Good day, everyone, and welcome to the Northeast Bancorp Fiscal Year 2019 First 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 JP Lapointe, Chief Financial Officer. Earlier this morning an investor presentation was uploaded to the company'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. 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 risk 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 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'm Rick Wayne, the Chief Executive Officer of Northeast Bancorp, and with me on the call is JP Lapointe, our Chief Financial Officer. After the close of the market yesterday, for the first quarter of fiscal 2019, we announced quarterly net income of $4.5 million or $0.49 per diluted common share, 12.8% return on equity, 1.5% return on assets and an efficiency ratio of 58.8%. As will be discussed in more detail, we had significant growth in our higher-yielding LASG portfolio, strong volume in our SBA portfolio and a decline in nonperforming assets with continued disciplined expense management. Turning to Slide 3. During the first quarter, bank-wide, we generated $136.3 million of loans, including $105.9 million in our Loan Acquisition and Servicing Group or LASG. LASG loan production included $71.1 million of originated loans and $34.8 million of purchased loans. Of the $71.1 million of originated loans, 93% were variable rate and 85% were indexed to prime with the weighted average yield of 7.48% as of September 30. For the quarter, the LASG portfolio had net growth of $20 million or 2.9% compared to the linked quarter or 11.6% on an annualized basis. Additionally, we generated $18.9 million of loans in our SBA division, all of which were loans secured by hotels, demonstrated the continued build out of our SBA hotel vertical. We generated a net gain of $851,000 on the sale of $12.3 million of SBA loans. Net interest margin for the quarter was 4.9%, and our total return on purchased loans for the quarter was 9.5%, which included $1.5 million of transactional income. Turning to Slide 4. As we have discussed in the past, under a regulatory commitment made in connection with the 2010 merger, purchased loans are…

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 $4.5 million or $0.49 per diluted common share. Diluted earnings per share were up $0.01 from the quarter ended June 30, 2018, which I shall refer to as the linked quarter, and down $0.01 from the quarter ended September 30, 2017, which I shall refer to as a comparable prior year quarter. The increase of $0.01 from the linked quarter was due to higher interest income, which amounted to $18.8 million in the current quarter compared to $18 million in the linked quarter, as a result of higher average balances in the LASG and SBA portfolios. This was offset by higher interest expense of $4.4 million in the current quarter compared to $3.6 million in the linked quarter as a result of higher cost of deposits to fund loan originations. Noninterest income was down $405,000 from the linked quarter due to no gain on sale of other loans as there were no other loans were sold during the current quarter, offset by higher loan servicing fees in the current quarter. Noninterest expense had a favorable variance of $123,000 compared to the linked quarter due to lower salary and employee benefit cost, offset by higher loan expense. Additionally, we saw the benefit of the lower federal corporate income tax rate in the current quarter, which drove income tax expense down to $1.5 million or an effective tax rate of 24.8% as compared to $2.3 million or an effective tax rate of 34.5% in the linked quarter. The decrease from the comparable prior year quarter of $0.01 was due to an increase in deposit funding costs, which increased $1.5 million along with an increase in noninterest…

[Operator Instructions]. Our first question comes from the line of Alex Twerdahl from Sandler O'Neill.

I'm first off wondering if you could, Rick, give us a little bit more commentary or color on sort of what you're seeing in the SBA line? I appreciate you kind of given us sort of color on what the pipeline looks for potential gains going into the fourth quarter, maybe the pipeline as well for originations as well as kind of whether or not you saw -- think there's maybe seasonality that impacted the third quarter. And then also maybe a little bit more about how you're thinking about that gain on sale, which seems like it took kind of a step back in the calendar third quarter relative to where we've seen it over the last couple of years, really.

Just so I get it, Alex, your first question is, what do we see in the market originations. And then the second one, when we expect for pricing in this -- the quarter that we're in now or the following quarter.

Yes.

Well, I thought -- first of all, that our almost $19 million of originations was actually quite good. There is some seasonality in the summer months and while -- close to $19 million, I thought was -- we thought was a strong number for that. I can tell you though that to kind of think about the future, it's a very, very competitive marketplace for SBA loans. We have seen in our own case in the hotel vertical that for loans of the quality that we want to book, the pricing is not -- I'll tell you what the pricing is, pricing is more between prime 1.5% to 1.75% and a couple of points to the brokers. And as you go back a while ago, say a year or 1.5 years, the pricing on those loans was more like prime plus 2.25%. So the reason that is recurring, of course, is there are a lot of lenders chasing that business. There are 3,000 or 4,000 banks that do SBA loans. There's maybe -- I don't know this exact number exactly, but directionally -- and most of those are doing in their local marketplace, there's maybe 100 that do -- as we do, they do them nationally. And there's a lot of competition, which is driving down the pricing, and also frankly driving down the availability. Business is getting tougher. Secondly, on the question of pricing, we're also seeing -- and I'm sure you're seeing this with banks that you follow, the premiums that buyers are willing to pay are going down. By way of example, I have this somewhere, in the current quarter, when you look at our gain, which includes both the gain and the servicing asset created, it was 7% of loans sold and it was 9.5% in the linked quarter. So that -- I don't want to be totally gloomy about that, because we're pleased with the inroads we're looking to in the hotel vertical. You -- as you know well, we missed -- we moved from a BDO model to focusing more on a vertical model. And when you compare that number with what we had done when the BDO and the quality of it, it's gotten better -- much better, I would say. But that's how I would describe the -- fairly describe the state of affairs in the SBA world.

