Good day, everyone, and welcome to the Northeast Bancorp Fiscal Year 2019 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 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.com under Events and Presentation. You may find it helpful to download this investor presentation and follow along during the call. Also, the 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 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 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 Bancorp. And with me on the call is JP Lapointe, our Chief Financial Officer. Before we discuss our financial results, I would like to provide an update on the proposed reorganization announced in January 2019. As previously discussed under the proposed reorganization, Northeast Bancorp would merge into Northeast Bank, with the bank continuing as the surviving entity. Shares of Northeast Bank's common stock would be owned directly by Northeast Bancorp shareholders in the same proportion as their ownership of Northeast Bancorp stock immediately prior to the reorganization. The Board and the executive officers of Northeast Bancorp will hold the same position in Northeast Bank following the reorganization. The FDIC approved the reorganization on March 11, and shareholders will vote on the reorganization at our shareholder meeting on May 9. Once completed, the reorganization will improve our efficiency by eliminating redundant corporate infrastructure and activities and by removing a second level of supervision and oversight that comes with our holding company. Accordingly, our commitments to the Federal Reserve will no longer be applicable and will be replaced with internal standards to ensure the bank continues to operate in a safe and sound manner. Commitments made to the Maine Bureau of Financial Institutions in 2010 as the Tier 1 leverage in total capital ratios are consistent with our internal standards and will remain in place. For the third quarter of fiscal 2019, after the close of the market yesterday, we announced quarterly net income of $4.8 million or $0.52 per diluted common share. Earnings were positively affected by strong net loan growth in the LASG originated portfolio of $42.2 million or 10% over the linked quarter. This quarterly activity helped us achieve…

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 $4.8 million or $0.52 per diluted common share. Diluted earnings per share were down $0.04 from the quarter ended December 31, 2018, which I shall refer to as the linked quarter, and up $0.09 from the quarter ended March 31, 2018, which I shall refer to as the comparable prior year quarter. The decrease of $0.04 per diluted common share from the linked quarter was due to lower interest income, which amounted to $20.2 million in the current quarter, compared to $20.3 million in the linked quarter as a result of lower transactional interest income, which is partially offset by higher average balances in the LASG portfolio. This was further impacted by higher interest expense of $5.1 million in the current quarter, compared to $4.7 million in the linked quarter as a result of higher funding cost. The provision for loan losses amounted to $414,000 in the current quarter, compared to $101,000 in the linked quarter due to changes in the composition of the loan portfolio. Gains on sale of SBA loans amounted to $568,000 during the current quarter, compared to $942,000 in the linked quarter due to fewer sales of SBA loans. Partially offsetting these decreases was an increase in the gain on sale of other loans, which amounted to $582,000 during the current quarter, compared to 0 in the linked quarter. Additionally, noninterest expense amounted to $9.8 million during the current quarter, compared to $9.9 million in the linked quarter, primarily due to decreases in professional fees and impairment charges on servicing assets. Effective tax rate for the current quarter was 28.3%, compared to 28.7% in the linked quarter. The increase from…

[Operator Instructions] And our first question comes from Alex Twerdahl with Sandler O'Neill.

This is Jeff Kitsis on for Alex today. After another very strong quarter for LASG originations, can you update us on how that pipeline looks heading into the second calendar quarter?

On the origination piece - line, Jeff?

Yes.

Continues to be strong.

And second, looking at the overall rate sensitivity of the portfolio, NII has benefited as the LASG originated portfolio has grown. But can you talk about how that - the balance sheet's positioned in case the next rate move brings rates lower?

Well, we're generally slightly asset sensitive, so if rates were adjusted lower, there would be some slight decrease in net interest income. Most of our originated loans, most of our loans are tied to prime. I would point out that most of our loans are structured with floors as well at the time that we originate them. So if we, for example, originate a loan today at prime plus 2, that rate would be 7.5. And if prime went down to - by 0.25 point, the rate on that loan would stay the same, so I would say it will be fairly negligible.

And then last question. A light quarter for SBA originations. Was that driven by demand or the government shutdown? And should we expect a rebound of income in this line of business?

We're mostly focused on the hotel vertical space. I would like to blame it on the government shutdown, but it really - that was not really the reason why the volume was lower. I would say there's more competition in that space. We are unyielding in credit quality when it comes to making a loan. We were presented with a lot of opportunities, which we - most of which we turned down for a variety of reasons: asking for too much debt, buying a property for too much money, inexperienced operator, insufficient resources by the owner-borrower post financing. And I would say the markets - this may be an overgeneralization, but you could kind of bifurcate it between really, really high-quality loans that are getting done at prime plus 1/2 or prime, and in which case, the premium on sale is very low, and those that get done at higher prices where the credit quality is poor. We're not willing to sacrifice on the credit quality and so, therefore, the volume hasn't been great. We're seeing a lot of them. I remain hopeful that the number will get better. But well, we closed the $6.4 million, of which $5 million was on the hotel space. That's what we were able to accomplish last quarter. I'd point out also that we - as you know and others know on the call, going back a couple of years ago, we had a lot more human resources allocated to this business line, which we have since repositioned in - more in our origination business. So it's not as if we have a lot of cost in this business, but we choose not to close loans where the pricing is prime plus 1/2 or prime, and the sale premium is small, and the piece that we hold is of lower quality and lower rate, significantly lower than we can get on our originated book. So that is how I would describe the situation with that. I wouldn't - it would be unrealistic to expect that, that volume was going to go from $5 million or $6.4 million this quarter to $25 million next quarter. I'm hopeful that'll be higher than it was this quarter, but not by a factor of 4.

