Good day, everyone, and welcome to the Northeast Bancorp Fiscal Year 2018 Third Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is Rick Wayne, President and Chief Executive Officer; and Jean-Pierre Lapointe, Chief Financial Officer. Earlier this morning, an investor presentation was uploaded to the company's website, which we'll 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 the investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. The question-and-answer session for this call will be conducted electronically following the presentation. Please note that this presentation contains forward-looking statements about Northeast Bancorp. Forward-looking statements are based upon the current expectations of Northeast Bancorp's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bancorp does not undertake any obligation to update any forward-looking statements. At this time, I'd like to turn the call over to Rick Wayne. Please go ahead, sir.

Good morning, and thank you all for joining us today. With me is JP Lapointe, our Chief Financial Officer. After the close of the market yesterday, for the third fiscal quarter of fiscal 2018, we announced net income of $3.9 million or $0.43 per diluted common share, a return of equity of 12.2% and a return of – on assets of 1.4%. As it'll be discussed in more detail during this call, we had strong growth in our higher yielding LASG portfolio, higher volume in SBA originations, a decline in the delinquent and nonperforming loans and continued disciplined expense management. Turning to Slide 3. For the quarter, we generated $128.1 million of loans, which included $72.9 million of LASG originated loans and $33 million of LASG purchased loans. Originated LASG loans increased by $35.1 million or 10.1% over the linked quarter. LASG purchased loans increased by $10.5 million or 4.3% over the linked quarter, for a combined increase in LASG loans of $45.6 million or 7.7% over the linked quarter. The $72.9 million of originated loans had a weighted average yield of 7.58% as of March 31. Additionally, we generated $8.9 million of loans in our SBA division compared to $4.5 million of SBA originations in the linked quarter. Of note, $8 million of the $8.9 million of SBA originations were loans secured by hotels reflecting a promising start to the build out of our SBA hotel vertical. We generated a net gain of $560,000 on the sale of $5.8 million of SBA loans. Net interest margin for the third fiscal quarter was 4.9% and our purchased loan return for the quarter was 12.2%, which included $2.6 million of transactional income. Turning to Slide 4. As we have discussed in the past, under a regulatory commitment made in connection with…

Thanks, Rick, and good morning, everyone. I'm picking up on Slide 12 to provide more information on our financial results. Net income for the quarter was $3.9 million or $0.43 per diluted common share. Diluted earnings were up $0.07 from the quarter ended December 31, 2017, which I shall refer to as the linked quarter, and up $0.04 from the quarter ended March 31, 2017, which I shall refer to as a comparable prior year quarter. The increase from the linked quarter is due to higher purchased loan transactional income, which amounted to $2.6 million in the current quarter compared to $1.9 million in the linked quarter and $2.3 million in the comparable prior year quarter. Additionally, the gain on the sale of SBA loans into the secondary market increased to $560,000 in the current quarter compared to $341,000 in the linked quarter and decreased from $951,000 in the comparable prior year quarter. We also experienced an increase in interest expense of $546,000 compared to the linked quarter and $848,000 compared to the comparable prior year quarter. Additionally, earnings were impacted by the new tax law signed into effect on December 22, 2017, which reduced our blended federal corporate income tax rate to 28% for fiscal 2018. As our effective tax rate for the current quarter was 30.7% compared to 29.5% in the linked quarter and 37.5% in the comparable prior year quarter. Turning to Slide 13. Over the past year, we have seen net loan portfolio growth of $75 million. The majority of the growth over the last 12 months comes from our LASG portfolio, with $342 million of purchases and originations. As shown in the chart, in the trailing 12 months period, we have closed $40 million of SBA loans and sold $37 million of the guaranteed portion…

[Operator Instructions] And our first question comes from the line of Alex Twerdahl from Sandler O'Neill. Your line is open.

Hey, good morning, guys.

Good morning.

Good morning.

First off, just wanted to ask a little bit more about the originated LASG loan book had another very active quarter, this quarter, that's getting to be a larger percentage of your overall loan portfolio. Are there any limitations, either in terms of capital restrictions or as a percentage of the overall portfolio from where you stand, as to how big that piece of the pie can be?

The general answer – this is Alex, not Jeff, I just want to make sure, correct, Alex?

Yes, no, this is Alex, for sure this time.

