Rick Wayne - President & Chief Executive Officer Claire Bean - Chief Financial Officer & Chief Operating Officer.

Alex Twerdahl - Sandler O'Neill Marc Heilweil - Spectrum Advisory David Minkoff - DCM Asset Management.

Good day everyone and welcome to the Northeast Bancorp fiscal year, 2015 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 Claire Bean, Chief Financial Officer and COO.

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 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 information for Northeast Bancorp.

Such information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involves significant risks and uncertainties. Actual results may differ materially from the results discussed on the 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 is Claire Bean, our Chief Financial Officer and Chief Operating Officer who will discuss our financial results following my comments. Following our presentation we will be happy to answer your questions.

Please turn to slide three. For the quarter we closed $84 million of loans, including $53 million of commercial loan purchases and originations by LASG, and $30 million of residential loans. With $2 million of transactional income, the purchased loan portfolio generated a return of 12.8% and bank wide net interest margin of 5.18%.

With respect to the stock repurchase plan announced in March, for the recent quarter we purchased 14,400 shares at an average price of $9.33 and cumulatively 305,690 shares at an average share price of $9.68. Moving on to slides four and five.

Of the $53 million invested by LASG for the quarter, $13 million consisted of purchased loans and $40 million of originated loans, including $36 million of loans to broker dealers secured by marketable securities. Purchased loans for the quarter had unpaid principal balances of $16 million, representing a purchase price of 82%.

Since June of 2011 when LASG purchased its first loan, it has invested an aggregate of $466 million, consisting of $317 million of purchased loans and $149 million of originated loans. I would like to briefly comment on what we saw in the small balance performing commercial loan purchase market during the past quarter.

As I noted, we purchased loans at an invested amount of $13 million, an unpaid principle balance of $16 million. During the past quarter we reviewed loans with approximately $244 million of unpaid principle balances, bidding on loans with approximately $28 million of UPB.

We remain disciplined in our selection, underwriting and bidding and singularly focus on building a quality portfolio.

While we bid on a relatively low percentage of loans reviewed, principally due to differences in perceptions of collateral value from that of the sellers, we continue to remain optimistic about the purchase loan business and expect to grow our purchase loan book. Turning to slide six.

As we have discussed in the past, under a regulatory commitment made in connection with the 2010 merger, purchased loans are limited to 40% of total loans.

Loan purchasing capacity was $13 million at June 30 and $24 million at September 30, reflecting loan purchases of $13 million on balance sheet loan originations of $42 million and pay-downs in our purchase and originated loan books.

Loan purchase capacity increases or decreases depending upon the relative amount of purchased and originated loans on our balance sheet at any point in time. Now on slide seven. Under another regulatory commitment, commercial real-estate loans are limited to 300% of total risk based capital.

Capacity under this commitment was $149 million at June 30 and $163 million at September 30, reflecting non-owner occupied purchases of $3 million, credit pay downs of $11 million and positive changes in our regulatory capital. Moving on to slide eight. At the end of the quarter, discount on purchased loans was $39 million.

The $39 million balance as of September 30, which represents a discount of 16% from the outstanding loan balances consists of $28 million of accretable discount and $11 million of non-accretable discount. These are contractual cash flows that in our estimation may not be collectable.

Now on slide nine, which provides detail on returns from the LASG portfolio. For the quarter, the purchased portfolio generated a total return of 12.8%, including transactional income of $2 million from unscheduled loan pay-offs and asset sales which has been previously discussed varies and sometimes substantially from quarter-to-quarter.

With respect to the portfolio purchase by LASG, which does not benefit from any purchase discount, the return on traditional originations was 10.2%, benefiting from $84,000 of gains from the sale of the guaranteed portion of SBA loans and 335,000 from exit and prepayment fees on the originated loan portfolio.

The yield on loan secured by securities was 1%. While the returns of our purchase portfolio are strong, it is important to emphasize that both the amount of loans purchased and the transactional income realized on the purchase portfolio may not be consistent from quarter-to-quarter.

As indicated on slide 10, we had run-off in the purchased loan portfolio of $11 million, which generated transactional income of $2 million, of which notably $908,000 was non-accretable discount. Turning to slide 11, which provides statistics on the LASG portfolio.

