we are looking at, but not something we would forecast.

Finally, capital remains strong. Shareholders' equity increased $24.5 million or 4.1% during the quarter. Tangible book increased to $73.22 compared to $70.58 at June 30. Tier 1 leverage ratio came in at 12.11%. Overall, the quarter reflected strong loan production, healthy purchase loan returns, favorable asset quality trends and continued capital growth. The loan volume we saw this quarter is a catalyst as we go into the second quarter of the year.

Now I'll hand it over to Pat.

Thanks, Tino. It's another good quarter on the lending front. In the purchase space, we looked at 29 loan pools containing 3,700 loans and $3.5 billion in balances. 8 of these had balances over $100 million. We bid on 10 of these pools for about $600 million, and were successful in 8 of them, winning just over 40% of the balances bid or $254 million at a weighted average purchase price of $0.935.

These pools were sourced mainly from banks who are managing internal concentrations and also M&A deals. Included in the pools we won are 89 loans located primarily in the Northeast, California and Florida, purchased at a weighted average LTV of just over 60% and a weighted average yield to maturity of approximately 8.5%. Of the 8 pools with balances over $100 million, we passed on half of them due to performance issues, undesirable collateral or unacceptable price expectations.

In 3 cases, we bid on and won smaller subsets of larger pools. In some cases, particularly on larger pools where we think we might not be the best all bid and depending upon the loan composition, performance, price expectations and competitive set, we bid on combinations or subsets of loans within larger pools or partner with complementary bidders in order to maximize the chances of winning something. We did win one large pool with balances of just over $100 million. This was a 23 loan pool from a New York area bank that needed to manage its balance sheet and close quickly.

Moving on to originations. In our small balance loan program, we originated 190 SBA loans and 10 GTL loans for just under $40 million. No significant updates there. For commercial real estate lending, we reviewed 201 loan requests this quarter for around $3 billion. We issued 69 term sheets for $887 million, of which 36 for $457 million were executed and returned. Many of these remain active with $259 million closed within the quarter.

This included 23 loans with an average balance of $11 million, LTVs of 54% and an average interest rate of just over 7%. Direct loans represent about 2/3 of these balances. This is a shift from recent quarters where lender finance was predominant, not surprising given increased market demand and rising funding costs for nonbank lenders. A rising or volatile rate environment has always been good for the purchased loan business and puts us at a competitive advantage relative to nonbanks in both the purchased and originated space. Both pipelines are currently very active, and we're confident of another strong quarter to come. Rick?

Thank you, Pat. Thank you, Tino. Now we'd be happy to take any questions that you have.

[Operator Instructions] Our first question comes from the line of Damon DelMonte with KBW.

First question is on the margin. Clearly, lots of moving parts going through each quarter. And as you pointed out, part of the movement this quarter was because of the elevated payoffs. So I guess my question is kind of twofold. Do you expect the pace of payoffs on the purchased loans to slow in the coming quarters? Or do you think we'll continue to see increased activity like we have in the last couple of quarters?

I guess I would say I'm hopeful that the pace of paydown slows down. I mean it's not something we can necessarily forecast very well. I mean with rates going up, that should be favorable for us on that front. The other thing I'd say is, as it relates to the couple of loans that Rick mentioned at higher credit marks, given the fact that we were expecting to take some sort of a loss on those loans, those are probably the types of loans that we're happy to manage out of the bank. But overall, I would hope to see paydowns come down going forward.

Okay. So if all else was like kind of equal, if the paydowns slowed, I mean, do you -- would we see like a rebound in the margin maybe closer back to what we had in the previous quarter? Or do you think you kind of stay in this 4.55% to 4.65% range?

I think it might rebound a little bit. A couple of things there. One is, we do -- depending on the rate mark that's on a given loan that prepays, you could see a bump in margin depending on any level of interest rate mark that we're able to recover at the time of payoff. So there are instances where it is actually beneficial to us, at least in the short term for those loans to pay off. And the other thing I'd say, assuming that paydowns do slow, the yields that we have on the portfolios we purchased this past quarter are all pretty healthy. So it should be net accretive to the margin. So hopefully, it should bounce back a little bit.

This is Rick. A feature of our bank, which makes your job more challenging, is that we frequently use the word lumpy in our business. So for example, we could have a loan with a small balance on it and a large credit mark. And then when that loan pays off, we have a big -- a large amount of income running through the allowance.

We could alternatively have a loan that we purchased recently that has a lot of interest rate mark on it, and it pays off early. It could be a loan with, let's say, 5 years remaining. So we anticipate we're going to accrete that interest mark over 5 years, but it pays off in 2 weeks. That happens also. And so it's -- it would be difficult for us to provide you with and the other listeners any help on that.

But I would make the point, that's why -- and maybe this is the fantasy world, but we have to be looked at on a yearly basis where these things sort themselves out. Quarter-to-quarter, that number can jump around. And I would just add for the record, 4.57%, while lower than some of the previous quarters is a very healthy NIM, as you know.

Yes. Totally, totally get that, for sure. Yes. Okay. And then maybe like on the fee income line, you had the insurance recovery gains that were booked. Is this something that we should expect kind of more consistently in future quarters? Or is this kind of an anomaly this quarter?

It's going to occur in future quarters also. I would -- it's hard to tell you guys how to forecast this necessarily because ultimately, what's happening is there's no P&L impact of that because while it shows in noninterest income, it's also an increase in the provision. So the 2 items net to 0, and it just grosses up those 2 line items in the P&L.

Got it. Okay. So while our provision or our fee income may be off, the net of those 2 should hopefully cancel each other out.

Yes, exactly.

Got it. Okay. And then if I could just squeeze one more in. On the loan growth outlook, the commentary around the originated loans seems to be very favorable. If you look back over the last 12 months, I think you're probably around 40% growth in that portfolio. Can we kind of expect something that we've seen over each of the last few quarters, something that's comfortably in the 25% to 35% quarterly growth rate? Or do you think that dials back a little bit?