No, there is not really any limits on that. Generally speaking, and I'll narrow it down a little bit where there might be. We have overall leverage limits, of course. So like any bank related to our level of capital, there are limits on how big the banking can get. But with respect to that category of loans, they are really – they are kind of in two categories, one is our portfolio finance business, which – those are C&I loans, not commercial real estate loans. And so therefore, not subject to the 300% commercial real estate limit. Other than that, I don't want to get too granular. Well, I'm happy to but may put people to sleep. Other than to the extent that they're – they get reclassed on the call report as substantively commercial real estate loans. But the general answer is, not with respect to those. To the extent that in the origination business, we're doing direct bridge lending, secured by investor commercial real estate that's subject to the 300% limit. But to kind of give the practical answer based on our capacity and the breakdown between those kinds of loans, I don't see the conditions that we operate under practically limiting us in that business line.

Okay. And then, can you just remind me, if I'm not mistaken the portfolio finance piece is at least is a prime-based product, is that right? Can just remind us, kind of, in that piece as well as the overall portfolio kind of what percentage of loans are prime or LIBOR-based that are floating with rising rates and which pieces are not?

I can. Indeed, you are correct that it is primarily a prime-based product. In our investors slide on Page 3, we indicate that in the quarter on the originated loans for this quarter, they were a little bit around here, we originated $73 million. And of that number, 96% of them were prime-based. Well, I think there was one loan that was fixed. It was kind of a one – maybe an 18-month or a two-year loan at 10%, other than that it's all floating. And we indicated March 31, the rate on those originations was 7.58%. And today, of course, it's 25 basis points higher. And so we love that product because it's floating rate – it's – the loans are typically prime plus 2.5% or so, in that range. And when it's in the case of – particularly in the case of portfolio finance, the relationship between our loan – of course, our collateral is assignment of a note mortgage from our borrower, whose is another lender. But if you go one level deeper than that to the underlying real estate, if you look at our loan to the underlying real estate, it's in the low 50s. So it's a very attractive low LTV, high yield floating rate. And there seems to be a good size market for us to continue to grow that business. And something we're going to focus on trying, I would point you to the forward-looking statement part of the next comment. But something we are focusing on to try and grow that quite a bit, if we can. And just to finish, on that table, you can see for the – for nine months, we did $158 million of which 97% of it was floating. So it's mostly doing a little rounding, it's all prime-based floating paper.

If I look at the first page of the press release, and you have the LASG originated portfolio sitting at about $382 million. Is it applying that same kind of high 90% prime-based? Is that an appropriate extrapolation?

I don't know exactly what that number – I don't think it would be as high as that. And I will for the next call, we'll provide that number on the portfolio. But because there are some loans in there that in the earlier days we did that were maybe three-year adjustable. So the rate got adjusted at three years. There could have been a couple in there that were five-year fixed. It's not the business that we're doing now. But I – and so – but by a long shot most of it's floating. Or if it's not floating, its paper that was written for a year or 18 months at a fixed rate that was appropriately priced to reflect that.

Okay. So that will be something I look forward to as rates rise, I guess. Can I just ask the SBA impairment charge that you had this quarter, that you sighted JP, is that something that it gets adjusted every quarter? Or is that specific to this quarter?

That's something that gets adjusted every quarter, Alex. So last quarter we actually had a recovery in that portfolio of about $110,000. And this quarter was a impairment charge of $140,000. So in that other noninterest expense line item, it's about a $250,000 swing compared to the linked quarter based on that. And that's due to different assumptions and payoffs in that portfolio. One of the significant assumptions that seems to be having a big drive in that valuation is prepayment speeds. And we have a third party, who values up for us on a quarterly basis. So...

Okay. And then, Rick, in your prepared remarks you mentioned some portion of the SBA originations this quarter being in the hospitality sector, I missed that number, can you just repeat what that was?

It was $8 million out of the $9 million was in the hotel space.

Okay. And maybe...

You may recall that – I'm sorry, go on Alex.

Yes. No, I was just going to ask, I know you hired someone that has a speciality in that last quarter. But I was just going to ask, it's certainly outlook on SBA. I know that it's been in a little bit of a transition over the last couple of quarters for you guys, just wondering where we are on the upswing here?

