Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2020 First Quarter Earnings Results Conference Call. This call is being recorded. With us today from the Bank is Rick Wayne, President and Chief Executive Officer; and JP Lapointe, Chief Financial Officer. Earlier this morning 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 & Presentations. You will find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for re-broadcast 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 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. At this time, I would like to turn the call over to Rick Wayne. Please go ahead, sir.

Good morning, and thank you all for joining us today. I am Rick Wayne, the Chief Executive Officer of Northeast Bank, and with me on the call is JP Lapointe, our Chief Financial Officer. Before turning the call over to JP for a more detailed analysis, I would like to discuss highlights for the quarter ended September 30, 2019, which is the first quarter of our fiscal year. For our first quarter of fiscal year 2020, after the close of the market yesterday, we announced quarterly net income of $4.8 million, or $0.52 per diluted common share, a return on equity of 12.2%, a return on average assets of 1.7%, and a net interest margin of 5.7%. Additionally, as announced last week, the Bank adopted a share repurchase program to purchase up to 900,000 shares of our common stock, representing approximately 10% of our outstanding common stock. The repurchase program has the potential to enhance shareholder value while returning capital to our shareholders, and gives us the opportunity to repurchase our stock at a price to the extent we feel it is undervalued. The repurchase program does not obligate the Bank to purchase any particular number of shares. Turning to slide three. During the first quarter, bank-wide, we generated $79.5 million of loans, including $69.2 million in our LASG of which $40.6 million were originated and $28.6 million were purchased. Offsetting the origination and purchase activity was an unusually high number of payoffs and pay-downs in the LASG portfolios, which totaled approximately $100 million for the quarter. The weighted average yield of the LASG loans originated in the first quarter was 7.5% at September 30th, all of which were variable tied to prime with the weighted average floor of 7.5% as of September 30th. The total return on purchased loans…

Thanks, Rick, and good morning, everyone. I'm picking up on slide eight to provide more information on our financial results. As announced in our earnings release that was made public after the close of business yesterday, net income for the quarter was $4.8 million or $0.52 per diluted common share. Diluted net operating earnings per common share were down $0.07 from the quarter ended June 30, 2019, which I shall refer to as the linked quarter, and up $0.03 from the quarter ended September 30, 2018, which I shall refer to as the comparable prior year quarter. The decrease of $0.07 per diluted common share from linked quarter was due to decreased loan interest income, which amounted to $19.7 million in the current quarter, compared to $21.4 million in the linked quarter, as a result of less transactional interest income, compared to linked quarter, which decreased by $1.6 million. Additionally, interest income on other short-term investments and dividends decreased by $389,000, compared to the linked quarter. These decreases in interest income were partially offset by lower interest expense, totaling $4.8 million in the current quarter, compared to $5.3 million in the linked quarter, as a result of lower funding costs from the decrease in deposits and the redemption of trust preferred securities, as a result of the corporate reorganization completed in the linked quarter. The provision for loan losses amounted to a credit of $136,000 in the current quarter, compared to a provision of $262,000 in the linked quarter, due to changes in the composition of the loan portfolio due to higher pay-offs during the current quarter. Fee income decreased $116,000, compared to the linked quarter, due to the write-off of servicing assets from the payoff of SBA loans in the current quarter. Additionally, bank-owned life insurance income increased $131,000,…

[Operator Instructions] And our first question comes from Alexander Twerdahl with Sandler O'Neill. Please proceed with your question.

Hey. Good morning, guys.

Good morning, Alex.

Good morning.

First off, I want to spend a little bit more time talking about that paydowns that you saw on the LASG originated loans during in the quarter, which were a little bit higher than they’ve been running over the last, I guess -- really since you’ve been doing that business. Maybe -- was that do you think tied to a decrease in interest rates or another event or anything else that we should be aware of?

Well, in the -- there was some dollars in those loans that were paid down because of business was sold. And in fact, those were -- they’ve been on the balance sheet quite a while at a pretty low rate which we had booked early on when we needed to increase our originated loans to increase our purchased loans. It may have been some of that with lower rates. So, I think, it was more just lumpy in the quarter. We don’t really see the pay-down staying at that rate, even on what seems to be a continually lower rate environment. So, maybe some of it, but I just think it was more coincidental than anything else.

Okay. So, kind of -- if you look at that business and kind of the pipeline going forward and sort of the origination volume that you’re capable of doing in any given quarter, I know that’s pretty too, but the expectation is for that portfolio continue growing. You don’t anticipate -- I know, these things are hard to project going forward, but based on what you know right now, you just like that portfolio to start moving higher again in the -- into the final quarter of this year, right?