Let's make sure we're dealing with the same headline. We expect that originated loan book to continue on the path that it's on. But you're not saying -- are you saying that you think it increased 25% from the linked quarter?

Linked quarter annualized, yes, the...

Well, if you annualize it.

Yes, the National Lending originated loans, if you annualize that, it was like 34% this quarter?

Yes. Yes, I think that's probably a reasonable way to think about it, but it all has to do with the level of payoffs. So there are, of course, 2 components to that. One, how much do you originate. And two, what are your payoffs. And in that origination business, we're primarily a bridge lender, either directly -- when we're making loans directly to the owner of the property or indirectly if we're providing leverage to a nonbank lender who in turn is making bridge loans. So that number, the net growth, again, could vary. This is what may be difficult for you. You still like us, Damon, they are hard to predict.

The shift -- one thing that's good is the shift toward direct loans tends to have a longer duration than lender finance loans. So the volume of direct loans is encouraging from that perspective and with respect to payoffs.

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

This is Bader for Justin. I just had a question on the purchase side. You guys had a pretty healthy amount of activity, and I appreciate the detail at quarter end. I know there are a lot of variables that go into it, but curious how you think higher rates, especially you have a couple of hikes coming in the next 12 months could impact opportunity here and how that could create more transaction volume maybe after the next quarter, heading in the next 12 months?

I think there's 2 -- if you remember back to 2022, 2023 in that rising rate environment, there was a lot of purchase opportunity back then. And I think there's a lot of reasons for it, but one of the principal reasons with banks is they tend to do fixed rate lending and fund short. And so in a rising rate environment, there's some portfolio management there for liquidity purposes. Rising rates also increases the cost of funding for -- more than us for our chief competition, which are nonbanks. So I think those are the 2 basic reasons why a rising rate environment is good for the purchase business.

The other thing a rising rate environment tends to do is slow down the pace of refinancing out of our portfolio.

Got you. That's helpful. And then just thinking about the balance sheet capacity here, if we were to hypothetically assume you'd be able to deploy the $1.6 billion, how much In added expense would need to go along with that? And like how would you generally frame the operating leverage that could create?

We have tremendous operating leverage. Of course, $1.6 billion depends on the amount of loans that you have there. But relative to the net interest income you would pick up, it would be very small. But you could do the math. You could take the $1.6 billion and assume a spread -- and then it will give you your net interest income. And I would expect the operating additional cost to do that. It won't be 0, but it's going to be very small to put on another $1.6 billion of loans.

Ladies and gentlemen, I'm showing no further questions. Now I'll turn the call back over to Rick Wayne for closing remarks.

Thank you. Thank you, Damon. Thank you, Bader, for your insightful questions. Thank you to those on the call listening and to those who will listen if they go to our website to hear the tape. There is also a transcript published as well. We look forward to meeting again in January, it's towards the end of January when we will be reporting our results for our second fiscal quarter or the fourth calendar quarter ending December 31.

And in the meantime, if you have any questions, feel free to call one of us if we're able to answer it. We will be happy to. And if you have any suggestions or material that you think would be helpful to include both in the investor deck and on the call, let us know that as well. That's all for today. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

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.

[Operator Instructions] 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 itself 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 7 has annual loan volumes in our National Lending division. Loan volumes in both FY '25 and FY '26 was $1.754 billion. This is a coincidence, not an error. NIM remained 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 contributed 37 basis points -- 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 '26, 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.

Now I will turn the call over to Santino.

Awesome. Thanks, Rick. As Rick mentioned, we finished fiscal year '26 with exceptional results. I'll walk you through the quarterly results, beginning on Slide 13. As Rick mentioned, we reported net income of $34.3 million or $4.05 per 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 per diluted share. Return on average assets improved quarter-over-quarter to 2.71%, our 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 31, 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 purchase 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 was modestly below the linked quarter's exceptionally strong $63.1 million, the decline is primarily driven by lower accelerated accretion on the purchased loan book. We did, however, see higher transactional income related to a release of allowance for credit losses this quarter, which you see played through the negative provision for credit losses.

Net interest margin remained strong at 4.8%, down slightly from 5.15% in the linked quarter. The largest contributor of the strength here continues to be the purchased loan portfolio, which had a total return of 9.3% and a yield of 8.6%. Despite the modest decline, returns on purchased 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. Looking at Slide 21, cost of funds improved during the quarter, declining from -- declining to 3.59% from 3.62% in the prior quarter. While spot rates are below our deposit cost during the quarter, I wouldn't anticipate much further relief on the cost of fund side given the current rate environment.

Over the next 14 months, we have approximately $300 million in brokered CDs as well as another $300 million of retail CDs that should be maturing and rolling over. On the broker CD front, rates are up slightly from what is currently on the books. So we would anticipate a little bit of interest -- increase in interest expense on that front that we should see an offsetting relief on the retail side. So 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 is going to discuss, volume remains relatively slow on the SBA front, but 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 recovery of insured credit losses associated with the insured small balance business loans, as Rick mentioned. I'll explain the accounting here in a little more detail because it's kind of wonky the way this works.

So 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 at June 30, given the delinquent status of the loans. So we don't anticipate being able to sell those and have a full allowance booked against those loans. So the way the accounting works here is you essentially gross up both the balance sheet and the P&L.

So there's a $1.6 million allowance and corresponding $1.6 million insurance receivable. And then on the P&L, we have a $1.6 million provision with an offsetting $1.6 million gain. So at the end of the day, everything washes and we should get our money back on these, but I just wanted to highlight kind of the way the accounting is working here.

Moving on to Slide 19, you'll see credit performance remains strong. We reported $679,000 credit provision compared to a $218,000 credit provision in the linked quarter. Nonperforming assets improved to 67 basis points from 78 basis points in the prior quarter and past due loans declined to 54 basis points of total loans from 64 in the prior quarter.

