Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2020 Fourth Quarter Earnings Results Conference Call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer; JP Lapointe, Chief Financial Officer; and Pat Dignan, Executive Vice President and Chief Credit Officer. Last night, 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 Presentation. 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. 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 these forward-looking statements. Northeast Bank does not undertake any obligations to update any forward-looking statements. At this time, I would like to turn the call over to Rick Wayne. Please go ahead, sir.

Thank you very much. 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 are JP Lapointe, our Chief Financial Officer; and Pat Dignan, our Chief Credit Officer and Executive Vice President. After our comments, we would be happy to answer your questions. Before, I start, let me say our thoughts continue to be with the individuals, families, communities, health care workers and first responders affected by COVID-19. It's unimaginable, the toll the pandemic is continuing to take around the world. We are doing our best to help those affected by COVID-19, including donating masks to local hospitals, contributing to local food pantries, homeless shelters and youth programs. We have been providing accommodations to borrowers through payment forbearance and meeting the needs of our employees who face new challenges while working at home. As we'll discuss, we've been actively participating in the payroll Paycheck Protection Program as well. Friends, investors and other constituents of the bank often kindly and genuinely ask how we're doing, and we continue to do well. To protect our employees and customers, we always service deposit customers in those branches that have drive-through windows. Other than employees and customers -- other than employees working in those branches, almost all other employees are working at home. Thanks to an exceptional IT and operations group and a dedicated team of other professionals, we've been able to conduct business virtually the same as before the COVID-19. It is certainly a different environment, but our professional, hard-working, adaptive and dedicated team has risen to the occasion. On this call, I'd like to focus on the Paycheck Protection Program or PPP, which has been quite meaningful to our bank, our correspondent banking income, LASG…

Thank you, Rick, and good morning, everyone. Today, I will be providing a very high-level review of our financial results and activities for the quarter ended June 30, 2020. As announced in our earnings release that was made public after the close of business yesterday, net income for the quarter was $11.2 million or $1.33 per diluted common share. Diluted net income per common share was up $1.12 from the quarter ended March 31, 2020, which I shall refer to as the linked quarter; and up $1.40 from the quarter ended June 30, 2019, which I shall refer to as a comparable prior year quarter. Driving the results for the quarter ended June 30, 2020, was a net gain from the sale of PPP loans, as Rick discussed in his remarks. Compared to the linked quarter, aside from the previously mentioned gain on sale of PPP loans, net interest income increased by $1.1 million due to increased interest income of $758,000, primarily from the PPP loans, along with interest expense savings of $305,000, primarily from lower deposit costs. Compared to the linked quarter, the cost of interest-bearing liabilities decreased by 48 basis points due to the lower rates from the FHLB and PPPLF advances , along with a 20 basis point savings on interest-bearing deposits. Compared to the linked quarter, the provision for loan losses decreased by $2.6 million due to the large provision in the linked quarter to reserve from potential losses inherent in the loan portfolio, primarily for SBA loans in response to the COVID-19 pandemic, whereas the ML provided in the current quarter was primarily due to increased specific reserves on impaired loans. Noninterest income increased by $9 million, primarily due to the net gain on sale of PPP loans. The noninterest expense increased $87,000 from the…

[Operator instructions] And your first question will come from the line of Alex Twerdahl.

First off, I wanted to -- I hope maybe you can give a little bit more color on the purchased market. I guess we sort of realized we weren't going to see increased activity so soon. But do you have a sense, do you think it's going to be the third quarter? Or I guess the calendar -- or the fiscal first quarter for you guys that we start to see activity pick up? And maybe talk a little bit about what sort of you're seeing in terms of the supply out there. And then also kind of as it relates to that, the pricing on what you did buy this past quarter was a little bit better than what we've seen in the past. Is that a function of fewer competitors out there? Or maybe just give us a little bit more color on that market.

Well, first, the last part, that it was a good [buy]. I think it was -- that's only one data point. I wouldn't read too much into the pricing on one or two transactions. We have not seen a lot in the market as we sit here now in part, it is seasonal. In part, it's COVID. In part, I think there is not a -- the bid-ask is too wide. Seller expectations are too high. Haven't recalibrated yet to really where stuff will trade. I'd like to give you a precise answer as to what we'll see, when we'll see it. I know it's we're challenging in that regard to try and model. But I think the best I could say is that I would expect over this fiscal year for us, we will buy a fair share. We will buy at better pricing. And I think it will come later, we'll kind of build over the year. Let me ask Pat, [listen] everybody. We're in different places, so we obviously in different places. So if we talk over each other, it's because we're not looking at each other. But Pat, do you want to add to anything I've said in response to Alex's question about the purchased loan market and what might be in the future?

Sure, Rick. Thank you. Alex, yes, I think traditionally, July and August are very, very slow anyway, and loan sales tend to pick up toward the end of the year, the calendar year, as balance sheet repositioning becomes a higher priority and other strategies fail to pan out. With respect to anything COVID-related, I think it's a little early for any kind of sell off or illiquidity events that would generate opportunities for us. There's a couple of hotel portfolios that are out that -- as you would imagine, that come out first couple of sellers looking to exit that business. But otherwise, it's pretty quiet, and it's difficult. I think it will be several months before there's the kind of liquidity issues that would create the opportunities that we'd be looking for.