Yes. We -- on the originated side, we booked $40 million, which by most any other standard -- that it applies to us, because we tend to be -- put more loans on the books than other banks. That was, I don’t know, 8% or 9%, I’m doing the math in my head of the original balance on originated loans in that. But, I won’t read the whole forward-looking statement that was read earlier. But I will point out, this is a forward-looking statement and it could change. But we have a fairly robust pipeline. And frankly, we thought we were going close to quarter at $60 million and we just had some loans that didn’t close. If they closed on September 30th, they’re in; and if they closed on October 5th, during the next quarter, we had some number of those that rolled into this quarter. I would expect that we will continue to see significant bookings in our originated loan portfolio. I would expect to see pay-downs slowdown. I don’t think we’re going to see $400 million of pay-downs in our LASG this year, that would be surprising. And we have as I said a pretty robust pipeline.

Okay.

JP went over -- just maybe Alex, I could use this as an opportunity for -- I know, you know this but for some of the other callers to underscores good things JP mentioned. We have on our -- actually repeating, but I want to amplify on that. In our originated loan book, we have a weighted average floor of 7.23%. It appears that prime’s going to go down again, which is probably 4.75%. So, we have baked into there pretty good spreads. We had to absorb a little bit of it, because the floor was less than our rate before. But, now, what we’re going to see is probably significantly less funding costs as all those CDs JP mentioned, fund in our loans. We have the floors baked into those.

Just to elaborate on that a little bit. So, based on those floors, and based on the average rate -- average yield on that portfolio right now, it seems like maybe if we get a cut I guess this week, there is a little bit more pricing pressure on the downside at least for one more cut and tem maybe it subsides. But then, you also mentioned that some of these payoffs were both at lower rates and kind of on the balance sheet for a while. So, maybe that acts as a little bit of an offset to any pressure of another rate cut this week?

I'm not sure I followed all of that. Will you -- one more time?

I was just saying, if we look at the originated loans right now, they’re at 7.55%, and if you're saying the weighted average floor is around 7.23%, then that would suggest maybe a little bit more pricing pressure on that portfolio, should we get a cut this week, which I think is largely expected. And then -- but I was wondering, if there would offset to that pressure on that portfolio -- on the yield of that portfolio, due to the fact that some of the loans that paid off were, as you mentioned earlier, lower rate loans?

Yes. Alex, I think, part of that is -- we had two rate cuts in the previous quarter. So, while we're at 7.55% for the quarter, some of those loans had adjusted at the end of the quarter. So, I'm not sure if this rate cut -- if it happens from the Fed tomorrow, will have much more of an effect on our portfolio from where we kind of ended the quarter.

You're right that if we're at 7.50 and the floor is 7.23, we're going to take a hit when the rate was down but then at 7.23 we’re then protected.

Right. So, my point was more by the September rate cut that we will experience going forward in next quarter. So, hopefully this next rate cut that may come this week, shouldn't have any additional impact on us.

I think, the big savings for us, we didn’t see any re-pricing on our -- we had, as JP mentioned, we saved about $500,000 in interest expense on deposits because our deposit came down by about $75 million or so. But, the rate on those didn't change. It was 2.02% in the linked quarter and 2.02% this quarter. And the improvement will come when those $120 million of CDs mature in roughly December, give or take a little bit that are at 2.86%. Today, they would reprice at 2%. And I suspect if there's is another rate cut, they will reprice at number less than 2%, and that ought to be meaningful interest expense savings.

Yes. That was going to be my next question, is beyond -- and then, even beyond the CDs, given sort of the nature and the complexion of the ways you guys gather deposits, should we expect some additional relief on things like money market accounts that seem like they are significantly higher than you might see money market account rates at other banks?

I would hope so. It really depends on what our competitors do. And I would call those -- we have two groups. We have money mark rates in Maine, and we have through our ableBanking, we have national rates. But, it wasn't that long ago that we had a money mark rate at 1.1. That was the highest and we were bringing in money like crazy. So hopefully, those rates will come down. They seem like they should come down. And if they do, we have great opportunity there as well.

Okay. And then, did I hear you right on the SBA business, is that going to wind up now that you’re going -- any SBA loans that you originate are going to wind up staying on the balance sheet as part of the LASG unit, or will you continue to sell a portion of those, depending on pricing?