Looking at noninterest 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 '27 as 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 was $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 a purchase of just under $40 million in transferable production tax credits was completed during the quarter that 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 entered fiscal year 2027 from a position of strength, generated 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 to the loan portfolio.

Thanks, Tino. This was a good quarter and capped off a very good year. On the purchase front, we closed around $100 million, including 8 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 a 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 8 of these for a total of $100 million.

Within those 37 available pools, 8 totaling $3.7 billion had balances of $100 million or more. These are 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 collaterals such as vacant office and rent-controlled multi-family. 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, LTV is just over 50% and an average interest rate of around 7.25%.

Once again, lender finance represented about 2/3 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 New York and multi -- Metro New York 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 6 new rule changes in the past 12 months, each of which further narrowed the eligibility window and increased underwriting requirements.

Together with annuity, we're adapting. And 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, and 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. And now we'll be happy to open it up to any questions.

[Operator Instructions] Our first question is going to come from the line of Justin Crowley with Piper Sandler.

Just to start out on the purchase business. Pat, you touched on it a little, but I was wondering if you could comment just a bit further on the environment for some of these larger-sized 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 from the business that you bid on. So just kind of curious for a little more color there.

Sure. There were -- we refer to them as well, which are the pools that have over $100 million of balances. And there were 8 of them, as I pointed out, and 4 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 a portion of that pool. In all cases, in those 4 deals, we were close, but no cigar. They were -- the competition was fierce. We were up against mostly very, very large credit funds who were looking for -- who ultimately bid thinner than we could.

The rest of those 8 pools had collateral types that we were interested in, mostly rent-controlled and vacant office or NPLs. So 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. And 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. Commercial real estate that'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. And 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, but -- and including this year as well, we had a large transaction of loan purchases early in the year, which -- 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. Yes, and 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 or winding down a particular fund and selling off the tail or M&A activity.

Got it. And then, 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, [indiscernible] 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 cost leverage having largely played out?

Yes. I mean, 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. And then 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.

So I'd say on the asset side, should be within 10 basis points of yield, that is kind of where we're at. And then 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. So we will see a little bit more of a pickup there as well.

Okay. Got it. And then 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. So -- just curious if you could talk a bit more about what informed that change. I guess that's probably the demand out there, obviously. But -- and maybe it's too early to say, but just how you think that might impact or impact the potential volume possible in this business?

Well, we always, from the beginning, mentioned we didn't -- 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 1.5 months because we want to be able to move them off 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. And we're hoping that we'll be able to sell these and 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 -- I think Tino may actually cover this, but the yields on these are pretty good. It's -- we've got a yield of around 11 and less 4 points of expenses with it, which go away the deductible, we're paid -- now we'll pay for the deductible over 2 years, which comes out of the yield.

So it's not -- we don't regret that at all that we have -- 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. But it's not our business to hold hundreds of millions of dollars of this kind of asset on our balance sheet. So it's a long answer, but the shorter version will be if we can sell and we'll do more.

Okay. And then 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 will be premature to tell you, it depends on who the buyer is for these to know what -- we've had conversations with a lot of buyers. So it depends. I think we can provide better information on our next call.

Our next question is going to come from the line of Damon DelMonte with KBW.

First question, I just wanted to start off on the National Lending originated portfolio. Obviously, a couple of good years of really strong growth here. I mean, 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% includes both purchase and origination in terms of the $800 million loan growth. I am being correct. On the origination -- in the growth...

Yes, the origination, I think it was like 27%...

Yes, 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 as Pat mentioned, is a big portion of that. I don't want to predict how much more that will grow from where it is, but I would say it will keep growing. And of course, the net growth on that also is how much we can -- what the runoff looks like.

Right. Right. Okay. Maybe on the expense side for Tino. I think you talked about some efficiencies from investments that you made recently. So -- 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?

Yes. I mean I would say expenses for the coming year, I would expect to pick up probably like somewhere around $1 million in the coming quarter and probably a steady run rate from there on out. And then in terms of efficiency, kind of 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. So I think you should see an 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. And then I guess on the tax rate going forward, the tax credits this quarter is kind of a onetime -- like a 1-quarter impact. Is that correct? And then we should kind of maybe go back to a 20% -- 25%, 26% level or maybe higher than that going forward?

Yes. I would say think about the tax rate on an annual basis. So I think for the year, we came in at like -- I'd say, 27%. So I'd say kind of on a 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 '23 and part of fiscal year '24.

So we have capacity from a tax credit standpoint to still carry back through part of fiscal year '24 and all of fiscal year '25, as well as utilizing that for fiscal year '27. So we can probably do another tax credit deal of a similar size to what we did this year in the coming years. So I would think about our tax rate for the year, probably in the realm of 28% to 29% for fiscal year '27.

Got it. Okay. That's helpful. And then I guess just lastly, to squeeze one more in here on the provision outlook. For the year, obviously, you had a release for the year of around $0.5 million. So I guess how do we think about the provision going forward? And kind of how does that factor into like the loan loss reserve? Is there a level that you're comfortable letting it run down to? I think you peaked at like 147 basis points in the fiscal second quarter and ended the year at 130. But does it kind of hold at that 130 range? Or could we see that go lower?

It's largely going to depend on loan volume. So it peaked in Q2 when we have that large purchase. Some of what we have purchased there carried higher individual reserves on individual loans. And what we've seen over the past couple of quarters is, we've been able to resolve some of those loans without having to take any significant level of charge-offs. So 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. So that's kind of TBD at this point.

I'd say right now, we're appropriately reserved for. If you think about kind of new volumes, the National Lending originations, we're putting an allowance -- general allowance on those in the realm of 45 basis points, I think. So pretty nominal allowance being added on that from that runs through the provision. And then 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 kind of -- I would expect provision to pick back up into like a normal provision, barring kind of any payoffs on purchased loans that are carrying larger individual reserves.