Okay, that's some helpful color. And then maybe give us a little bit more color on the funding pressure that you're seeing this quarter. Obviously, the whole industry is seeing higher rates translate to higher deposit costs. But this quarter specifically were there some longer durations CDs or something you put on that kind of impacted that more than what you've seen or maybe talk about how you're planning to address and think about the funding side of the balance sheet over the next couple of quarters.

So this quarter as we grew and as JP mentioned, most of our funding came from term deposits, CDs that were running in our ableBanking channel and most of that is come from 1 year CDs that are currently priced at 2.70%. And that's on the -- obviously on the expensive side, kind of the focus first on the good news and then talk about the cost of it. As we have a condition that we need to fund our loans with core deposits, so we don't have the liberty of going to borrow money. I suspect borrowings would to be roughly the same. The good news is because make so much money on the asset side, we're able to pay those rates and we're able to attract money at those rates. So we're able to fund ourselves, but we need to pay up for it. One of the other things that is unique about our bank is that because we have to fund our loans with core deposits, we need to inventory money. And so we have a lot more cash on hand than probably other banks that you look at. And that money that we're paying 2.74%, until we can deploy it in loans where it's sitting at Fed at 2.20%. So we have 50 basis points of negative spread on the extra cash that we carry. And given that we're in the business of buying loans and that is somewhat transactional, we need to -- even inventory, if you have more cash than others. So I think we see -- tell me, confirm JP that is right. I want to say that our funding costs on deposits went up 25 basis points last quarter compared to the linked quarter. And -- but I would also point out…

I think that you certainly have some lines that can be somewhat lumpy and some quarters they all hit -- fire at the same time and some quarters they all kind of don't fire at the same time. So just -- to the point on the LASG originated loans, which I know most of those are prime based and have been repricing higher, but just relative to the June quarter, the yields were kind of flat. Was there something that kind of inflated the June quarter's yield on the LASG originated loans to make that kind of not seem as asset sensitive as it is?

I'm going to need some help from somebody here to answer that. Can you? What was...

7.53%

Is 7.43% this quarter, last quarter was 7.45%?

Anyone know -- there must have been some fee income in there because the -- I'll have to look at more closely. I don't want to -- I don't have the answer to that as we sit here with that, but I will take a look at our public information where there will be an answer to that and will have something more to say on it. I don't want to mumble through it here. It's certainly within the realm of possibility that on our loans there's a little bit of price compression on -- we may have done some more loans that were prime plus 2.5% and now maybe some are -- have prime plus 2% in the mix. But we have public information on that, I will be able to figure out.

Got it. But we would expect that portfolio based on the September hike to be yielding higher in the final quarter -- the final calendar quarter of the year relative to how we saw this quarter, correct?

Yes, and I would say just that the -- virtually all of the originated portfolio in our variables generally tied prime. The only -- there's two things that can affect the question that you're asking. One is, was there some amount of an exit fee or some kind of -- something that went into that interest income in the prior quarter. And secondly, sometimes we do loans at prime plus 2%, sometimes prime plus 2.5%. There could be some of that in the mix. But it's -- they're still very good numbers and it's notable. But let me just use that as a launching point pad to make one more point, which I intended to earlier. When you touch on this in your report, one of the things I think that is important to point out and I think very significant in -- as we're building our earnings and the quality of the earnings. For those of you who have the slide deck, if you look on Page 16 of the deck, we have a slide that shows the components of our net interest income quarter by quarter. And we break it up into base net interest income, which is the blue bar and transactional interest income, which is the -- comes from generally from prepays. And you can see that in the quarter that ended September 30, our base net interest income was, call it, $12.9 million income and $12.9 million with a bit of rounding. If you go back just a year ago to the first quarter of -- fiscal quarter of fiscal year '18, it was $10.5 million. So it went up $2.4 million, the base net interest income in that time period. Why does that happen? That happens because we're building our portfolio. By way of example, our average loan balance for the quarter, if you go to Slide 18, for the quarter that ended on September 30, the average loan book was $895 million. The average loan book in the quarter that ended June 30 was $825 million. That's $75 million increase in our average loan size and a big chunk of -- you look quarter- to quarter-end, you wouldn't see that as clearly. But a lot of the loans were booked at the very end -- in the month of June. So between June and September, we've grown our loan book significantly. And so therefore transactional income is important. Yield on our purchased loan book is important. But one of our goals is to build a high-yielding, high-quality loan book so we can add more consistent and predictable earnings, even with this quarter with transactional income $900,000 lower than last quarter and SBA gains $200,000 lower, we still had a very -- in my opinion a very strong quarter. Not to our potential, but earning almost 13% ROE and 1.5% ROA and efficiency ratio of 58% and 59%. Compared to most banks, pretty strong with lots of loan growth capacity.

My final question is just, JP, you gave some color on the tax rate this quarter, how should we be modeling that for the remainder of the year, excluding the impact of the -- what happened this quarter?

Sure, Alex. I think for the year we should be -- excluding discrete items should be somewhere around 27% for tax rate going forward, so somewhere around there should be appropriate.

[Operator Instructions]. I'm showing no additional audio questions in the queue at this time. I would like to turn the conference back over to Mr. Rick Wayne for any closing remarks.

Thank you, and thank you all for listening, participating, reviewing our material every quarter. We try and provide more visibility into our company so you can understand it more. I hope that the Q&A with Alex and some of my expanded answers were helpful and not tedious for you. I try to provide some color to what's going on, and look forward to talking to you in our next call. And as always, if you have suggestions on items you like us to provide some more visibility into, and we can, we would be happy to do it. And with that I wish all of you a very nice day and week. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.