Welcome to the Northeast Bank Fourth Quarter Fiscal Year 2022 Earnings Call. My name is Jenny. I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press zero one on your touch-tone phone. As a reminder, the conference is being recorded. I will now turn the call over to Rick Wayne. You may begin. Good morning, and thank you all for joining us today. As mentioned, I am Rick Wayne, the Chief Executive Officer of Northeast Bank. With me on the call are JP Lapointe, our Chief Financial Officer, and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments, JP, Pat, and I will be happy to answer your questions. Let me first turn to page three of the investor deck that was uploaded on our website last night. I want to comment on a few items listed on page three. First, for the quarter, we reported $10.3 million of net income or $1.35 per diluted share. Our return on equity was 16.55%, and our return on assets was 2.68%. A big driver of our income for the quarter were our national lending loan volume, and in particular, the activity around our originated loans. For the quarter, we originated $172.9 million of loans, and for the year, $587.8 million of loans. You know, that's a record for us, both on the quarter and for the year, by a substantial amount. For the year in particular, by a substantial amount. I also want to point out on those loans that 93% or 94% of our originated loans are variable, tied to prime. Of course, in a rising interest rate environment, that is helpful to have variable rate loans. I just want to comment on something about that, which was, I think requires some explanation, because our yield on our loan book for the quarter on originated loans was 7% and was 6.9% for the prior quarter. It only went up 10 basis points, and one might wonder why, and with loans that are tied to prime, why they only went up 10 basis points. I will answer that question for you. That is that our loans are structured so that if there is a payoff before maturity, in each loan, we negotiate a minimum amount of interest that the borrower has to pay. We had more loans pay off early in the prior quarter than we did in this quarter. To put some numbers to that 6.9% in the prior quarter included 70 basis points of minimum interest that paid off from loans that paid off early. Net of that, the yield was 6.2%. As compared to the fourth quarter, where we only had 50 basis points of minimum interest. Netting of that, the yield was 6.5%. Which is a long way of making the point that ignoring minimum interest, the yield on our originated loan book went up 30 basis points from Q3 to Q4, reflecting changes in interest rates. To the extent you're thinking of that, I hope that clarifies that. One of the big things we've been working on is understanding that our correspondent fee income was going to go down each quarter and eventually go away. Just as a reminder, we have correspondent fee income resulting from discount when the loans were purchased, and we also share in the servicing income on the portfolio that Loan Source has on the PPP loans that they purchased. For a reference point, let's take a look at slide number four in the deck. I will remind you that, starting in the fourth quarter of 2020 through the first quarter of 2022, The Loan Source purchased $11.2 billion of PPP loans. At the end of June 30, 2022, there remained $1.4 billion. There was about $9.8 billion of loans that were, either paid off or forgiven. The reason that's meaningful is that The Loan Source earns 65 basis points on the PPP loans that they hold. As the portfolio gets paid down, I should point out, we share half of that, and as the portfolio pays down, our share of the income goes down. To put some numbers to that, if for a second we turn to slide number 29, which I am trying to get to, you can see that, looking at the quarterly amount of correspondent fee income, which is in blue, on the right side of the investor deck on that page, that correspondent fee income, if we compare with Q1 of our fiscal 2022 with Q4, correspondent fee income went down by $4.1 million because the PPP loans were being either paid off or forgiven. What we investors know and we've talked about, you know, what we need to do is increase our loan book to offset that. Now if we look at the base net interest income, which is in blue on the chart next to the one I just described, you can see that if we compare Q4, which just ended, with Q1, that base net interest income increased by $4.3 million. Punchline is we're growing our loan book, we're generating more net interest income, and we have more than offset the amount of reduction in correspondent fee income. For the year, if we look at it for the year, I have this number that net interest income, if we compare FY 2022 with FY 2021, net interest income increased by $16 million. That's a result of that our loan book grew on our national lending portfolio by $284 million or 30% at the end of FY 2022 compared to FY 2021. If we just look at the originated part