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 the 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.

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 will 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. Plan 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.

And we're very proud of those records that [ we've broken. ] Taking a look now at some of the other items in the financial highlights. We had a total loan 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 and now going back to the quarter, an increase in 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 looked at in excess of $1 billion -- we've been 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 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 just to 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 purchased 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 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 or $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 on 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%, which was offset slightly by a decrease in our purchased portfolio of $46 million or 2%.

Net interest margin was really strong this quarter, coming in at 5.15%, 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 purchased portfolio this quarter, which was driven by a combination of both accelerated accretion of $7.3 million with 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 OREO 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 or 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% and tangible book is $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 1 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 pointed out, we closed $254 million this quarter, another record, increasing that book by over 10%. This included 33 loans with an average balance of $7 million, LTVs 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 absent 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 just a little color on the thought behind that.

Yes. Yes. Damon, a 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 off the release then. Okay. Maybe 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 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? 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 of it 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 3.55% at the end of the quarter versus 3.62% 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 brokered 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 hits NII.

WAM.

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.

WAM if it's 8 years -- if the WAM is 8 years, the actual life will be shorter for sure. Those have a higher CPR and they tend to pay off. Do we have in this slide deck a bridge, Rebecca, on the purchased loans that shows the amount of...

We have a bridge on Slide 17. It's the whole National Lending portfolio.

If you want to look at that for a second, it's not just purchased loans. We don't have that in this deck, but it shows the -- it shows -- on this Page 17, it shows the purchase runoff 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 -- or 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 factor in floors that are in place in that book?

Good question. I don't have that right...

[ Do we have that ] 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 to either SOFR or prime. So depending on what happens with 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, just 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 if 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 for from other sources, just given some of the commentary you made on the amount that you took a look at this quarter?

Could you just clarify that a little bit one more time. We'll make sure we're giving you a responsive answer to your question.

Sure. 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 -- 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 pool, 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 write a check over $100 million, a lot of these big funds come out and they have insurance, CMBS exits, insurance platforms, they can place these loans. 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 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 comments on monthly volume, but just a little more detail surrounding that business.

Well, when we started this business, it was with a view towards a very tech-forward, largely -- we're still looking at approving 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 could -- 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 -- or 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 of the 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 requirement 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 should continue there. And again, I think we may be able to do more if we're able to participate in this new 9% -- I mean, 90% guarantee program, which were is very interesting.

Okay. And then I guess just like a quick follow-up, somewhat related, just on the small balance insured product, do you have any updated thoughts there, just as you continue to generate some volume? How do 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 a -- has a 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.

Your next question comes from the line of David Minkoff.

Congratulations on a wonderful quarter. I've been a shareholder for going back more than 10 years. CFO at the time was Claire Bean. So how many years ago back is that -- so -- and I've listened to every conference call each quarter. I haven't missed one. So if you just took at 10 years, I've listened to 40 conference calls. It's more than that. And we kind of become accustomed to hearing good news because 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 them, ROI up 26%, tangible book value up 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 another excellent -- they're 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, Rick, 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 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 named after a bank yet. Do we? I mean, National Bank -- Northeast Bank Day that sounds -- has a good ring to it, I think, don't you?

No. It's the best idea we've heard recently. I like that.

Right. The schools will be closed, no postal delivery, no 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.

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.

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 [indiscernible] 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 repocast on the website for future use. [Operator Instructions] 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 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, 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 for -- to make it easier for you, we have taken some of the slides and move them into the appendix. There's also a new slide, which I just want to start with on Page 5 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, 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, evolved into a national commercial real estate, and small business lender. And on Page 5, you can see there are three pillars. One is the purchased commercial real estate which is 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 about with a lot of rounding here, about 25% of our loan book. And finally, we have started to do a couple, 3 years ago, or maybe even starting with [indiscernible] doing small business lending.

Some of the stats over a 3-year period are an average return on equity of 17.7% and on a return on assets of 2%. Our 3-year low growth has been 76%, and our 3-year small business originations, or 600 -- 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 [indiscernible] on, our 3-year average NIM is 4.9%. And in our 7 branches in Maine, deposit growth over a 3-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. And 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, but I want you to consider kind of the, 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 3 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, and consisting of purchase loans with UPB of $575 million and a basis of $532 million. Or -- while we bought them for [ 92.6% ] discount mostly -- maybe all, call it, 95% is all an interest rate mark, not a credit mark that we took. And so that will be income that will come in over time. On the originated loans, this is a record quarter for us. $252 million of originated loans at weighted average rate of origination of 7.6%.

And 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. As 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 #4 ] and had a tax return transcripts 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 12 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 30, 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.

So -- 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 -- $3 billion or $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're going to have -- 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 12/31 quarter. We 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%. And in terms of just some other numbers, EPS diluted was $2.49. Return on equity was 15.6%. Return on assets were [ 1.87 ]. And if we're correct that we expect SBA loan originations to increase and sales to -- 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. And then Pat will discuss our commercial real estate originations and purchases, and we'll probably touch on our SBA and insured loan business. And then after all of that, we will be very happy to answer any questions that you might have. Tino?

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. Churn on average assets was [ $1.87 ] for the quarter and 2% per 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 30. This incredible loan growth is attributable to both the purchased 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 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 6 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, 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 remains strong, with delinquencies, nonaccruals 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 30, to $63.8 million, or a coverage ratio of 1.47% at December 31. This was largely provided for as part of the purchase loan activity during the period. Net charge-offs during the quarter were up to $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 is 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 that are going to set the bank for long-term success. Noninterest expense for the quarter is 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% -- $8.9 million in the linked quarter. Capital remains strong. 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 31.

Pat, over to you.

This is a big quarter for loan volume. We purchased 152 loans in 5 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 five 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 '24, and '26 is shaping up 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 2/3 were lender financed, with an average balance of 7.5 million, LTVs, just over 50%, at 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 could still be picky on credit without sacrificing too much in yield. I 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, it 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 and most characteristics to SBA loans we originate, but carry private insurance [indiscernible] 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 already knee deep into the current quarter, so we hope to keep it going. Rick?

