Northeast Bank's Q1 2026 Earnings Call: Contradictions on SBA Loan Volume, Tax Rates, Cost Structures, and FDIC Costs

Date of Call: October 29, 2025

Financials Results

• EPS: $2.67 per diluted share (net income $22.5M)

Guidance:

• Effective tax rate for the remainder of the year expected to be roughly 31%–32%.
• SBA volumes expected to ramp after government reopens; management estimates full ramp could take several months (roughly ~6 months) depending on timing.
• Purchase and origination pipelines are very large, driven by M&A and balance-sheet repositioning; expect meaningful opportunities while remaining credit-disciplined.
• NIM/margins remain unpredictable due to lumpiness of transactional income and timing of payoffs.

Business Commentary:

• Strong Financial Performance:
• Northeast Bank reported net income of $22.5 million for Q1 2026, with a NIM of 4.59%, return on equity of 17.64%, and return on assets of 2.13%.

• The strong financial performance was supported by robust loan activities and strategic capital allocation.

• Loan Growth and Origination:

• The bank purchased loans with an UPB of $152.7 million and originated $134 million in loans.

• The growth in loan activity was fueled by the significant purchase opportunities driven by M&A activity and balance sheet repositioning, as well as a strong origination pipeline.

• SBA Activity and Impact:

• The bank funded $42 million and sold $53 million of SBA loans, reflecting the impact of rule changes at the SBA.

• The projected decline in SBA volumes is attributed to these rule changes, but the bank expects a ramp-up post government reopening.

• Capital and Deposit Management:

• Capital remains strong with Tier 1 leverage at 12.21%, and tangible book value just under $60 per share.

• The bank utilized excess cash to pay down brokered CDs, contributing to a slight reduction in deposit portfolio size.

• Expense Management and Strategic Investments:

• The bank showed disciplined expense management despite some temporary personnel and legal costs related to new products.
• Strategic investments in people and technology are expected to drive long-term success and growth.

Sentiment Analysis:

Overall Tone: Positive

• "We consider the quarter very strong," reported net income of $22.5M, NIM of 4.59%, ROE 17.64%, and diluted EPS $2.67. Management said the purchase pipeline is "as large now as we have seen in quite some time" and emphasized strong asset quality and disciplined underwriting, supporting a constructive outlook.

Q&A:

• Question from Mark Fitzgibbon (Piper Sandler & Co., Research Division): Could you share how the cost structure arrangement with annuity changed?
  Response: Since October 1 last year the annuity fee moved from a split of gain-on-sale to a flat per-loan fee; that structure has been consistent for the past four quarters.

• Question from Mark Fitzgibbon (Piper Sandler & Co., Research Division): Assuming the government reopens mid-quarter, can SBA gain volumes return to Q3 levels and how should we think about Q4 gains?
  Response: Uncertain; activity was ramping each month pre-shutdown but closures require government functions (SBA numbers, tax transcripts); management estimates it could take several months (roughly six) after reopening to fully regain prior volume.

• Question from Mark Fitzgibbon (Piper Sandler & Co., Research Division): There was a linked-quarter increase in professional fees—anything unique driving that?
  Response: Increase driven by temporary staff cover for leaves (nonrecurring) and higher legal/professional fees tied to the new insured loan product plus general period-over-period increases.

• Question from Mark Fitzgibbon (Piper Sandler & Co., Research Division): Can you tell us what the margin will look like next quarter?
  Response: No specific margin guidance; margins are unpredictable because transactional income is lumpy and payoffs/discounts (noted $207M discount on purchased loans) materially affect results.

• Question from Damon Del Monte (Keefe, Bruyette, & Woods, Inc., Research Division): How do you feel about the quality of your lender-finance portfolio and any signs of stress given recent industry fraud issues?
  Response: Comfortable—firm uses 'trust but verify' controls: third-party background checks, independent lien/title verification, custody of original docs, daily monitoring and robust reporting; every loan is underwritten and structures include bankruptcy-remote SPVs and carve-out guarantees.

• Question from Damon Del Monte (Keefe, Bruyette, & Woods, Inc., Research Division): Any visibility on payoffs this quarter to help assess net loan growth?
  Response: This quarter saw unusually high paydowns (~$122M of paydowns/amortization vs. $145M purchases → ~$24M net purchase increase); elevated payoffs reflect refinancing activity and deliberate reductions in certain exposures (e.g., NY rent-stabilized multifamily); net growth will depend on closing pipeline opportunities.