of that, it grew $236 million or 45% from the beginning of the fiscal year. That is what we are focused on, is growing our national lending book. Just a few other comments before we open it up for questions. On our non-interest expense line, it grew. If you compare the fourth quarter, that is June thirtieth, with the third quarter, September thirtieth, non-interest expense grew by $1.5 million. That was, as is usually the case in the fourth quarter, where the comp committee takes a look at how the bank is doing and if appropriate adds to the incentive comp. That $1.5 million was virtually all additional incentive comp in the fourth quarter. Just for modeling purposes, you know, as we're going into this fiscal year, FY 2023, adding more people, probably a good number per quarter noninterest expense is around $13 million for those that are doing the modeling. Also we bought back during the quarter, I have that number. 285. JP, how much? 285. 285,000 shares in the quarter. For the year we bought back 821,000 shares. Just took a look at this morning. I thought someone might be interested. Since we started the repurchase program, we have repurchased 3.8 million shares at an average price of $16.93, which is about 34% of the shares outstanding before we started a repurchase program. Finally, just a few words on our 7(a) program with NEWITY. This is, again, taking longer than we had expected. These are not the biggest numbers in the world, but in the quarter, we closed 26 loans for $600,000. I shouldn't say we closed. Yes, 26 loans for $600,000. I don't wanna promise more than we can deliver, so we'll see what happens in the next quarters. The technology is working. We're able to close loans. The marketing is continuing, and I'm hopeful that we will have better numbers to report when we report at the end of our first fiscal quarter. No promises on that score. We will see when we will see. Asset quality. These are things that are in the report, so I'll point out just, I know you can read them. You know, delinquencies were at a very low number at around $7 million. Non-accruals came down to about $13 million, which are numbers that are levels that are much lower than we have been in some time, and particularly impressive given the size of our loan book now, which is about $1.3 billion. With that, I will turn it over to all of you to answer any questions that you might have. Thank you. Thank you. If you have a question, please press zero one on your touch- tone phone. If you wish to be removed from the queue, please press zero two. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press zero one on your touch- tone phone. Our first question comes from Alexander Twerdahl. Please go ahead. Hey, good morning, guys. Morning. Morning. Hey, first off, I was just wondering if you could give us a little bit of commentary on what you're seeing in the loan purchase market, just given all the volatility and change in interest rates, if that market has changed at all and what your expectations are for later this year? Wait. I don't know if our operator read the forward-looking statement, so I will remind you that it's in the material when I answer the question. We're seeing a lot of activity now in the pipeline. We think that the higher interest rate environment and concerns about credit quality for some banks in the real estate area. I think we're expecting to see a fair amount of activity in this. We've also seen some groups that previously would have bid against us out of the bidding and now becoming sellers of their portfolio. I would remind everybody that, you know, I was very optimistic about the loan purchase possibilities when COVID started, and we were wrong. Well, hopefully, we won't be wrong now. We think that there will be a lot of opportunities. We see a lot in the pipeline now. Of course, you know, the results are always binary. You win or you don't win. It could turn out we don't buy as much as we are hoping for. Pat, do you wanna add to that, add any color to that question? Just to add on to what you said, but the rising rates have obviously resulted in increased funding costs for a lot of our non-bank competitors, which is good for us. On the seller side, fixed rate assets are becoming, you know, it looks like there's some activity out there with banks trying to shed some of that in anticipation of further increases. Also on the credit side, there's debt service coverage pressure as a result of rising rates. All of those factors are causing the market there to be in some increase in activity and a lot of talk on the street of more to come. We're very hopeful that there'll be some opportunity for us this year. I would add to that there are not many banks that are in the business of buying loans nationally. 