Thank you, Pat. Marvin, we're ready for any questions out there.

[Operator Instructions] And our first question comes from the line of Mark Fitzgibbon of 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?

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.

Okay. But you didn't exercise the ATM at all. Is that correct?

We did not utilize the ATM, no. No share activity this quarter besides stock compensation.

Okay. And then based on your comments before, Tino, it sounds like we should see a bit of a lift in the net interest margin going forward, given the downward liability repricing that you anticipate over the next 2 quarters. Is that fair?

Yes, I think that would be fair to say.

Okay. And then next, I wanted to 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 broker deposits continue to be the main source of growth?

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. The -- 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, I don't know 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 anyway that it deserves it now. It's a very efficient way of funding without all the cost of either an online presence in 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 -- I know that it's not -- investors tend to love cheap liabilities. We love that, too, if we can get it over. That's kind of a brick-by-brick building process. But in order to fund ourselves with the kind of growth we have had, broker deposits work well.

Okay. And then lastly for me, can you give us a sense for what percentage of the purchase loans you have typically, sort of, you retain at maturity?

We don't have that number right off hand. I mean we -- it's notable somewhere, but the three in this room don't have that. And we can get that and provide that information on another call, or the next call. But I could say to you, anecdotally, we try and keep a lot of the loans when we have them, and 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 3 pages long or so, and it's easy.

And I would say also, it's easy for us to keep them when rates are higher because their refinancing alternatives are not as great. When rates come down, is it probably going to be now, the runoff may be greater. Because you have a lot of local banks that would be chasing these borrowers. 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 that don't like to exercise. I know you're not in that camp, Mark. I know you do.

Our next question comes from the line of Matt Renck of KBW.

Matt Renck filling in for Damon DelMonte. My first question, just with the 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 and fee income like when more things flow through? Or is it more just a return to normal fee income levels?

One clarification. That's $20 million a month. So roughly in the ballpark of $50 million to $60 million a quarter.

Okay. Got it. And you did $40 million this quarter, right?

Yes, correct. So we expect it to increase next quarter. In terms of the -- you're asking about the percentage gain on sale?

Yes, yes.

Yes. We anticipate that to stay somewhere in the realm of 8% to 9%, compared to the balance of guaranteed balance being sold.

Okay. Got it. And then just on the insured small business product, how much -- how -- like 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?

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

Okay. But even when you guys do start to get to sell them, it should be lower than that, like 8% to 9% gain you're seeing on the SBAs?

No, because these are different. The SBA loans, 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, will there be some, but premium on the on the sale, not going to be like the SBA. It's going to be much smaller than that. But the benefit is once we sell them, we're going to keep us spread and we split this with annuity, 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% or 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. [indiscernible] same.

So it's a different kind -- different -- economics are different on this. But if we're able to sell these, the economics will be terrific.

And 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. They get recorded on the balance sheet, and that will flow through the game line. So until we have the contract finalized in front of us, it's hard to say what exactly to expect from a gain on sale versus how much will be some sort of spread income that's recognized over time.

We have to go through a [indiscernible] a couple of loan sales first. And on loan volume, we have -- it's been -- we've kind of described it as a fire hose, as Rick pointed out, but we've got intentionally got kink in that fire hose. We're really slowing the incoming volume down until we can prove to ourselves that we could sell these loans and see what the real return will be.

We have no further questions at this time. I will now turn the call over to Rick Wayne for closing remarks.

Thank you, Marvin, and thank all of you for calling in and listening, and I know we get a lot of listeners after the call will go on our website to hear a replay. And to those I thank you as well. I 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 were in New England somewhere the tri-state area. So you probably have a lot as well. Thank you. Thank you, Marvin.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Welcome to the Northeast Bank First Quarter Fiscal Year 2026 Earnings Call. My name is James, 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; Richard Cohen, Chief Financial Officer; Santino Delmolino, Corporate Controller; 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 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, and good morning, everyone. As I go through this presentation, as we go through it, I want to just outline what the agenda will be for this morning. I'm going to first go over some highlights for the quarter and dig a little bit deeper in some of the material that we had put out yesterday. And after that, Pat will discuss the lending activity, and Santino will go over the financial results for the quarter. Finally, I want to make a few comments on Richard Cohen, who is moving on after tomorrow after almost 2 great years at the bank.

So first, as to the highlights. We consider the quarter very strong. We had net income of $22.5 million, a NIM of 4.59%, return on equity of 17.64%, a return on assets of 2.13% and diluted earnings per share of $2.67. And finally, within a whisker, if that's a technical term, I don't think it is, actually, of $60 of tangible book value at $59.98.

I want to comment first on loan activity. Purchases were strong. We bought loans with UPB of $152.7 million at an invested amount of $144.6 million. Now as you know, in our past, we have had 2 very large quarters where we purchased large transactions, the first in the second quarter of our fiscal year '23 and the second one in the first quarter of fiscal year '25. If you exclude those very large purchases, this would have been our second largest purchase quarter going back 3 years and probably longer. I just looked at the material for 3 years for this.

One of the things that we are frequently asked in investor calls and otherwise is what does the purchase pipeline look like? And with all of the caveats in the forward-looking statements, specifically, we may buy a lot or we may not buy any. It's transactional. I would say that the purchase pipeline is as large now as we have seen in quite some time. A lot of it triggered by M&A activity and some balance sheet repositioning by other holders of commercial real estate loans. We have both the capital and the human resources to do the appropriate diligence on the amount that's out there, and we will look at every -- virtually every opportunity that is within our parameters.

