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Welcome to the Northeast Bank Second Quarter Fiscal Year 2025 Earnings Call. My name is Didi, 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; and Pat Dignan, Executive Vice President and Chief Operating 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 very much, and good morning to all of you listening on this call. I'm going to start going over some of the financial highlights and other important matters during the quarter. And following my comments, Richard Cohen, our CFO, will then spend some time going over certain important financial matters. And following Richard's presentation, Pat Dignan, who is our Chief Operating Officer; and importantly, our Chief Credit Officer, will discuss the loan activity in our various loan lines, including purchases and originations from our national lending group and also SBA activity. And following all of that, we would be happy to answer any of your questions.

Let me just start off by saying we think it was a really great quarter. You will hear in some of the matters I highlight on the financial highlights, which is Page 1 of the investor deck that there were many records broken in this quarter.

And so with that, let me begin to point out that we had $361 million of loan volume, which included $14 million invested on approximately $15 million of UPB on purchase loans. And Pat will comment on the lumpiness purchase activity and why we think we should look at that on an annual basis much more than quarter-to-quarter.

Now you'll hear of a record on originations. We originated $246 million in the quarter. And again, Pat will provide some commentary about what the pipeline looks like for us. We also had another record in SBA origination activity where we originated $100.3 million of SBA loans, of which $64.5 million were sold.

I should point out that it was not necessarily the production in the quarter, some of it related to originations in the prior quarter, but those loans sold generated a gain of $5.6 million. I want to also point out that our net income of $22.4 million was a record quarter for earnings, excluding the third quarter of fiscal '21, where we had significant income from the sale of PPP loans.

So if you exclude that, $22.4 million was a record. Another record is our base net interest income, which was $45.6 million for the quarter, another record, as I mentioned, tangible book value for the quarter increased by $4.49 or 9% since September 30. That is since the linked quarter, of which it was broken down of $2.74 from basic earnings plus the benefit of stock sales, which were sold at a price higher than tangible book value, which increased the tangible book value on a per share basis by $1.75.

If we go back and we look to the increase in tangible book value from June 30, which is our fiscal year-end for 6 months from the 12/31 quarter, tangible book value increased by $5.95 or 13% over that 6-month period, I guess, again, also a combination of earnings per share, which for that time period, the 6 months was $4.96 and also the benefit of selling stock.

And at the end of the quarter, Richard will talk about this much more. Our loan capacity based on our capital was $856 million at the end of December or as they say, a lot of the dry powder. I'm not sure that's a good metaphor anymore. But $856 million of loan capacity. I want to spend a few minutes talking about asset quality, which, of course, is near and dear to our hearts, I say our, those at the bank and you who are investors.

And we had -- if you -- on Page 7, I'm looking at some information there. I'm not going to go through each of the 4 slides. I'd point out that the ratio of nonperforming assets to assets and nonperforming loans to loans have declined from the linked quarter, nonperforming loans to total loans are 84 basis points, down from 106 basis points and to the chart -- to the right of that on the same page, classified commercial loans have declined from $31.1 million to $26.6 million. That is one point I wanted to make.

If we go on to Page 8, you can see that non-performing assets declined from $37 million to $31 million, a little rounding there or a reduction of about $6 million or roughly 16%, largely due to the payoff of 2 loans totaling $5.7 million. And then I want to go to Page 12 and point out that we take a look at the weighted average seasoning of our loan portfolio.

This is on our purchase portfolio is $5.2 million -- 5.2 million years, that's a long time -- 5.2 years and you can see we've now added one more column to what you have seen previously where we divide up the years. We've added a breakdown. We used to be just everything from 2019 forward. Now we break that down to 2019 to 2021 and then 2022 and later.

And you can see that only 17% of our purchased loan book was originated 2022 or later and 83% was previous to 2021, and you can see it broken up by the columns.

And with that, I would ask Richard to begin. Thank you, Richard.

Thanks very much, Rick. So I'm going to speak about 2 principal themes. I'm going to speak about interest rates as well as the bank's growth capacity. As far as interest rates are concerned, we have mentioned on previous calls that we monitor our interest rate risk in an effort to remain relatively neutral if rates were to increase or decrease. What has happened is we have been slightly positively benefited from the fact that rates have decreased.

