Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2020 Third 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 the northeastbank.com under Events & 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 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'd like to turn the call over to Rick Wayne. Please go ahead, sir..

A review of financial results for our third fiscal quarter, recent changes in our Tier 1 leverage and total capital ratio limits, activity in the share repurchase plan and a deep dive into asset quality.

For the third quarter of fiscal 2020, after the close of the market yesterday, we announced quarterly net income of $1.9 million or $0.21 per diluted common share, a return on average equity of 4.6%, a return of average assets of 0.6% and net interest margin of 5.5%.

Earnings were negatively impacted by an increased provision for loan losses of $3.3 million or $0.26 per diluted common share, of which $3 million was allocated to the SBA portfolio, and also a nonrecurring income tax expense of $554,000 or $0.06 per diluted common share related to the recapture of tax reserve for loan losses triggered by the repurchase of common stock during the quarter ending March 31.

Turning to Slide 3. During the third quarter, bank wide, we generated $119.7 million of loans, which brought the quarter end loan portfolio to $1.034 billion. Loans closed in the third quarter included $113.8 million in our LASG, of which $48.8 million were originated and a record, a record $65 million were purchased.

The weighted average yield of the LASG loans originated in the third quarter was 6.8% as of March 31, all of which were variable. The total return on purchased loans for the quarter was 10.05%, which included $2.5 million of transactional income.

Those of you who have followed our story that know that in connection with the merger in 2010, the Federal Reserve and the Maine Bureau of Financial Institutions, or MBFI, imposed numerous conditions on the approval of our merger application. Over the years, some of the conditions have some set, some have been waived.

And last May, then a holding company for the bank was dissolved and the conditions with the Federal Reserve were no longer applicable. I'm pleased -- very pleased to report that the remaining regulatory conditions have been weighed.

The bank's Board has reduced the Tier 1 leverage ratio limit from 10% to 9% and the total capital ratio limit from 13.5% to 12%. The impact of this change is shown on Slide 4, where based on capital at March 31, loan capacity has increased by $143 million from $255 million to $398 million.

With this change, we are now in conformity with the capital limits of many other banks, and we have additional capacity to prudently, and I say prudently, grow our balance sheet. In October 2019, the bank adopted a share repurchase plan for up to 900,000 shares.

As indicated on Slide 5, during the third fiscal quarter, the bank repurchased 416,700 shares at an average price of $12.83. The repurchase of shares during the quarter increased tangible book value by 26% -- $0.26 per share. At quarter end, 483,300 shares under the plan remained available for repurchase.

Asset quality is always important for a bank and an understanding of it is critically important at this moment. I will spend the remainder of the presentation discussing our loan portfolio referencing Slides 6 to 14. The remaining slides in the book are those that we typically provide and at your leisure, please review those.

But I believe, today, a focus on asset quality is the best use of our time. As you will see, our $908 million LASG portfolio, which represents 80% of our loan book and $76 million of our Community Banking division portfolio, which represents 7% of our loan book, both have low LTVs.

Our $50 million SBA portfolio, which represents 5% of our loan book, not surprisingly consists of weaker credits with higher LTVs, but now with the additional reserve, has a substantial allowance to absorb credit losses. Now that I've spoiled the punchline, let's examine the information on the slides.

Slide 6 provides a breakout by group of our $1.034 billion portfolio, which consists of 2,384 loans. Of note, the $908 million purchased and originated LASG portfolio has weighted average LTVs ranging from 49% to 56%.

The aggregate $76 million commercial and residential and consumer portfolios in our Community Banking division have weighted LTVs of 51% and 65%, respectively. The $50 million SBA portfolio has a weighted average LTV of 78%. Slide 7 brings out the $908 million LASG portfolio by collateral type.

Note that we have $83 million of hospitality with a weighted average loan-to-value of 52% and $179 million of retail with a weighted average LTV of 52%.

You will note that with very few exceptions and very small dollars, we have avoided higher-risk collaterals, such as raw land, land development and construction, big box retail, shopping malls and large-sale single-tenant exposure. Slide 8.

Because weighted average by definition is an average, we provide bracketed weighted average LTVs for our $908 million LASG portfolio. You will note that only 2% of that portfolio is greater -- that has greater than 80% LTV, 10% between 70% and 79% LTV and 80% of the LASG portfolio has an LTV of less than 70%.