Probably, we would -- depending on pricing, we probably would sell them. The point I was really trying to make is previously we had higher aspiration for that SBA business. So, while back when the market was different, but we’ve been -- as you know, every quarter our originations are going down. And we probably have -- this is a round number, but we probably had a $600,000 of cost in business development and marketing and travel and those things by having what was kind of separate division when with Fred who we like very much and our departure was very amicable and understood by both of us. But we’re going to still do SBA loans as we get referrals from groups currently known to the Bank. But, we’re going to just run that as part of -- through our LASG. So, it’s going to save us some money on the cost side. And we previously did all the underwriting for that out of LASG anyway. So, it’s not -- no one is getting displaced in the bank there. I’m going to just continue to work in the LASG activities. And when we have SBA loans, we’ll book them through them. But, I’m trying to make the point that I don’t want to emphasize this -- overemphasize this part of our business. It’s a relatively small part of our revenue. And we think by putting it now where it belongs based on the volume we’re doing, it will be clear -- we’ll save some meaningful amount of on the expense side and clear to you and to investors as to how that fits into our entire business. But on your question, we could sell -- if we book them, we could sell them, that’s not the change we’re making. It’s not kind of what [indiscernible] decided to move from the model of selling to putting them on their portfolio. That was a really the impetus for the structural change.

And you mentioned in your prepared remarks that really the reason the volumes are way down has to do with the credit quality, what you’re seeing out there. However, I know that the pricing has change materially as rates have gone higher. I mean, have you seen any change in the pricing for these things to sell or has that -- I guess, you mentioned that you don’t see much changing in the way of the underwriting out there. But, nothing that would suggest that that market could come back, based on what the outlook for interest rates are, correct?

Are you saying the pricing is challenged dividing into pieces? When you say the pricing changes, are you referring to the premium on loans sold, or the rate that….

Yes.

Okay. So, for us, it wasn’t -- we could live with lower rates in there. We were reasonably happy with the premium. For us, it was all about credit. And we saw a lot. To Fred’s credit, I want to make sure that’s clear on this call. We think the world of him and he did it. He’s shown us a lot of deals. But, there is a spectrum of credit quality, you can range from an exterior corridor hotel that needs a meaningful and what they call, PIP property improvement in a tertiary market sponsored by a borrower -- owner that’s worked hard and accumulated some money, but post closing doesn’t have a lot of capital, if there is a problem. Those are the kind of the deals that we saw lot of and turned down. You can -- obviously say on the other end of the spectrum is as the credits get better, a lot of times they’re not appropriate SBA loans. We were seeing a lot of deals that we could have booked; we probably could have -- if we booked everything we saw, I don't know what we would have done. We could have done $50 million -- $60 million of hotel loans. And now, this is going to be a complementing the team, not me. But, we have the discipline to say no to those, because those are loans we just thought where credits were going to be a problem. We could feel great on day one by booking those, selling those, having meaningful gains and growing our volume. But, when they blow up, it’s pretty unpleasant. So, we just couldn't find deals that we were comfortable on the credit quality side. And that's really what happened for us.

Seems like it makes a lot of sense. A question on the buyback, 10% of shares outstanding seems like a pretty large number. Can you give us a little bit more color on sort of the thought process around that size of the buyback, and if there is any expectations, and you know what sort of price points you might be interested in actually being in the market buying shares?

For us -- we wanted to have this as a tool in our business. As we've seen recently, the market can be volatile. We're a small company thinly traded. Our thought was if woke up one day and somebody had to sell a block and we saw our stock trading at a very low price, we wanted to have the opportunity to move in and buy it as a good investment. As I said in my comments, the plan doesn't obligate us and investors shouldn't assume that we necessarily will buy any stock. It's really a function of kind of few things. One is, what is the stock price relative to what we think it's worth. I’m not just talking about -- in relationship to tangible book -- relationship to what we think the company's worth, is one; and two, what are our opportunities to use that capital in our business. Are we looking at a lot of loans to buy in a pool? This quarter we bid on over $100 million and frankly we thought we were going wind up with more than we wound up with. So, it’s kind of looking at those two things, what are opportunities in the business and what is the stock price. This will not be a particularly helpful answer in terms of providing guidance. But, I wouldn't -- I don't know whether we’ll buy any shares or will buy a lot of shares. It really depends on those factors. But, as was we talk to investors, and we felt the same way, they encourage us to put in place a buyback plan. So, if it turns out that there was -- our stock runs up at a price where it made sense for us to do that, we would do that.

Understood. I think, that's all my questions for now. Thanks for taking the time.

Thank you, Alex.

Thank you. And our next question comes from David Minkoff with DCM Asset Management. Please proceed with your question.