Thank you. I'm glad you asked that because I wanted to comment on that. First, it was noted – in your report this morning, you had indicated that expenses you noted went up against the linked quarter, $250,000 of it. JP just talked about it in the change and the servicing rights. And then there was another piece having to do with payroll number. This is our first – even though it's our third quarter, it's the first calendar quarter, where payroll taxes go up because you restart FICA, et cetera. But now to the relevant point about – I'm going to get to your point about that hotel. We're going to spend about another $100,000 in marketing. It all had to do with the SBA. And we're really trying to build that. We've really been focusing on the hotel vertical space. At first, we hired a fellow you are referring to was formally the Head of the Asian American Hotel Owners Association, which is a trade group representing half of the hotel owners in the country. He is well known there. And as part of our marketing plan to do that, we'll be going to – and he has in particular, he's probably going to go to 30 or 35 conferences this year to meet with hotel owners. We've invested in – we've hired a marketing firm that provides branding and help us build technology where we can do a much better job with – when we send out emails, tracking them, building a micro site for our web page for the hotel space booked. We've had – we have two people in the bank that are on the calls all day, calling up and following up on that. So we're making a big investment in people, technology and…

All right. That's a lot of good additional color. So there – and as you look out, it's going to take a couple of quarters, if not years. But if I look at like the calendar second quarter of 2017, I guess your fourth quarter of 2017 is being kind of a high point of the old SBA model. There is no reason why a couple quarters from now or however long it takes, you can't get back there given the infrastructure and given what kind of like your outlook is for that segment, is that correct thinking?

It's correct. And I would say, we don't do better than that openly. I'm saying, I – we have a whole team here, we will be disappointed. No, we made the transition to this model with the view that we can do better than we did before that's why we did it. I'm not saying reliable on our – in our SBA business that – and the numbers, obviously, don't line up. But as a model focusing on verticals and developing a reputation and our brand in certain areas starting with hotels and adding to them over time, we believe is a very good model for us.

Okay. And then, just a final question from me. It looks like the end of period share count went down very slightly from the end of the last quarter. And your share price has kind of come down a little bit over the last couple of months. I mean you still have the buy back in place, correct? And is there any change in your thoughts on using that? Have you been using it? Will you use it at some point in the future? Or is that is really growth or is the best use of capital, as you look toward?

Well, first, let me just comment on, and I'm going to ask JP to comment on the share count is – JP, will you look – you are saying on the linked quarter? Alex, just want to make sure we're working with the same...

I have in my mind the end of December, are you having 8.94 million shares and then it's going down to 8.93 million at the end of March?

We're just taking a look at that to make sure. We – I assume you have the right number. But let's...

If not, I've to get Jeff back on the call.

We went down by 3,000 shares, you're saying?

14,000 shares.

I think it was like 14,000 shares. It was a small – it's a small number.

Yes, my – what we haven't brought back any share back. If it goes down, it probably went down because there was an employee that had restricted shares that left the bank that forfeited his shares. That would – JP, would there be another reason the share count would go down?

No, we're just following up right now to make sure that...

I'm sure it's that. But to answer your question, Alex, on the use of the buy back. The board and management, we think about use of capital to make sure we have – we're using it wisely, the possible – the two obvious possibilities are, using it for growth or returning it to shareholders either through a repurchase or through a dividend. And the board values that. We – the conclusion to date has been so far that – and, of course, this – the price of the stock drives that decision. But the choice – the decision so far has been that, it's not – it wouldn't be wise for us to use capital to buy back stock. We are disappointed what's happened to the stock price. But when you see how much growth we had in our loan book with the linked quarter, it's particularly in the LASG. What's happening, the LASG is growing and the lower yielding community bank portfolio is shrinking. It is our hope and expectation we'll continue to grow the LASG. And we're probably going to want to use that capital. But if sadly the stock price went down to a level where it makes sense to buy back that's a tool that's certainly available to us.

And Alex, the answer to your question is, what Rick said, forfeitures and then share cancellations for vested restricted stock awards. It's what caused the change in the shares during the quarter.

Okay, all right. Well, thank you very much for taking my questions.

Thank you, Alex.

[Operator Instructions] There are no further questions at this time. I would now like to turn the call over to Rick Wayne for closing remarks.

Thank you. Well, I hope that was, I mean, good conversation with Alex that – between that and the material that we provided. We were able to answer all of your questions and describe the activity of the bank during the quarter. Our goal is to be as transparent as possible. I always say in these calls, if there is additional information that you think would be helpful in future calls, I mean, we are able to provide that information. We would be happy to. So feel free to let JP or me know. And thank you for listening to the call and reading our material, supporting us, we appreciate it. It's Thursday, so I can't wish you good weekend, but hope you have a good weekend. Thank you.

This concludes today's conference. You may now disconnect.