Slide 9 examines seasoning in our $395 million purchase portfolio. $244 million or 62% of our purchase portfolio was originated before 2009. Since origination, these pre-2009 purchase loans have paid down 42% of the original loan amount and our basis, which reflects our discount on the purchase of those loans is 52% of the original principal amount.

A $152 million or 38% of our purchase portfolio was originated in 2009 or later. Since origination, these post-2009 purchase loans have paid down 28% of the original loan amount and our basis, reflecting our discounted purchase, is 66% of the original principal amount. We frequently -- Slide 10.

We frequently structure originated loans, both direct and portfolio finance loans with interest reserves. In the case of our portfolio finance loans, $192 million out of $230 million loan book or 82 -- 81% have interest reserves with a weighted average duration of 6.1 months.

In the case of direct originations, we have our interest reserves on $104 million out of $274 million with a weighted average duration of 6.4 months. Interest reserves on $296 million or 58% of our total LASG portfolio finance provides -- originations, I should say, provides meaningful payment coverage over the next 6 months.

Slide 11 provides a collateral breakdown of our $76 million Community Banking division portfolio.

Well, without spending an inordinate amount of time on this slide, I would point out that the $33 million commercial loan book has a 51% weighted average LTV and $39 million or 92% of the consumer book is 1-4 family with a very comfortable 65% weighted average LTV.

On the prior 6 slides, I've discussed our $908 million LASG portfolio and $76 million Community Banking division portfolio, demonstrating well-weighted LTVs across all collateral types, significant interest reserves that cover payments over the next 6 months and substantial seasoning in the case of our purchased loan book.

Slide 12 summarizes our SBA loan book. You will note that LTVs are higher with concentrations in hospitality of $26.7 million or 40 -- 54% of the total book. And retail of $7.9 million or 16% of the book. While higher LTVs and weaker sponsors is a hallmark of SBA lending, it is these type of loans that can suffer in a downturn.

And it is for this reason we substantially increased our reserves relating to our SBA portfolio. I would point out, as many of you know, under the CARES Act, the SBA is going to provide payments on the SBA portfolio or that that's current, which in our case is around a little bit less than $40 million, over the next 6 months.

So if that portfolio perform well for the next 6 months and then, of course, if appropriate, and due to the COVID-19, we could also provide a 3-month deferment. So we have a fair amount of time to see ultimately what happens with that portfolio.

But without any particular knowledge, but understanding that at higher LTVs and sponsors that were not as strong as in other parts of our portfolio, we thought it was appropriate at this time to substantially increase our reserves. And with that, I will turn to Slide 13, which is a breakout of our allowance on March 31.

I would want to remind you, and I believe most of you know this that accounting rules do not permit an allocation of the general reserve to purchased loans. The only reserve on purchased loans are those that are impaired and specifically identified.

And so I think it's most helpful when analyzing our reserve to look at our originated loans, which have a balance of $637 million at the end of March, $8.277 million loans.

The reserve of $8.277 million is a substantial increase over the $5.182 million reserve, which is what we had in the last day of our fiscal year -- the prior fiscal year, June 30, 2019. I want to highlight 2 things. One, that the reserve on our unguaranteed portion of our SBA loan is now 10.6%.

And just a simple illustration, if -- of how important and how much coverage, I should say, more accurately, that reserve provides to our SBA loan. If we originated an SBA loan with an 80% LTV, using really simple math, we would have a loan of $80 on collateral worth $100.

If that collateral lost half of its value and was worth $100 at origination and is now worth $50, which I might add I'm intentionally overstating to make this point, that would mean that we would have a loan of $80 with collateral of $50, so there would be a $30 loss. Of that loss, we would eat 25% of it or $7.5, and we have 10% on a reserve there.

Not every loan is going to decrease in value, probably none will decrease that amount. There will be some decrease of amounts that will be determined over time. But we believe that a 10% reserve is substantial.

And then I would finally add that the overall coverage on our originated loans, and this, of course, improves the SBA and excluding the purchase has gone from 80 basis points to 130 basis points. Now just on Slide 14, some final observations. Investors ask us about how the -- what's going on post quarter.

And of course, we're only on the 23rd day of the month. So we don't have perfect information but we will tell you what we do know. I'm now on Slide 14. I had mentioned the $296 million of our LASG has an interest reserve.