On originations, we did $134 million with a little rounding this quarter. I would point out that there is some seasonality to the origination business. We went back and looked 4 years ago, and we only had one first quarter in our fiscal year, which was in Q1 of '23 that had a higher amount of originations, $182 million. That meant, obviously, that for -- out of the last 4 years, 3 of the quarters, we did not do as much origination volume as we have done this quarter. And our origination pipeline is also quite robust.

I now want to comment briefly on the SBA activity. This quarter, we funded $42 million, and we sold $53 million of loans that, of course, include some that were originated prior to this quarter. As we discussed in the July call, there were changes made to the SBA rules, which suggested and we indicated that we would have lower volumes in some number of quarters to come. Because we had less closings, we had less sales and because we had less sales, we had less gains. The gain in the linked quarter was $8.2 million compared to $4.1 million for the current quarter. And that difference of $4.1 million amounted to $0.34 diluted EPS. I think it's very helpful to understand that.

We expect a few things to happen. Of course, one, at some point, the government will reopen. Pat may touch on the impact of that for us. And we now have -- absent the government closing, we have been seeing a ramping up of the volume that was temporarily diminished for the reasons that I described.

Finally, a few comments on asset quality, which Santino will expand on relative to our balance sheet size. Overall, our loan book was pretty flat. Our purchased loan book increased by $31 million and our originated loan book decreased by $39 million. Because for purchases, the allowance comes out of the purchase price typically rather than booking a provision and because our originated loan book decreased, as I mentioned before, the amount of the allowance also decreased.

And finally, I want to make a point on the timing of transactions. As I said, our loan book was mostly flat but our average loan balances were down $92 million compared to the linked quarter because much of the activity around purchasing and some originations occurred late in September. So that had an impact on interest income in the quarter. But for the reasons I described, it bodes well for the future because our average loan balances were higher.

And with that, I will now ask Pat to talk about our loan activity. Pat?

Thanks, Rick. We had a solid loan activity this quarter, especially for the summer months, as Rick pointed out, the real estate and financing markets are very active. And while this is fueling more loan payoffs than we'd like, it's also creating a lot of opportunity.

First, another note on the SBA business. The $42 million closed is comprised of 286 loans at an average rate of 11.7%. Although we saw increasing volume in each of the 3 months of the quarter and felt like we were making real progress toward our volume targets, the government shutdown essentially halted any new originations since October 1. We continue processing loans in the hopes of funding soon after the government is reopening. So we won't be wasting any time with that. But obviously, it's out of our control. Meanwhile, we're very optimistic about our new insured small business loan product with annuity, which is off to a great start since launching on October 1 with about $10 million closed since then.

In our purchase business, we bought 522 loans in 7 transactions with $153 million of principal balance and a purchase price of $145 million or just under $0.95. These were mostly smaller balance loans with no real concentrations of note. Five of the 7 transactions were from loan funds, one from a small bank and one from a national insurance company.

As Rick pointed out, over the last few weeks, we've seen a significant uptick in purchase opportunities, mostly from M&A activity, which is likely to continue for some time. This is a lumpy business and no guarantees will win at all or any of it, but the sheer volume of new opportunity is very encouraging for the next several quarters. In our origination business, we closed $134 million, which included 22 loans with an average balance of $6 million, LTVs just over 50% and an average interest rate of just under 8%.

While lender finance product continues to dominate the origination business, direct loan opportunities have picked up significantly. The belief from borrowers that interest rates will come down over the next year is fueling new transactions and at the same time, creating an aversion to traditional debt, which typically includes significant prepayment protection. Our pipeline is as full as it's ever been, and we expect that we can remain disciplined in credit and still show strong growth going forward. Back to you, Rick.

Santino?

Thanks, Rick. As Rick mentioned, this was another good quarter for the bank. We had earnings of $22.5 million or $2.67 per diluted share. ROA was 2.1% and ROE 17.6%. Total assets ended the quarter at $4.17 billion, which is down slightly from $4.28 billion at June 30. Loans were flat as purchases of $145 million and originations of $134 million were offset largely by paydowns and payoffs. Much of these purchases and originations occurred at the tail end of the quarter, so you'll see our average balances are down quarter-over-quarter, partially -- which is partially impacting our lower NII for the quarter.

The excess cash we carried on the balance sheet at June 30 was put to use during the quarter to pay down our brokered CDs. So you'll see some shrinkage in the deposit portfolio as well. Capital remains strong with Tier 1 leverage at 12.21% and tangible book value came in just under $60 a share.

Switching focus to the P&L. NIM was strong this quarter, coming in at 4.6%, resulting in pre-provision net interest income of $48.2 million, down from NIM of 5.1% in the prior quarter and pre-provision net interest income of $59.4 million. Decrease here is largely a result of heightened transactional income that we saw in Q4 fiscal year '25. Additionally impacting that is the higher average cash balances we carried during the quarter, which while accretive to net interest income did compress NIM a little bit.

Provision for loan losses was a credit this quarter of $435,000, as Rick mentioned, which is due to a few things: one being less loans put on the balance sheet that required a provision as well as a slight decrease in the allowance coverage ratio. This is largely a factor of our continued strong asset quality, particularly in the originated loan business. From an SBA front, we had gains on sales of $4.2 million on sales of $58 million compared to $8.2 million in gains on sales of $108 million last quarter.

As Rick and Pat previously mentioned, this is largely due to rule changes at the SBA back in May, which we previously disclosed the projected impact on this -- on earnings. On the expense side, we continue to be disciplined while strategically investing in our people and in technology that set up the bank for long-term success. Rick, back to you.

Thank you, Santino. And now we would welcome any questions that you might have.

[Operator Instructions] Our first question comes from Mark Fitzgibbon from Piper Sandler.

Rick, I wondered if you could share with us. I noticed in the press release, you said there was a change in the cost structure arrangement with annuity, I assume over the SBA stuff. Could you share with us how that structure changed?

Yes. So we put out an 8-K on this back in last October. So beginning October 1 of last year, the cost structure changed where instead of a split in the gain on sale with annuity, they're charging us a flat fee on a per loan submitted basis. So that structure has been consistent for the past 4 quarters now. It's really just in comparing to the quarter end September 30, 2024, it was different.