• Question from Damon Del Monte (Keefe, Bruyette, & Woods, Inc., Research Division): The tax rate came in lower this quarter—was that due to taxable income or other factors and will it persist?
  Response: Lower tax rate resulted from two state apportionment law changes (MA down, CA up partially offsetting) and a one-time tax benefit from stock vesting fair-value; on a go-forward basis expect an effective tax rate around 31%–32%.

Contradiction Point 1

SBA Loan Volume and Market Dynamics

It involves the expected recovery of SBA loan volume, which is a key revenue driver for Northeast Bank, impacting investor expectations.

What are your expectations for SBA loan gains in Q4? - Mark Fitzgibbon (Piper Sandler)

2026Q1: If the ramp-up continues post-reopening, we expect to recover to pre-shutdown levels by year-end. The shutdown's impact is unknown, but a ramp-up would likely occur once operations resume. - Richard Wayne(CEO)

When will the SBA recover from the potential 50% decline in Q3—Q4 or next year? - Mark Thomas Fitzgibbon (Piper Sandler & Co., Research Division)

2025Q4: It's hard to say exactly. We believe we will climb back, but we're also looking at adding new verticals to our SBA business. There are several factors affecting the funnel, including a decrease in the SBA cap, increased minimum credit scores, and economic factors. The market is enormous, so we remain confident but will need to adjust our marketing efforts and processing times. - Patrick Dignan(COO)

Contradiction Point 2

Effective Tax Rate Outlook

It involves changes in the projected effective tax rate, which affects the company's financial forecasts and investor expectations.

Were there any unique factors contributing to the increase in professional fees in the linked quarter? - Mark Fitzgibbon (Piper Sandler)

2026Q1: State law changes and tax benefits from stock vesting contributed to this quarter's rate. Future effective tax rate is expected to be 31%-32%. - Santino Delmolino(CFO)

Will the effective tax rate return to 36.5% going forward? - Matthew James Renck (Keefe, Bruyette, & Woods, Inc., Research Division)

2025Q4: Due to changes in state taxes, we expect the effective tax rate to be around 33% to 34% in the future. - Richard Cohen(CFO)

Contradiction Point 3

SBA Loan Cost Structure and Revenue Impact

It involves changes in the cost structure of SBA loans, which impacts the revenue and margins of the bank, crucial for investor analysis.

What changed in the cost structure for SBA loans? - Mark Fitzgibbon (Piper Sandler)

2026Q1: Beginning October 1, 2024, the cost structure changed. Instead of splitting the gain on sale with annuity, a flat fee is now charged on a per loan submitted basis. - Santino Delmolino(CFO)

How do you plan to grow the SBA business, and what volume capacity are you targeting? - Mark Fitzgibbon (Piper Sandler & Co.)

2025Q2: The SBA business is self-sustaining, generating more gains when selling loans, only requiring them to retain 18%-20% of the loans due to SBA guarantees. - Richard Wayne(CEO)

Contradiction Point 4

Impact of Government Shutdown on SBA Loan Operations

It highlights differing perspectives on the potential impact of a government shutdown on SBA loan operations, which could affect the bank's revenue and operational efficiency.

Can you expect gain on SBA loans in Q4? - Mark Fitzgibbon (Piper Sandler)

2026Q1: There's uncertainty due to government shutdown. If the ramp-up continues post-reopening, we expect to recover to pre-shutdown levels by year-end. The shutdown's impact is unknown, but a ramp-up would likely occur once operations resume. - Richard Wayne(CEO)

Can you discuss current loan yields, specifically regarding SBA, and their potential impact on future margins? - Damon DelMonte (KBW)

2025Q3: The SBA business is growing, with a significant increase in loan units and dollars. - Richard Wayne(CEO)

Contradiction Point 5

FDIC Costs as a Run Rate

It concerns the sustainability of higher FDIC costs, which affects the bank's expense structure and profitability.

Was there anything unique driving the increase in professional fees this quarter? - Mark Fitzgibbon (Piper Sandler)

2026Q1: The increase was primarily due to balance sheet growth. - Richard Wayne(CEO)

Will the higher FDIC costs be a sustained run rate? - Damon DelMonte (KBW)

2025Q2: Yes, the higher FDIC costs should be considered a run rate going forward due to the growth in the balance sheet. - Richard Cohen(CFO)