In particular, as you'll see on Slide 15, our average cost of deposits for the second quarter was 4.15%, contrast that with 4.34% in the prior quarter. In other words, the average cost decreased 19 basis points quarter-on-quarter. We think it's worth pointing out is that the spot cost of funding as 12/31 is 3.89%. That then is down a further 26 basis points.

We have noted in the past and continue to see that as our liabilities reprice, they do so with a delay, but we are relatively well matched in a rate-down environment and have seen that play through in our interest rates and our net interest margin.

Turning now to the 2 key aspects that will enable the bank to grow responsibly, should the opportunity arise to add quality assets at a favorable rate. Those 2 factors are liquidity and capital. Let me start with liquidity. Our liquidity position improved, which in turn enables scope for growth. As of December 31, 2024, our on-balance sheet liquidity sat at $430 million -- that's an increase compared to $379 million as at September.

Importantly, our off-balance sheet capacity sits at over $1 billion, and that is up very significantly and in turn helps in the event that we have an opportunity to add loans whether through purchase or origination. Turning now to the second piece, which is capital. Our leverage ratio sat at 11.2% for the quarter, and our total capital ratio sat at 13.9% as of the end of the quarter.

This was a healthy level of capital which enabled us to grow significantly, particularly in light of the fact that at the end of September, we had a significant increase in our loan portfolio due to the material purchases that took place at that date. The reason for the healthy capital notwithstanding the significant growth in the book arises, as Rick had said before, from both the ATM at the money offering as well as our retained earnings.

Speaking about that, in particular, we have been approved for a further $75 million of ATM, of which $69 million remains to be utilized as and when the opportunity comes forth. From a loan capacity perspective, Rick has already mentioned the $856 million and that capacity increases as we retain earnings and continue to grow.

In summary, should the opportunities present themselves, we are comfortable that our liquidity as well as our capital will enable us.

Let me turn over now to Pat Dignan.

Thanks, Richard. As Rick pointed out, this was a good quarter for us with record volume in both our SBA and origination verticals. For purchase loans, we bought 70 loans in 3 transactions with gross balances of $14.8 million and at a purchase price of $14 million or $0.91. The weighted average loan to value of these loans was around 55% at our purchase price, and we're mostly small balance with a variety of collateral types and located in 25 states.

Although purchase loan volumes were below average this quarter, it really should be looked at annually, as Rick pointed out, and it's not indicative of a diminished appetite on our part or of a slowing market. On the contrary, we saw a lot of purchase loan volume this quarter, including several sizable portfolios in our strike zone most of which were either pulled or delayed by the sellers.

There were a couple of larger clean multifamily portfolios that did trade, but a very skinny yields and to groups with securitization exits. We'll see whether this represents a shift in market pricing for larger pools or a one-off for just the right deal at just the right time. In any event, there's a lot of volume out there. We remain optimistic that 2025 will be a good year for loan purchasing.

Unlike loan purchasing, loan originations is less lumpy. In SBA lending, we closed just over $100 million of loans this quarter up from $82 million in the previous quarter. This includes 917 loans with an average size of $110,000 and weighted average interest rates 10.85%. Slide 14 illustrates the growth in this business over the past few quarters.

And you may note here that loan sales remained roughly flat since last quarter despite a significant increase in loan volume. That's because we had $35 million of loan sales at the end of December that were held for sale. This should normalize over time. NEWITY, our lending service provider continues to refine its marketing and technology efforts and we believe that the current level of lending is sustainable going forward. A level that puts us near the top of SBA lenders national.

We're very excited to see this business taking off and look forward to continued growth. In our national real estate lending program, we closed $246 million for the quarter. These included 28 loans with an average balance of $8.2 million. Collateral types included multifamily, hospitality, retail and industrial and generally located in New York, California and Florida. At origination, the weighted average LTV for these loans was just over 50% and average rates were approximately 8.5%.

Of particular note is the net growth of the originated portfolio, as we discussed in the past, it's a bit of a treadmill given our higher rates and shorter loan terms, and we've grown the originated portfolio by over 10% in the past year due to both an increase in loan volume as well as a proactive effort by our asset managers to retain maturing loans.

Looking forward, we're continuing to see a lot of confidence in the markets from both real estate investors and lenders and our loan pipeline is showing no indication of slowing. Back to you, Rick.

Pat, thank you. Richard, thank you. And now we would be happy to entertain any questions that any of you might have.

[Operator Instructions] Mark Fitzgibbon of Piper Sandler in online with a question.