I also mentioned that -- I said $38 million, it's actually $34 million of the SBA portfolio will be paid by the SBA over the 6 months. With respect to modification requests, on our purchased book, we've received 97 million for $69 million out of a total purchased book of $928 million -- or 928 loans for $396 million.

On our originated book, we've received requests for -- on 28 loans for $64 million out of 220 loans for $512 million and the Community Banking division, we've received requests. This is now for both commercial, residential and consumer of 84 loans for $10 million out of 1,100 loans for $76 million.

When we have -- our forbearance agreements are generally in two flavors. We give our borrowers the option for a complete forbearance for three months or interest-only for 6 months. We do follow the guidance from the regulators and FASB that they're not treated as they won't be treated as TDRs, if they do solely because of the COVID-19 crisis.

When we report those in the fourth quarter, and we will accrue income on those, we will, of course, provide complete transparency on all of that. With respect to delinquencies so far, as I say, we're in the third week of April, but to make these general observations. Delinquencies are slightly elevated on our purchased book, slightly.

They're on track on our LASG originated portfolio. I'd say on track, I'm -- using where they are compared to a typical 30-day month and similarly on track for our Community Banking division. There's an awful lot of information we provided this morning on asset quality.

We thought it would be much better and meaningful presentation to focus on kind of 4 big things rather than go through line-by-line on our financial reports. Of course, there's a lot of information in our press release, there will be a lot more information in our Q, and we are available now.

And if you have calls later, or think of issues later, feel free to call. And with that, I will open the floor to questions. Thank you very much..

[Operator Instructions]. Our first question comes from Alex Twerdahl from Piper Sandler..

First off, Rick, really appreciate all this detail on LTVs and credit in all your different portfolios. The LTVs all seemingly look great, but certainly, depend on the value of the collateral.

Are there any of these segments where the collateral values have either declined recently or over time or may not be fully reflected in the LTVs that we're seeing on these slides?.

Let me thank you, Alex. That's a good question, and I want to make sure everyone is clear on the methodology that we use. We wanted to, for purposes of this, be using the values where there were appraised value. So I'm going to divide them into two groups.

The purchased loans, the way we calculated the LTV -- the way we reported in this slide, LTV, we looked at the original valuation at the time the loan was made, which, as I indicated in the seasoning conversation was quite a long time ago.

And then we looked at what our basis was because there's been a lot of paydown, and we bought them at a discount relative to that value.

And we tested that methodology by looking at the values that we came up with when we determine the value when we purchased the loan, because as most of you know, when we buy loans, we're not looking at what the value is in the file, we're making our own determination. So we're very comfortable that's a good value.

With respect to all of the other -- and so that's about $400 million of our loan book with the remaining $634 million, it's all -- let me break it actually into 2 groups to be more precise.

For the remainder of the LASG portfolio, which is another $0.5 billion, those are very recent values because that's a portfolio that we have assembled very recently. With the case of the Community Banking portfolio, we looked at those values at the time the loans were made.

So they're a little bit over, but Maine -- and we know this from -- well, first of all, living in -- not living, but working in a state and analysis we've done over time, Maine values never spike up or spike down, pretty steady. And finally, the SBA value, so that's a book that was assembled recently, and we use those value.

So I think it's possible when we look at it and say, if we say we're 53% LTV on our LASG book, wanted to look at it and say, yes, but maybe the values have gone down some amount since then.

But the point we're really trying to make is we have such enormous cushion there that they're going to go down probably and certainly in the short and medium time, but they're not going down 47%..

It's very helpful, Rick. And then kind of maybe a little bit related, I mean, a big portion of the LASG purchase business is resolving these loans and creating transactional income, which has been relatively consistent over the last couple of years.

Do you anticipate any change in the timing or ability to recognize some of that transactional income and resolve these loans in the near term?.

It's a little bit hard to predict because by its nature, it's transactional. And we have some where we have big discounts where borrowers are asking for pay downs, but they don't always -- or payoffs, but they don't always wind up closing.

I think the best way I could comment on that is that we should think about this over the next 9 months rather than the next quarter in two regards. One, I think it's hard to say what's going to happen over the next two months on paydowns.

People are so busy dealing with the COVID-19 crisis that refinancing debt, selling property, which generates transactional income and the kind of typical life events are not the highest thing on people's to-do list.

So I would not be surprised if that number was lower in the following quarter, although I really couldn't predict how much but -- and the reason I say 9 months because I think over 9 months, those things will just have to -- they will sort out.