One thing I would add to that is that in some ways, it's a little bit unpredictable business. We could wake up tomorrow and we could've -- I'm not predicting this will happen, nor is it based on anything that is happening. We can wake up tomorrow, and there could be a purchase opportunity for $200 million of loans.

That's true.

We have the capital to do that. Again, just to be clear, I don't want -- start any expectations, I'm not saying that's there. It's not there. But companies decide to sell making this and it could be a lot of volume. I was thinking about this morning, if you go back, I was thinking about this business, we first started buying loans. This going back to capital crossing in the early '90s after the problems in the banking industry then. After 1998, after the financial crisis, while we weren't doing this yet, but there were opportunities, and there were huge opportunities. Loans that we recently were paying $0.92 for the FDIC was selling for $0.60. And I think the most important thing, if we're in this for the long term, not trying to just do well quarter-by-quarter, it's to be patient, it's to be smart, it's not to either originate or buy loans that we're going to regret having and be somewhat defensive now so that we can play offense when the time is appropriate. I don't mean to get on the pedestal. Probably every banker would say that, but it's true in our case.

I mean things like hotel loans, obviously, a lot of challenges in that industry right now. Is that something you would avoid? Or are some of these more at risk don't, not associate to hotels but...

I don't think so. I was going to say it. And I'm sure Pat was going to say the same thing. He was saying that there was a portfolio out there because those are less desirable asset play, but we're not buying hotel loans, no. Of course, when you make credit decisions, there's a lot of things you think about, but 2 really important ones are LTV and the ability of the borrower to pay. And when LTVs values are sort of settling in and not quite settled, you want to be on the really low side. And we don't want to be in asset classes that are not add to them, we already have a fair amount of hotels that are not particularly liquid. That's not something we would bid on. No.

Okay. Understood. And then kind of on the similar, I guess, topic on Slide 7, maybe not so similar, but Slide 7 with the COVID modification summary and some of these loans, like the $21.6 million that have gone to less than 30 days past due. Can you provide just a little bit more context on what's going on with those loans if they're not paying, they're not in deferral? Give us a little more comfort to those loans.

We could have more granularity about that. Less than 30 days past due could be a borrower that had a payment. Let me back up. This is as of July 27, right? So because we wanted to provide you with complete up-to-date information as possible, we often have loans that are less than 30 days past due and then they pay. So even there included in that, for example, could be a borrower that had a payment that was due on July 20 and didn't pay on July 20. I feel reasonably comfortable that when we do this slide again next quarter, we will see good performance out of that group, and that's the best way I could say it. You shouldn't read, look at that list at all and think of that those are bad loans, the [$21.6 million] are bad. I mean, this is the nature of our business, a lot of them purchased. And that people don't always pay on time, but they generally pay within 30 days. And a lot of times not so much on these because of the nature, but we get late fees and all kinds of things. I think those are good numbers, is the way the color I would put on it.

Right. I mean they would have been, I guess, these loans were in deferral, they would you would have had at least a conversation with them if they needed additional deferral, and they'd still be there if there are loans that couldn't make the payments.

Oh, 100%.

Is that the right way to think about it?

Because out of the $86.3 million in April, there were $19.8 million that went on deferral, 1 on 3 more months, the rest of them didn't. So no, yes, if we were to -- this doesn't exactly answer your question, but if you were to file a call report, those would all be shown as current because they're less than 30 days. I would get more concerned if there was a big chunk of those. I wouldn't like go crazy about it as it happens sometimes. But if they were -- if that [$21.6 million] was in the 30 to 60-day bucket, that would be cause for more alarm than being in the less than 30-day bucket.

Agreed. And then going to the arrangement with the Loan Source, which is -- just seems like just, obviously, nice tailwind for you guys over the next couple of months. But do you have any sort of window into what the pipeline could be like for the Loan Source's future purchases?

Well, I'll just put some numbers kind of around. So there were $550 billion or so of PPP loans originated by something like 5,000 banks and 1,100 credit unions. Through their marketing plan, and they have lots of inexpensive marketing plan, they're probably going to touch most of those banks to see if they're interested in selling. And banks, the ones that have sold, mostly they've sold -- the main reason they've sold is they wanted to get rid of the servicing part of it. And that's the reason we sold, frankly, because the rules change. You need technology. You need to reallocate your people from doing what they -- their core business to learning how to service these and doing that. And that costs money. And so these loans typically sell at 98.5, so somebody gives up 1.5 to sell it, but there's both actual cost and opportunity cost to service it and the risk that you're not going to get it right. And so they're talking to a lot of folks. They've done a lot of volume already. If we started this, we would have been happy as all get out, if we got the $3 billion, which we did. They now have, as I did mentioned in my comments, it was kind of fresh off the press yesterday late, and now it goes to September 30. I would be reluctant to estimate what more they'll do. Could be not much, could be a lot. I'm sorry to give you such unhelpful answers, Alex, but it's not as if I -- I know, that they're talking to a lot of banks, but we'll see what banks, what they do. And then -- I would just add 1 or 2 other points to that one. The legislation as to how this will all fall out is uncertain. There's a bill in, as everyone knows, presumably in the House, in the Senate. They're light years apart. They have different remedies for making their forgiveness process easier. The more complicated it is, the more likely a bank is going to sell, although that's not the only reason that a bank will sell. But on the positive -- well, that's on negatives. It's just a fact. And then also, I think there are going to be other PPP opportunities in the future, namely, they're talking about allowing existing borrowers to borrow again. They're talking about having a program for seasonal businesses. And so there's lots of things that could possibly flow out of this. Again, I'm not trying to make a prediction as to what we will do or how much it will be, but there seems to be a continuing opportunity.