A couple of questions. Maybe starting with you, Richard. It looks like you're letting cash balances build a bit, and I can only assume that that's to fund loan purchases in maybe the first half of the year. How do you think that will impact the net interest margin, say, the early part of 2025? And what other factors should we be thinking about as we model the market.

So I can answer part of that, Mark, thanks for the question. As far as cash balances are concerned, we watch that very closely because we clearly don't want to sit with excess cash, but it's important that we sit with sufficient cash on the balance sheet to make sure that we are liquid. So it's not so much that we're trying to accumulate excess cash, but to manage it to an appropriate level.

In terms of the net interest margin, the cash balance should not act as much of a gain on that because that, of course, is primarily driven by, a, how the liabilities repriced and the composition of those liabilities as well as whether we fund longer term or shorter term and how much of that is variable versus fixed.

On the income side of that, from the asset perspective, there clearly is a difference in the mix of the portfolio as we, for example, purchased lumpy books or put on originated loans, and they've got a different interest rate profile. So I think the summary of what I'm answering for you is we don't think there's a direct link between cash and the likely part of net interest margin. It will be driven by other factors, which are, of course, the composition of assets and liabilities, cash then being held at the appropriate levels.

Let me just add 1 thing to that. Normally, we run around 8% as our target for cash and short-term investments. And it's not always at 8%, sometimes -- and particularly at the quarter end, where we have transactions that we are going to believe are going to close at the end of the quarter. And sometimes they roll over into the next quarter.

So I would say the answer is normally at 8%. To the extent we were a little bit higher than that, it most likely had to do with transactions anticipated to close that did not, but we generally run right around 8%, of which we've done for a very long time. So that would be consistent in how the NIM is determined that weighting of the 8%.

Okay. And then secondly, you obviously had a very strong volume in the SBA business. And I know that might bump around a little bit from quarter-to-quarter. But I was curious how you're thinking about your volumes going forward, how much you're willing to grow that business, how much volume are you willing to sort of take on?

Well, subject to the forward-looking statement, which I won't bore you by reading again, we're very optimistic about that business. If you -- there's a slide in here that shows the volume going back, I think we have 5 quarters on there. We were $100 million this quarter. I don't have it -- over $88 million last quarter? $82 million last quarter, and then it was much lower in the preceding quarters.

The pipeline or as we kind of referred to as the top of the funnel for what we're looking at with NEWITY is very large. Pat mentioned that their technology has continues to improve. And so we think there's lots of opportunity there. I say how much we want to hold, I would point out that from a cap -- use of capital perspective, it's really self-sustaining because we generate more gains when we sell off loans only are required to have on the 18% or 20% that we retain. I say 18% or 20% because some loans have an 85% guarantee if they're under $150,000 and then over that 75%.

So it's about 18% that we're holding on -- and we're holding on to those loans with a good yield. They're generally a prime 2.75%, which is good. And we reserve roughly 3% on the unguaranteed portion that we hold, and there's lots of data from the FDA on these kinds of loans as to what you might expect for losses in the future. We're actually running better than that because our credit box is tighter than what the SBA would permit under their credit scoring requirements for smaller balance loans.

Long-winded way of saying, we would -- we expect the business is going to grow. We're happy to hold more of the unguaranteed portion on our balance sheet. And we think this will continue to be a meaningful revenue stream for us.

Okay. Great. And then I guess I was curious, what caused the large uptick in FDIC costs this quarter? What drove that?

Primarily balance sheet side, balance sheet growth.

Okay, super. And then, Richard, will you be able to share with us the average price on the 280,000 shares that you issued this quarter?

Yes. I'm just -- we're just having a look, give us a second.

We have handlers with us that are providing us information there.

$98.36 is the average price.

It's on the highlight page, Mark, on the deck.

Got it. And then last question, can you help us think about the outlook for expenses? I know to some degree, it depends upon how successful you are with loan purchases and tools, et cetera. But any help there would be much appreciated.

This quarter, it was -- what page is that on that was about $19 million for the quarter, which compared to when we get the exact number. So I think -- thank you. I have it now. So from memory, not bad, it was $19.1 million this quarter, and the 2 preceding quarters were -- the last one, $17.7 million, $17.1 million -- and then prior to that, they were in the $16s million.

There has to be a range on this because part of this reflects the extra comp and hiring more people. But I think somewhere between $18 million and $19 million would probably be a good range based on what we know now.

Damon DelMonte from KBW is online with a question.