And the other comment I would make now -- I'm going to make a forward-looking statement, so I'm going to remind everybody we have a forward-looking disclaimer in air. But not that we -- anybody, of course, absolutely 100% not whatever wish the tragedy that's going on to have occurred, but it is.

And I think that what we're going to see, and we are built for this there are opportunities to buy loans at better prices. There's going to be more supply, we believe. We believe there's going to be less buyers than there has been.

The funds that we're buying, distressed debt for the longest time and more recently, without distressed debt they've been approaching in our world are going to be back to buying distressed debt there's going to be less buyers with liquidity to do this. As you know, there are very few banks to do what we do.

And on the origination side, there's going to be less liquidity and less banks willing to lend. And we'd be ever mindful of not being the victim of a falling knife, and really tightening our credit box. So even more so than our already type credit box, I think we're going to have a lot of opportunities. But I think we should be thinking about 9 months.

I don't think we should be thinking about the next quarter..

Okay. That's helpful.

And then just to that point, maybe it's going to be a 9-month thing and not a next-quarter thing, but in terms of your ability to actually transact in the market, can you talk a little bit about whether or not there's any lapses in your abilities, considering that the bulk of your workforce is working remotely?.

We're doing this better than I ever could have hoped. And I mentioned in my scripted comments about our great IT group and our great operations group. I'll give the same accolades to everybody in the bank. Everybody is working really hard. We've never been busier. We've never been busier that I recall.

And with technology that's readily available even to smaller companies like ours, getting into your VPN, having team meetings, using Zoom, we have nCino to manage our commercial, it's a platform to managing our commercial portfolio. We can keep track of things. We have all of the internal controls in place to do this.

We are -- as we sit here, we're sourcing business, we're underwriting business. We're closing deals, we're funding deals. We're managing our portfolio. And in fact, we did $65 million of purchased loans in the quarter ending, where it's -- $20 million of that about was done while people were working at home.

And just as a touchy feeling though, the whole team is -- we always work well together. I think we have a really great culture, even better now. People are trying to help each other out. People are talking continually on Zoom. People understand that everyone is important in what we're doing and everyone's stepping up.

And so I don't really think there's only -- I wouldn't say -- I would say there's probably two practical things. One, people can't get on planes. They will look at purchased -- look at collateral as we did before. We have folks in the New York area that work full-time for us that can look kind of in the mid-Atlantic safely.

And we have third parties that can look at collateral around the country for us, but any kind of collateral that's -- Pat and his group can tell you in his sleep what a multifamily property is worth in a particular market or certain kinds of collateral. But if we have collateral, it's tricky. We're passing on that for the time being.

So I would say in that regard, it's different. But other than that, we're working really well and as well as we did before..

That's great to hear. And then with respect to the purchase market, you talked a little bit about the supply increasing, the demand potentially decreasing.

How does that change your internal thought process around the pricing of some of these loans?.

Well, we want to -- there's a couple of things to figure out. One, we're going to -- we want -- we're going to get higher yields because there's going to be more supply and less buyers. I can say anecdotally, I don't want to put numbers or describe in any way. But we've recently had a loan -- a pool that we bid on. And there were 4 bidders.

We came in fourth, which we thought was unfortunate at the time. As it turned out, the buyer wants to and needs to resell at a number that's significantly less than our bid was a month ago. And so we expect we're going to see lower pricing. How much lower, we will report when we reconvene in July.

But I think we're going to start to -- and just to put it in context, after the financial crisis, the FDIC was selling performing loans for $0.60. We've been recently buying loans like that for $0.94. I expect that number is going to be declining. I'm not saying it's going to be $0.60. I'm not saying that at all, but I think it's going to be less..

Great. And then just -- you guys did a lot of buybacks this quarter, which is fantastic to see, especially given the stock valuation.

What -- can you think about the capital position, you think about this opportunity, having really no way of telling how long or how deep the opportunity is going to be for you guys, how do you stack up buying back stock at 65% intangible versus saving capital for the opportunity that exists on the purchased or the lending side?.

Well, on the stock repurchase side, we were getting investors, smart investors, investors that pay attention to our stock that were urging us to buy back when our stock was trading above tangible book, buy back at $18, buy back at $19.

On the theory that -- and it's a rational one, not what we adopted, but it's a rational one that the intrinsic value of our stock in their view was worth more than that. So we will be paying more than tangible book. Over time, it's going to be smart.