Of significance, on an invested basis the average loan size is approximately $817,000 with the largest loan at $12 million and with 64% of the portfolio consisting of loans of less than $4 million.

Collateral is diverse by type, focused on retail, industrial, office, hospitality and multifamily, and by geography, with the largest concentrations in California at 17% of the portfolio and New York at 14% of the portfolio.

The purchased loan portfolio had a weighted average price of 84%; the overall portfolio consists of 65% loans and 35% originated loans. Before turning it over to Claire, I would like to comment on our SBA program.

On our last call I noted that with the addition of Jeanne Hulit, the former Acting Administrator of the SBA, we intended to build a national SBA origination program utilizing our deep experience in underwriting and managing out of market owner occupied loans.

I am pleased to report that in September we hired Jonathan Smith, formally at TD Bank and most recently responsible for its national SBA lending program, and have also brought on several seasoned SBA Development Officers.

As a natural complement to our existing National Commercial Lending program, we expect the SBA lending and other forms of government guaranteed lending, such as USDA, will be an area of increasing focus for us moving forward. Claire. .

Thanks Rick and good morning everyone. Starting on slide 12, as Rick noted, it was a strong quarter with net income of $1.6 million or $0.16 and that was an increase from last quarter when core earnings were $0.11 and from core EPS of $0.05 in the comparable fiscal ’13 quarter.

This quarter’s results were driven in part by the significant transactional income realized, but they are also the results of continued growth in our balance sheet and our ability to leverage our existing infrastructure, thereby holding operating expenses in check.

Before I turn to slide 13, I’d like to just make a quick comment on our period-over-period change in capital and our share repurchase program and its status.

The net change in tangible equity from a dollar perspective was just under $1.2 million for the quarter and that consists of our earnings of $1.6 million, less the effect of our $0.01 dividend and the change in the AOCI account.

Our share count increased a bit during the period as a result of equity incentive awards, offset in part by the shares purchased, for a net increase in shares outstanding of approximately 106,000.

While we weren’t able to repurchase significant amounts this past quarter in the windows available to us under our share repurchase plan, in the aggregate we repurchased over 300,000 shares to-date or 35% of the program that we put in place approximately five months ago.

At this point we are very focused on future repurchases, in light of our current share price relative to both tangible book and in consideration of our own views on the value of the company.

Turning now to slide 13, looking back over the past four quarters, we stayed ahead of the run-off that naturally flows from the LASG purchase and originated portfolios by booking 176 million of new purchases and originations to achieve 12% growth in our loan portfolio.

For the current quarter we grew the portfolio by just under 5% on the strength of $13 million in purchases and $14 million of LASG originations.

And then flipping quickly to slide 14, these results are further detailed here and show the composition of net loan growth over the last four quarters, all of it coming in production by the LASG with purchases up in net $29 million, originations up by $44 million, offset by runoff out of our Community Banking division portfolio.

With the recent investment of additional Maine based commercial lending resources, we are working hard to build our commercial book in Maine as we move forward.

As you can see on slide 15, the composition of the deposits that have funded our growth over the past year, this growth has come primarily through our ableBanking internet platform, through which we’ve gathered approximately $24 million in the past three months, most of that in new money market accounts.

Slide 16 illustrates both the variability and transaction income and that’s shown in the green bars on the first three graphs in which we’ve discussed quite a bit on previous calls. And it also shows perhaps even more importantly the steady growth in base net interest income in that chart on the upper right.

The chart on the lower right, as well as the graph of slide 17 show our core operating expense trend, which has been relatively flat even with growth in our balance sheet, demonstrating the operating leverage we have as we continue to grow.

There will be some expense increases as we build out our SBA lending platform, which we are actively doing as we speak, but we expect that these will be relatively modest compared to our existing expense base and the revenue opportunity from the origination of SBA guaranteed loans.

Slide 18 shows trends in loan yields, purchase loan returns, which Rick discussed earlier. Our net interest margin this quarter at 5.18% reflects the strong showing and transactional income realized in the period. The baseline NIM measured without the effective transactional income was also strong at 407 for the quarter.