And then just how do you think we should be thinking about gain on SBA loans for the fourth quarter? I mean, assuming the government opens up maybe halfway through the quarter, can you kind of get back on track and get to a volume level that looks something akin to what you had in the third quarter?

A little bit hard to say that, Mark, because there's a bunch of variables. I could say that starting in that we were seeing, and Pat mentioned this, we were seeing a ramp-up in SBA activity each month in the past quarter, which is what we expected to happen as both from a technology perspective and retraining those at annuity that are doing the first cut of underwriting and then our team as well. And I think if absent the government shutting down any of those things that happened, we probably would have been reasonably comfortable saying that by the end of this calendar year, we would have been up to where we were. But the reason there's less certainty about saying it now is what will the ramp up -- one, how long will the government be shut down? Because now it's essentially other than doing as much as we can do, there are critical things that we cannot do while the government shut down.

We can't get an SBA number, and we can't get tax transcripts and we just can't get the loan to close. And how long that will -- that ramp-up will take, it's hard to say. I would say this reasonably comfortably that once the government is reopened over some number of months, let's say, 6 months. This is really an estimate because I don't know this for sure. We would expect we would get back. There's no reason to believe there won't continually -- continue to be large demand for that product. But there are a bunch of variables that would impact that.

Okay. Fair enough. And then it looked like there was a decent linked quarter increase in professional fees. Anything unique in there?

A couple of things impacting that. One is just some temporary employees for folks that we've had out on leave during the period. So that aspect of it shouldn't continue on a go-forward basis. We've also seen -- we had some heightened legal fees in relation to the new growth term loan product, the insured loan product as well as just general increases in professional fees period-over-period.

I want to just use that as a jumping off point, if I can, Mark, and others on the call because I want to comment about Richard before -- I don't want anyone to leave the Q&A before I've had a chance to say this. And the triggering thought to that was what Santino just said because we had hired a highly experienced auditor to come in and help us as we got through getting our financials. That's why that was more expensive. But as everyone knows, a while ago, we announced that Richard would be leaving the bank at the end of this month. This will be the last time you'll hear him in this room, I suspect he may, because he's still a stockholder, he may call up and be a really aggressive questioner, but we'll have to see about that.

But I want to make a few points clear on this. One, Richard left on his own. I tried to talk him out of it almost every day, but unsuccessfully. Richard came to us. He moved his family boldly from South Africa. He was formerly a partner at KPMG. He came here without a job and not knowing much other than visiting from time to time the states, not knowing exactly what he would do. We were lucky that we were able -- first, we hired him as a consultant and then in this role, he's really done an extraordinary job for us. He grew a lot in the job. And this sounds like cliche because this is what people always say when someone leaves. In this case, it happens to be very true. He's really liked by everybody, he's respected by everybody. He added a lot of value to us, and he will be missed.

I just want to add one other thing because 2 things can be true as I suggested to the Board yesterday, Richard can be all of those things, but we're lucky we have a deep enough bench, and Santino, who was our controller, could step right up. And Rebecca Jones now Rand, married name, sorry, Rebecca, who is our Director of Accounting, will be here, and we've hired a new controller. So we still continue to have a very, very -- and lots of other people in the accounting and finance roles. We have a very, very deep bench. But I just wanted to be clear about Richard that he's going out to start some business he's figuring out. And I suspect at some point, I would bet that he'll be wildly successful. I am not going to say bet, I'm not going to invest in it, but I believe he will be. Richard, do you want to say anything before we.

I really do. Thank you, Rick. I mean it's been a very difficult decision to leave the bank. I'm immensely privileged to have been part of this fantastic organization. I'm equally immensely grateful for the relationships that I have with all of you, the investors, with the Board, with the leadership of the bank, with my team and with the incredible staff here. I so thoroughly enjoyed the culture. It's an amazing place to work. The bank is solution-oriented. It's focused. It's a warm place to work, and it's a very open environment.

Maybe the last thing I'd like to say is a very special thanks to Rick and to Pat and to the Board for their faith in me for the close relationship that I have with them personally, which will continue into the future. And my very best wishes to Tino and to my fantastic team in whom I have immense confidence. I leave you in very, very capable hands, and I intend to stay very close and in contact with the bank over here.

Thank you for that, Richard. We're clapping, you can't hear us. Thank you, Richard. Mark, I apologize for jumping off on that, but I wanted to make sure those things were said and heard.

Richard, congratulations and best of luck in your new role. And Tino, to give you an opportunity to swing to the fences here, can you tell us what the margin is going to look like next quarter?

Almost, almost. No, we generally don't give guidance on margin. The real challenge, as you know, is with the transactional income, it can be really lumpy just depending on which loans pay off during the period.

Here's a stat we don't mention often, but we have $207 million of discount on our purchased loan book. And what happened last -- for the linked quarter, we had more primarily, because of one big transaction. But -- and it's hard for us to know when there are going to be payoffs. And some loans have very significant discount. Most of all what I described is interest discount from loans that we bought at a discount because of interest rates, but that's always out there. So it's hard for us to say -- to predict what our margin will be because that's really the piece of it that is unpredictable and can be significant.

Our next question comes from Damon DelMonte from KBW.

Richard, good luck with your new endeavors. Just a quick question on the -- NDFI lending has become kind of a hot topic in the industry in the last couple of months, and you guys do a lot of similar financing in that regard. Just kind of curious how you're feeling about the quality of the people you're with and the underlying assets and if you're seeing any signs of stress or there's any concern from your seats?

I assume you're talking about that...

Well, yes, but like the lender financing you do in general. I mean the items in the news have been tied to subprime auto lending. But I think just overall, just kind of how do you feel about the health of your lender financing portfolio?