0.1%, 0.2%, as a bank with really low funding costs, they're rising a little bit and will rise more. It gives us a competitive advantage against non-banks, and it seems that some of the non-banks, with the rising interest rate, you know, are gonna be less competitive. Historically, their funding was through a securitization where the rates were quite low for them, and that's not the case now. We're optimistic, but as I said, you know, results are binary. You win or don't win. We have the resources, human resources, you know, to look at a lot of loans, and we've been doing it. As you know, Alex and others do, we've been doing this for a very long time. Hopefully, our time has come. With that last point, with respect to the human resources, do you have the capacity to meaningfully increase the loan purchases as well as maintain the growth rates that we've been seeing on the originated portfolios? We do. You know, as part of our. When I mentioned earlier about the projected, you know, costs going forward, you know, we have in a fair number of slots to hire more people, and, but, you know, we'll do what it takes to carefully and, you know, underwrite the purchase and originated loans and not, you know, we won't fund, buy any loan or originate any loan unless we're 100% comfortable in the underwriting that we have done. I don't think we'll have a bandwidth problem on what we're seeing now, and we will hire more people as we need them going into the next year. Great. For this past quarter, the volume that we saw, was it the supply just not there, or were you losing bids to others? Or is this the pricing not appropriate? What kind of drove the lower volumes based on your commentary? I would have expected to see volumes a little bit higher. I think we looked a lot. I mean, we looked at what was available in the market in our sweet spot, and we bid on a fair number, and that's why, like, as Rick pointed out, it's a lumpy business. You know, I think what the market, the supply in the market last quarter was, it started to pick up toward the end of the quarter. I don't think it's indicative of anything other than that. Okay. On the originated loans, the yields on the new production, just given the variable nature of those, are those yields pretty similar to the book yield that you would have, to that kind of, I think you said 6.5 core yield? Is that where new loans would be coming on as well? No, they're coming on at. Yeah, well, in that range. You know, you know, anywhere between, you know, between prime 1.5 and 2.5, so there's a range for those. They don't, of course, reflect the expected 75 basis point increase in prime that will be announced, but that's about right. Okay. It's gonna go up at the rate it increases in prime, is really the point I'm making. Yeah. Can you give us some commentary on the cost of funds? I know it's ticked up a little bit, and you have the slide here that shows that it should probably tick up a little bit more, and you've done a lot with respect to improving your deposit profile over the last couple quarters. You know, in terms of the pressures that you're seeing on deposit costs, where those are coming from. Sure. You know, I think you made the point that, you know, we're starting in a better place than where we were, you know, two years ago. You know, being at a 36 basis point cost of funds, you know, for this quarter, obviously lower than where we had been. There's definitely some, you know, pressure upwards for customers who are, you know, asking us to reprice your deposits and everything. You know, but we're definitely not a 100% beta. You know, while we do expect, you know, rates to go up, we expect our loans to move up, significantly more than our deposits. You know, I think it's kind of sign of the market and kind of based on what our competitors do also. You know, as competitors move, we have to be a little more, agile and flexible to make sure that we can continue to fund the growth that we, you know, hope to see in the balance sheet, by retaining our deposits to continue to grow, more. We do have a projected uptick in the cost of deposits, but, you know, nothing overly significant, based on where the projected rates are expected to go over the next, you know, at least six months. Okay. Rick, I think you said in your prepared remarks that we should be modeling expenses in the coming quarters around $13 million per quarter, which seems kind of an uptick from where you were last quarter in kind of the non-year-end quarters. Can you maybe just talk a little bit about why that is? It's mostly comp. Well, I think there's three big buckets of that, you know. One are more headcount, you know, this year with inflation, you know, base salaries went up because of, you know, we gave out kind of the standard increase in base is higher than it had been in the past because of inflation. We're also moving from our current office to another office for those that know Boston and the Seaport. You know, we needed more space and, you know, we signed this lease in 2012, and rents are higher. We have. It's kind of rate volume. We're taking more space, and it's more expensive. Those are the three major items that are accounting for the increase in non-interest