And our next question comes from Bruce Baughman with Franklin.

I was puzzled by a paragraph in the release that talks about past due loans. And part of it says the increase in past due loans from June 30, 2018, is largely attributed to the 31-day month in March, as past due loans totaled $18.3 million or 1.95% of total loans as of December 31, 2018. I can't quite understand what that's saying.

What it means is this: if you have a loan that's due on the first day of the month - so let's compare a loan that's due on March 1 with a loan that is due on June 30, same loan. On March - for a 31-day month, if that loan payment is not made on March 1, for the quarter ending March 31, it's 30 days past due and, therefore, counted as delinquent. In the month of - that's 30 days. On June 30, it's 29 days past due and, therefore, not delinquent - or not 30 days past due as of the end of the month. So we have 2 quarters that have 30-day months and 2 quarters that have 31-day months. And a big part of our loans are due on the first day of the month, so it tends to have a weird effect. One of the things that we're doing to provide more consistency around that is when we can - when we originate loans now and when we have a chance - when there's an opportunity to modify them, we move the payment date off the first day of the month, so that we can have better comparisons quarter-to-quarter. It's weird, I admit, but it's the way the days work.

[Operator Instructions] Our next question comes from David Minkoff with DCM Asset Management.

Congratulations on a pretty good quarter on most metrics that I can see here. One question that kind of stuck out of me is on the lesser important area of the loan portfolio. But on the loan balances in community banking, I noticed you were down roughly 5% in 3 months and 19.18% in the 9 months. Is that due to the fact that rates have been up for the 9 months vis-a-vis prior years or the economy is slowing down that much? Or are we charging a noncompetitive rate vis-a-vis the other banks in your area? Why did we drop 19%, let's say, in the 9 months for community banking?

It's actually none of those reasons. It's - in the community banking in Maine, which we'll refer to as our community banking division, which I want to point out is a very important part of our entire bank, where they provide operational services, raise deposits in our branches. Our focus on lending in the community banking division is really in 2 areas: residential lending and small business lending, both to support our CRA requirement as - it's in our material, but perhaps you and others haven't focused on this, that to get a satisfactory grade in CRA, you need to do half of your lending in your footprint. Now, obviously, for us as a national real estate lender, that would be impossible for us, so we have a CRA strategic plan, where we have agreed with the FDIC in how we can get a satisfactory CRA grade. And we focus a lot on community service, community development investments, lending in our residential area to low and moderate borrowers, in low and moderate census tracts, all of which we sell those loans, so that part of our balance sheet doesn't grow and, to a much lesser extent, small business lending. And so I say that to provide some context for the following point, which is when we have a choice of lending money nationally at prime plus 2 or an alternative financing in market in Maine at 5% fixed for 5 or 10 years, we think it's a better allocation of our capital to be doing the national lending. So it's not really an area where we're trying to grow our balance sheet, but we are trying to focus on those areas that are helpful in our CRA strategic plan.

Well, that point's well taken. And so this was really done by design, you might say. Is that right?

Absolutely.

What were the average rates on those numbers? You hit 99 - $99 million roughly versus $123 million in 12/31/18. What was the average rate, just so I could put it in perspective? What was the average rate that you charge on those community banking loans?

JP, do you have that?

Sure. The yield on the community bank loans for the 9 months ended March 31, David, was 5.2%.

And that competes favorably or in the right market with your competing banks up there, is that right? In other words, the drop certainly wasn't due to the fact that you're charging 5.2% and the other banks are charging 4.9%, let's say.

It's - I'm sure it's competitive. First of all, the 5.2%, these are loans that we originated quite a while ago. We're not actively trying to grow our Maine commercial loan portfolio. As I said, we're focused more on the residential which we sell and, to a much lesser extent, small business loans that count for CRA purposes.

So then - so we're not really too concerned that it's down 19%. It's basically as you explained, right? I mean that's okay. We're okay with that, right?

We are.

I noticed that - is your symbol going to change when - after the May 9 vote, assuming it goes through? I know you're going to trade on NASDAQ. You trade on NASDAQ now, right, with NBN?

It'll be the same symbol. As I mentioned in my comments, you'll own the same number of shares in Northeast Bank as you own in Bancorp. All of the directors will stay the same, all of the employees will stay the same, with the same titles and the management team will stay the same.

And the symbol is going to stay the same, is that right?

Yes. Correct.

[Operator Instructions] And with that, that concludes our Q&A session for today. I'd like to turn the call over to Rick Wayne for closing remarks.

Thank you. Thank you, everyone, for listening, support, your good questions and look forward to talking again in July after we complete our June 30 quarter and the end of our fiscal year. It's my assumption by then we will be talking as the public company, Northeast Bank, as opposed to Northeast Bancorp. Thank you all.

Thank you. And with that, this concludes our presentation for today. Ladies and gentlemen, you may disconnect. Everyone, have a great day.