At that time, we only had, as indicated in the stock repurchase slide, something like $250 million of capacity to grow our balance sheet. And we thought that at that level, it was much better for us to use our capital to invest in our business.

When the stock went down to levels that were just ungodly, I mean it was down to $6 or $7 at one point, it became irresistible. It was -- we thought the most profitable thing we could do was to buy back our stock. Now we wouldn't use all of our capital to buy back our stock because we have a business to run.

But with the relief we got -- regulatory relief, increasing our loan book now by $140 million, we think we can do both. We think we can buy back our stock where the prices make sense. And we can -- and still have enough capital to grow our balance sheet.

I'm not saying we're going to do this, but just to -- as a math model, if you take a look at what your earnings are, and you multiply them by 10, and you take that by 80, but -- let me just use real numbers, but I'm not trying to say we're going to do this. We may do better, we may do worse, I don't know.

But let's say you made $20 million in the year. So $20 million under our Tier 1 test, we could divide that by 0.09, actually. And I don't have a calculator in front of me, but I'll call that $225 million. I'm probably off a little bit.

And if you loan 80% of that, that gives you about $170 million of additional loan growth from earnings -- from organic earnings.

So between the $400 million we have ready now, the additional amount we're going to get as we earn money, the pay downs that we have, we think we can -- we have lots of ability to originate and purchase loans and if the stock price stays where it is, to buy back stock.

I want to make one comment also, which I saw in your note, but I think for the broader audience, at the end of -- within the third quarter, while the window was open, directors went in the market and bought 75,000 shares.

Now that we file with the FDIC rather than the SEC, we, of course, put that on our website, and anybody can find it on the FDIC website, but it sometimes not readily is available. So I'm just mentioning that for anybody who didn't know it..

That's fantastic. Two more quick questions, if I may. One, just as I look at the funding side of things here and maybe not quite as important as credit today, but the margin is still important for a bank.

It seems like your funding is still relatively expensive at 170 basis points cost of deposits versus what the market has done over the last couple of weeks.

How quickly do you think that $170 million can start heading back down towards 1% or even potentially lower?.

JP, you want to take that, please?.

Sure. Thank you, Rick. Alex, agreed. The cost of deposits was still a little high during the quarter. The cost of interest-bearing deposits for the quarter was 1.86%, which was down from 1.98% in the previous quarter. However, at the end of the quarter, the weighted average rate of our interest-bearing deposits was 1.8%.

So obviously, lower at the end than it was during the quarter. Additionally, in the first 5 days of April, we lowered the rates on our money markets, both ABLE and Community Bank by at least 30 basis points. So that's about almost $300 million that will have 30 basis points savings on.

Also, we have about $72 million of CDs that are scheduled to mature in our fourth fiscal quarter at a weighted average rate of 2.19%, which either we let the money run off if we don't need it or if we put it back on the books, we're saving about 100 basis points on that $72 million over the next quarter, so. In this upcoming three months..

That's great. That's very helpful. And then final question for me. The income tax expense that you guys -- the nonrecurring item this quarter related to -- I think related to the stock buyback.

Is that something that we're going to see every time you guys buy back stock? Or is that some sort of a -- something that's kind of a onetime thing? From here on out, we're not going to see it?.

No, it's one and done. The really crazy thing. And before 1990, there was some tax rules that allowed companies and banks to take more bad debt expense than they actually encouraged. It's kind of like depreciation recapture. So there were triggering events to having to recapture that, one of which was the stock repurchase.

But this round, we've used it all up. So if we were to purchase more shares in the future, we would not have that tax -- associated tax costs..

[Operator Instructions]. I show no further questions in the queue at this time. Now I'll turn the call over to Rick Wayne for closing remarks. .

Thank you. First, thank you, Alex, for all of those good questions. I hope that the others on the call found the answers good. They were certainly good questions. I want to, just on a personal note, wish all of you, health and safety and that we all get through this challenging, challenging time in good shape.

I want to thank many of you who have either e-mailed or called asking how we're doing, very, very much appreciated. I hope when we talk again in July, we -- the world is in much better shape and -- when we have that conversation. So thank you very much. We always appreciate your input.

We always try and improve our presentation to address any things that you think are -- would be helpful and that we can do so. I encourage you as you have other thoughts on this to let us know. And with that, we will say goodbye and wish you a nice day and soon to be a nice weekend. Thank you very much..

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