Right. And then is there a way that you can help us frame what that servicing piece could potentially be on $3 billion of loans?

Well, I'll try and be helpful, and then I think I will fail you again. So if you think about the servicing, the revenue is the difference between the interest rate the borrower pays is 1%. And the borrowing cost from the Fed, which is 35 basis points. So on the revenue side on $3 billion, they have 65 basis points of revenue. They're -- we're hoping that they can service this. I'm reluctant to put a number out. I'm just -- I'm going to get into trouble if I do. But I think you had put out in one of your releases, Alex, that you thought the -- our share of it could be in the 20 basis range. I don't think that's -- I think that's as reasonable an estimate as any. So if we were to quantify that, that's on a run rate of $6 million until the loans are paid down. I think that's reasonable. I could be off. I won't bore everybody by reading the forward-looking statement. But I think based on what I've seen, that seems a reasonable prediction, give or take a few basis points. And so I want to just expand on what the income opportunity will be for a while. One, the $8.5 million, there were -- how much, JP, did we amortize of the original $3 million so far? Like $20,000?

Yes, about $20,000 in June.

So that's $8.5 million, all but $20,000 of that will be amortized into income roughly over the next couple of years. It could be a little less if the loans pay off earlier. Okay. So that's one thing. Secondly, the servicing income we just talked about. And thirdly, which we really haven't mentioned, but when they buy the loans, they pay whatever they negotiate the prices, say, $0.985, but they usually wind up making like more like $0.99 because they have referral fees. So source the business. But one of the things that happens is they have to pay for the accrued interest up until the time they buy the loans. And at some point, they're going to get that back. So for example, this is a lot of rounding. But the $1.6 billion that they just bought, let's say, net of commissions, they received -- they got it for $0.99. So that's $16 million. So you would expect our share to be $8 million, but it was only $5 million, $6 million because there's about $2.5 million of interest expense that they paid for that they won't get back until the loans start paying or get forgiven. So there's a lot of money coming in over the next year or two years from this.

When that interest expense comes back upon forgiveness, does that mean that the $8.5 million or so can actually, does that actually goes higher?

It will be higher. So let's just think about the last transaction, which is the $1.6 billion one. So $1.6 billion. If they, if we can get all round numbers, but if they netted 1% discount, they would have made $16 million. So I'm just repeating what I said before. So, our share would be $8 million, and we only got $5 million to S6 million. That's because they had to pay the seller, almost $5 million of interest that had accrued on those loans. Think about buying a bond when you pay for accrued interest. So when those loans start paying, they're going to get back that interest they paid for, and we only account for this when we actually get the cash. So we're not the buyer of the loans. They are. So we'll have even more income coming in.

That's pretty helpful, Rick. And then just final question for me. JP, you gave some numbers on the CD maturities just at the end of your prepared remarks. I just missed those. Can you go through those one more time just on the funding cost reductions?

Sure, Alex. Our weighted average rate on our deposits at the end of the fiscal year was 1.38%. In addition to that, we have $151 million in ABLE and Bolton Board CDs that are scheduled to mature over the next 6 months, I guess 5 months at this point since we're at the end of July at a weighted average rate of about 2.35% on those. So we'll see that money coming off the books. And as you can tell on our financials at the end of the year, we do have some excess cash on hand. So right now, we're not putting new CDs on the books. But if we were, the current cost of those CDs that are running off to replace those would be around 30 basis points. So don't need the funding. So we do see some street dollar savings in the interest expense. But if we were to put them on at 30 basis points, that would clearly bring the weighted average rate of our deposit portfolio down pretty dramatically when the time comes, and we need some of that funding.

[Operator Instructions]. And there are no more audio questions at this time. Now I will turn the call over to Rick Wayne for closing remarks.

Thank you, Alex, for your very thoughtful questions, which hopefully were responsive, and I hope they were helpful to you and the other listeners on the call now as well as those that will listen in the future online. This is quite a quarter for us as we went over a record quarter in so many ways. I appreciate your support. I appreciate you following us. We value your input. We always try and improve our information in our slides very often from the feedback we get from investors and others. If you have thoughts, unless no, we appreciate the communication. Most of all, I wish all of you that you stay safe, that your families stay safe. We look forward to the time when this is all behind us. And with that, I thank you again, and we'll sign off. Thank you.

Thank you, everyone. This does conclude today's conference call. You may now disconnect.