Good morning, Rick and JP. Congratulations on another very decent quarter. You seem to make it look easy, even though I'm sure it's not. Actually my question was on the buyback, and Alex probably preempted the question. I think you largely answered it. But, I'll tackle it a little bit anyway. It was a large buyback that you announced. And in the past, you've always announced your buybacks and completed them within the year. But each time you did it, the buyback was announced at a time the stock was selling below book value. This is the first time you announced the buyback, let’s say, the book value I think was $17.17 in the latest quarter. And even though you caution us not to annualize quarters, [indiscernible] in the first quarter, I’m going to go out on the lim and annualize that despite your lumpiness warnings. And so, I’ll assume approximately $2 for the year. So that puts the book value up to $19.17 let’s say -- or $19. So, you announced the buyback at $22.5. I was going to ask you, before you basically answered it. Whether -- what was different this time? And I think you kind of said that it’s there as a failsafe should the stock hold. That’s certainly understandable. But each time you did in the past, you did it at the then market price. Could you still justify buying the stock at the current price when you announced it, not only being as failsafe or should it fall 19 or 20 or whatever number you had in mind?

I wouldn’t say what price we would buy the stock. I know you know this data, but I’ll say it to remind any of the other listeners that in the past buybacks we bought 20% of the Bank back at $10. Now, obviously at $22, $10 was quite smart. I think the kind of the guiding philosophy to this is, if we wind up accumulating more capital than we need for our business, it would be appropriate to return that capital to investors. So, I’ll go back to the point I made when Alex asked the question, the decision to buy back stock relates to both the price of the stock to what we consider the real value of the company, which is not necessarily -- it’s not tangible book and it’s not necessarily where it’s trading at, versus our opportunity to use that capital. So, to make that more tangible, if God forbid, our stock price went back to $10 and we have $17 tangible book value, I suspect most rational people would say, you could buy a lot of stock at $10, you would do that. If our stock price, now I would say, please God, went to $40, while we would be thrilled with that, you probably -- which would be more than 225% of tangible book in my head, most of rational people would say don’t buy back stock at that price. If it turns out that we’re kind of creating a more rationale range relative to tangible book and we have an opportunity to grow our loan book, the most profitable thing we can do -- not a buyback, the most profitable thing we can do is leverage our existing capital and put on loans that - and earn slightly less than 6% NIM on. And so, that’s a function of what opportunities do we see, both on the purchased and the originated portfolio. I know it’s not as helpful an answer as saying at this price we would do X and at that price, we would do Y. But, it’s really a dynamic and we have to take -- consider all of the things that are going on.

Right, well understood. Of course, the other way, and I mentioned this a few times, the other way to return funds to shareholders would be to increase the dividend that’s a lot less expense than buying back stock. Well, there are two ways to look at it. You can say it might be more expensive, might not be. But, I think, earning in the $2 a share range for a year, paying only a penny a share probably there is plenty of room for an increase should you choose to do it. You haven’t chosen to do it in the past. I’m just wondering why you prefer to keep the dividend so low. I think, if you look at your peers Camden, other banks in Maine, the dividend yield may be 1%, 2% even upto 3% in some cases, and yours is basically just out there at a fraction of 1%. Just wondering why that is and might you take a harder look this time at perhaps raising dividend. I think, you will get some mileage in your stock if you did it. So, I just wonder why don't it and how you are thinking about it?

I would say, what distinguishes us from other banks is our ability notwithstanding this quarter, where our average loan book went down. But if you take a look at your last year, we grew our LASG portfolio by 20% at the kind of yields we get as opposed to the growth in -- that other banks are able to achieve in their loan book. I do agree with your underlying principle, which is if we don't have a use for our capital in our Bank you know, it would be appropriate to think about returning it. But, it's not as if we have -- we're sitting and we have $900 million of loan capacity. We have maybe $300 million, $350 million. And we looked at last quarter, $130 million of purchase opportunities, one of the things -- this is my view anyway -- well, not really my view, I'm repeating what one of our very smart directors told me about capital, which is the lease expensive capital that we’ll ever get as the capital we have now. And so, we don't want to really be in a position where we distribute the capital and then need it to buy loans and to originate loans and need to go in the marketplace and raise it. That tends to be pretty expensive. I don’t just mean in the well-earned fees that Sandler would get. Alex, I say that for your benefit and your colleagues. But, just in terms of -- you go out to the market and very often you don't get the price that you are trading at before you go after the market.

I think, this is something, David, we're going to -- obviously, the Board thinks about it a lot. We talk about capital planning, management does as well. I think, you and I and others, we could identify all the issues; we may come to different conclusions as we see the facts on the ground. But, we're paying attention to it.

Okay. I accept that. Very good. Keep up the good work.

David, it was nice talking to you. Thank you.

You’re welcome.

Thank you. [Operator Instructions] I'll now turn the call over to Rick Wayne for any closing remarks.

Thank you very much. For those of you on the call and for those of you that will listen later online on our website, we want to thank you for the time you spend, thinking about and reviewing the activities of our Company. And I want to -- it’s a little bit early but we won’t talk before then. I wish all of you and your families a healthy and happy Thanksgiving, and look forward to talking to you again in January and we wish you happy New Year but that's way out there. Thank you very much.

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