expense. Okay. Just a couple more questions from me. When you guys will adopt CECL on January 1, 2023. Is that correct? That's correct. Do you have any sort of early guidance or, you know, color that you could help us kind of figure out where that ACL might shake in and kind of how your loan portfolio is given sort of the purchase nature of a big chunk of it and, you know, then another big chunk that's had a zero loss history. You know, like how CECL might impact your various portfolios? Yeah. It will most likely reduce, you know, the majority of our portfolio, our segments, you know, given the low LTVs and the minimal losses that we have in our originated portfolio. You know, where we see an increase is in the residential real estate side. When you look at, you know, the life of those loans is much longer than, you know, the short-term nature of what we have in the national lending originated portfolio. You know, one of the other factors is that we will have to begin reserving for purchase loans in the allowance for credit losses. So that'll come in also as a factor. You know, and some of that that we have right now is in purchase discounts. Some of that discount that's sitting against the loan balance will actually migrate over to the allowance for loan losses when we adopt CECL. It'll just gonna be a reclassification in the balance sheet and have no capital or earnings impact at that time. We expect the overall allowance, you know, probably won't change materially from where it is now, but kind of how we get there might be some components moving around on the balance sheet at that time. Okay. That last piece, the purchase discount going into the reserve for purchase loans. Post the sort of January 1 adoption date, if we look forward into some quarters for next year, does that mean that a larger quarter of purchases would result in a larger provision? That depends on where FASB ends up. They're looking at still updating some of the CECL guidance that will allow you to take some of that discount that you purchase on loans and move it over to the allowance at the time of purchase. The way CECL is worded right now is that you would have to reserve for purchase loans through a provision in the income statement. FASB is looking at making an adjustment for purchase loans in the future. Okay. Just the final question, Rick, on the NEWITY 7(a) program, I think you said you closed 26 loans. I think it was $600,000, that's loan balance is correct, not income for you guys. Can you just remind us should those volumes pick up, you know, how that's gonna actually impact the income statement? Are you saying, Alex, if the volume were to pick up, how that would impact our earnings? Is that your question? Yeah. I know there's a gain on sale component, and then there's also, if I remember correctly. Oh, okay. I could say so. A reserve as well, or a provision as well. Yes, if we were to sell those loans, they're now priced at prime 2.75. Currently, if one were to sell loans, these are 10-year loans at prime 2.75. Assuming they get the same pricing as larger traditional 7(a) loans, today, the premium's 8 points. It's come down a little bit. It was at one time 10 or 11, maybe a little bit more, but currently it's 8. I think it'll change as rates change over time. If we were to sell those loans, there's a 90% guarantee on the loans. If you sold off, let's say to make the math easier, you had $1 million of UPB on the loans, you could sell off $900,000, and the premium would be 8% on that, so there would be a gain of $72,000. We would split that with NEWITY.. We get $36,000, they get $36,000. We would keep the 10% that we didn't sell on our books and earn prime 2.75 on that. I should have added that if there were any losses in that portfolio, we'll split that with NEWITY. 50/50, and we will withhold starting off if we look at do we expect the losses in the portfolio over time will be 3%. We would withhold 1.5% of NEWITY. 's share of the gain on it. I should point out for the audience, if I'm only using that $1 million to make the arithmetic easy, you know. It's linear. If it was a much bigger number, obviously that would be much more interesting, which is our. It's what we're trying to accomplish. I was gonna say hope, but that sounds too tentative. That's what we think will happen with more volume. Awesome. Thanks for taking all my questions. Those were all excellent ones. Thank you, Alex. As a reminder, if you have a question, please press zero one on your touch -tone phone. We have no further questions at this time. Well, thank you. Thank you everybody for listening in and your continued support. We look forward to talking again at the end of the current quarter. We try and make our slide deck as helpful as possible. The information we provide, if you have any suggestions, it's a standing offer, let us know. If we can accommodate it, we will do that. On that note, I will say thank you and goodbye. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.