I hope you're all doing well today. Just to follow up on the expense -- and just to follow up on the expense commentary. So the higher FDIC costs, I think, Richard noted was basically due to like the larger balance sheet. So should we kind of expect that kind of run rate going forward just given the growth this quarter and then continued growth? Or do you feel like this is kind of an aberration this quarter?

No. So I think it's roughly in the right side. It may come down a slight amount. But...

Okay. Great. And then could you just maybe talk a little bit about your thoughts on the opportunities for the larger loan purchases with the market disruption that we've seen and we've talked about in the past, kind of do you feel that you're kind of in the negotiating stages for some increased activity here in the upcoming quarter? Or do you think it kind of drags out for a little bit longer into the latter part of this calendar year?

It's hard to say. Rick and I have been and others here at the bank who have been in this business for a very long time. And all I could say is that the number of pools that are available that have been -- that are out there is a lot. There seems to be a lot of M&A activity, a lot of the larger institutions are looking to reposition their balance sheet.

For whatever reason, last quarter, there was a lot of -- we looked at a lot, and there was just a bunch of them that just they decided not to sell them at that particular time, whether it's due to pricing or their own logistics. But all I can say is, we're looking at a lot. We're very optimistic given the volume that's out there, but it's hard to say whether or not what the competition or pricing will be when it comes to the day we make a bid.

I just want to amplify a little bit on Pat's comments. One is -- and David, I'm sure and others, Mark, others, you must see this. There's a lot of talk of M&A activity out there. M&A activity is -- typically generates opportunities to purchase loans. Secondly, and Pat mentioned that.

And secondly, there's been a lot of equity being raised for banks, which is kind of a new phenomenon with the increased interest by investors in bank stocks and banks -- some of the banks that are doing that are using it as an opportunity to reposition their balance sheet, including selling commercial real estate and some loans in some cases.

And so we're seeing that. But I think we have to answer your question with some humility because we expect there's going to be a lot of volume. That's our expectation. I also expect that when right after COVID, there would be a great opportunity to buy loans as well. And there wasn't and the commercial real estate loan market held up pretty well.

I think one of the things that is really important to understand about our opportunities is that when there are opportunities to buy, put a lot of volume on our balance sheet and single transactions, as you can do with the purchase loan business reminding you that we bought $1 billion in December of '22 and roughly $800 million in September -- late September of '24. It's a cyclical business. It usually doesn't last forever in such great volume.

But we're also building a large commercial real estate loan origination business with good rates, low LTVs and good asset quality. So it's really important to understand our business is not solely loan purchasing. And in fact, if we went back, I don't know, a couple of years, before December of '22, our loan activity was more like 75% originations and 25 purchases. So we're going to take advantage of the opportunities wherever we find them.

Got it. Great. Appreciate that color. And then just lastly, given the national scope of the loan portfolios. Do you guys have any exposure to California in light of the massive amount of wildfires that are out there?

It's such a great question, and we have such a great answer. Pat?

We have around $1 billion of real estate in and around that area, and we looked at every single loan we had and not a single one of them damaged and all of them with insurance had they been damaged. And that's because if you look at where the fires were and mostly residential areas and also mostly on size of hills and canyons where the brittle vegetation caught fire so quickly.

And a lot of the real estate we have is in the more urban areas of Los Angeles. So fortunately, we fared very well in this tragedy. But it's also along with flooding in Florida and other places is on our list of concerns as we look at new opportunities.

So one thing on the fire question, Damon. So we're not unique. It's why all banks do this, of course, when we make loans or buy loans. Our borrowers are required to have insurance for that casualty and we track all of that. And in the event that something slipped through the cracks, we have a mortgage impairment policy that gives the bank insurance protection for any of our borrowers that don't have fire insurance, for example.

So it's a horrible tragedy, of course. But as Pat said, we haven't had those -- we were fortunate, very fortunate, but if something happened, we have insurance covering all of that.

Got it. Okay. Well, good to hear that.

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

Thank you for that. Thank you for those of you who have listened and those that who will listen when they go to our website to review this and appreciate your good questions, Mark and Damon. And we always say this, we like to present as much and as helpful information as we can in our investor deck, we've gotten complemented on it frequently for all the transparency we provide. If there's something that you think would be helpful to you and other investors let us know.

And if we agree and we can include that, we will. And on that note, wish all of you a good weekend. Thank you.

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