We've heard from a few investors concerned about that recent fraud issues that were in the news, specifically the case where a title policy was doctored to improve the lender's perception of a lien position, resulting in significant credit deterioration when the truth was revealed. And our approach is and has always been a trust but verify. In the lender finance business, obviously, our borrower is the lender, and they are collecting documents from their borrower. And so I think oftentimes, we're getting that documentation secondhand. And so we have developed over time -- there's no way to 100% protect yourself from fraud, but we've -- we believe we're doing all we can to prevent this type of issue from happening.

We do complete third-party background checks on all borrowers, funds and principles. We do independent verification of lien position and title insurance. We hold all the original loan documents in custody. We do daily monitoring of all court and recording activity relating to our borrower, the underlying borrower and the underlying collateral. In fact, it's fairly frequent that we will know that there's been a lien or some judgment on the underlying collateral and these usually minor things before our borrower does because we monitor it so closely. And we have very robust monthly reporting from our borrowers that show all activity, loan payments and communications with the borrower. So I think the short answer is this is a business that you just got to stay very, very closely on top of, and I think we do.

In addition to what Pat just said, apart from potential fraud risk, it's not really the same business we're in. I know it's loan on loan and some people may consider that to be indirect financing and maybe that's true in some sense. But in another sense, it's totally different. We underwrite every single loan. So virtually all of our transactions are structured into bankruptcy, remote, special purpose entities with carve-out guarantees generally for any fraud or something that's specified in the documents, but it's a guidance line underscored.

Meaning somebody comes in and they have a line with us and they want to take an advance under that line, we have to approve that advance, and we underwrite that loan right next to him. And so it's very different, totally different than some kind of a warehouse line where a borrower can borrow based on a borrowing base certificate without the lender focusing on the actual credit like we do, is totally different what we do. So to answer in a word, and we're very comfortable with our asset quality. And especially, as you know, from what we include in the material, the low LTVs throughout our whole book.

Right. Okay. That's great color. That's kind of what I was looking to hear. And then I guess just on the loan growth, obviously, pipelines for both purchased and originated sound like they're pretty healthy and you have some strong optimism to close out this calendar year and going into next year. Just wondering if you have any visibility on the payoffs thus far this quarter to kind of help give us some perspective as to what the net growth could be for loans outstanding for the quarter?

I'll just make a general comment. Let me ask Tino to fill in if he has the information, he's saying no. This quarter, we had, I would say, a larger amount of payoffs than we typically have. And kind of something that is surprising is usually when you have large payoffs, in the purchase space, you tend to have more transactional income. But in this quarter, we had larger payoffs and we didn't have as much transactional income as I would have estimated at the beginning of the quarter. We purchased $145 million. We can just think through this live and Tino or Rebecca will correct me when I go wrong here. We purchased -- invested $145 million in our loan portfolio on purchase did what -- what was the net change in it, Tino or Rebecca?

Net change. Purchase is up like 20 -- I don't have the number right in front of me, but on Slide 3...

So $24 million. So that would say we had $122 million of paydowns and amortization. That is high for that. And I think that in an interest rate environment that is declining, we would expect payoffs to increase. When somebody didn't have a better offer on the table, they wouldn't refinance just for the support of it. But historically, we've seen in lower interest rate environments, we have seen more payoffs. And so I would kind of -- I'm not saying it will be more than the $120 million we had this quarter. This quarter was particularly high, but we had some loans that we were -- sometimes when you have paydowns on the purchase in particular, it's a good thing because you have loans that we think are teetering.

Teetering may be too strong, but loans we would be happier if they were out of our portfolio. And we made an effort, and it was either last call or the one before, we took a look and we provided detail on where we thought there was risk in the New York multifamily portfolio based on rent stabilization and the possibility of an administration change going forward. And we've made a concerted effort to reduce our exposure in the area of rent-stabilized or rent-controlled portfolio for that reason.

So I think that was kind of a big chunk of why the purchase -- the payoff around purchase book was a result of that. And just on that topic, as it relates to originated loan, one thing we're seeing is we're seeing borrowers now negotiate much more strongly for getting rid of floors or having a floor that is -- typically what we like to have is the floor set at the rate when we originate a loan, but for borrowers, that's not market anymore.

So we're seeing some lowering of the floor also. That sounds very pessimistic in terms of loan growth, but that's not my intention because we would expect both our originated loan book based on what we know that's in the pipeline. And with the caveat I said about purchase loans earlier, you win or you don't win, but there's an awful lot out there. We would expect -- I got to give another caveat, but I won't. You get the point that we would expect a fair amount of volume and opportunity in both of those spaces.

Got it. Okay. That's good color. I guess just lastly on the tax rate that came in lower this quarter. Is that just a function of taxable income? Or is there something -- I know there was like some state law changes. Does that like carry through for the next year?

Yes. A few things there that are impacting our tax rate this quarter. There were 2 state law changes that had pretty significant impact. One, Massachusetts, we're now paying very little taxes in the state of Mass because of their apportionment law changes. California also changed their apportionment laws, which has caused -- which offset the decrease in Massachusetts a little bit. We're paying more in California now. And the third piece is in Q1 of the fiscal year is when we have all of our stock vests and grants.

So to the extent that tax -- the fair value of the vest exceeds what we booked for book expense on that restricted stock, we get a tax benefit for that. So with where the stock price was at the date of vesting this quarter, we saw a pretty good tax pickup on that front as well. That won't be recurring through the rest of the year. So on a go forward, we're expecting the effective tax rate for the rest of the year to be somewhere in the realm of 31% to 32%.

[Operator Instructions] Now I will turn the call over to Rick Wayne for closing remarks.

Thank you for those of you on the call -- I'm sorry, no. Thank you for those who are on the call for listening. Thank you, Damon and Mark, for very thoughtful questions. And again, thank you, Richard, for your work, your friendship, your professionalism, so much appreciated. And we will talk to you again at the end of January. Thank you all. With that note, we will say goodbye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.