Turning to slide 19, our residential lending group produced solid results, generating total originations of 30 million, nearly all of which we solid in the secondary market.

As we’ve noted before, this is our preferred practice, but it’s always potentially subject to change as we monitor the pace of commercial originations relative to purchase loan capacity. Slide 20 is the snapshot of our asset quality metric, which remains strong across the Board.

NPLs, NPAs, charge offs have all remained relatively consistent over the past four quarters, though they are always prone to some fluctuations due to the nature of loan purchasing business. With that, well that concludes our prepared remarks. We’d like at this time to open the call up to Q-&-A. .

Sure (Operator Instructions). Our first question comes from Alex Twerdahl with Sandler O'Neill. Your line is now open. .

Hey, good morning. .

Good morning Alex. .

Alex Twerdahl - Sandler O'Neill:.

:.

I can. First, a few points. One is, when I am optimistic about it I am optimistic about it relative to what we are trying to achieve.

Keep in mind that it’s a multi-billion dollar market and last year we invested $80 million throughout the year and so we are not a fund that’s got billion of dollars that we are trying to put out in this market, that’s one point. .

Getting back though to the specific numbers for us, in the last quarter we purchased $13 million, which as you indicated in your note this morning, is why relatively to other quarters – I would point out that one, that quarter included the summer months, which are typically or well not always, but typically slow.

And secondly, what’s not in those numbers that you don’t see, is the activities of transactions that we come to agreement on and we should have closed in the quarter, but got postponed for reasons relating to title around collateral, etc. And so I think that’s how I would respond to it.

As I said, we did $80 million last year, that’s on average $20 million a quarter and we just went through this summer quarter. .

Okay, that’s helpful. And then you briefly alluded to the competition out there for these types of loans. Has that changed a lot over the past two or three years since you’ve been back doing this. .

I think it has changed.

What started out with funds that had raised pools of money to look at non-performing loans and that market has really been reduced significantly and yet they have pools of capital and the securitization window has opened up for them as a way to fit into those transactions, and so we see on larger deals buyers that were not previously – non-bank buyers that previously were not bidding on that kind of collateral.

I don’t think there’s been more competition from non-bank buyers – I mean from bank buyers. I think we are one of the few banks, not the only one, but one of the few banks that looks to purchase loans nationally.

There are certainly buyers of loans when they are done through a loan sale advisor and they call up every bank within 100 miles of the collateral; a local bank may bid on a particular transaction, but that’s how I would describe it. .

Okay, and then Claire you talked about some of the investments you’ve made in the SBA line and expenses that are likely to tickle a bit higher in the next couple of quarters.

Can you talk about when the revenues should follow that? How quickly can they get this SBA loan origination and sale business up and running and kind of what kind of volumes are reasonable to expect?.

Yes, I’m not really in a position to be able to comment on specific volumes, but I don’t think, for example we are going to be waiting three quarters before we see any results from this. I think they will come sooner. .

Alex, I just would add to that by saying that the profile – I mentioned in my comments we hired Jonathan Smith who for TD Bank ran their out of footprint SBA lending program.

Very experienced in that and for the benefit of everyone else here I would point out, the reason we are excited and comfortable about this opportunity, not just because we have Jeanne Hulit, who I mentioned and Jonathan, but we have core expertise in underwriting and servicing out of market loans and including owner occupied commercial real estate loans, which is a big chunk of what we are looking at.

We’ve also hired business development officers and we are hiring people that have a track record of generating business and so as to your question as to the timing, these are not people that are coming in from ground zero trying to do that.

These are people coming in with significant centers of influence as they like to say and sources and so for us as they come in I think the pipeline will build just by virtue of the fact, if you are coming on -- you bring a borrower in on day one, doing a little bit of rounding, it takes a couple of months at least to get from there to closing and so it’s filling up the pipeline.

So we think there’s going to be some lag time, but then we would expect that we will bring in volume and we will also, starting with the next quarter and thereafter report on this. So you will get a view and others will get a chance to see the numbers on this..

Right. So that’s going to be in a separate line. It doesn’t come into the gain on sale of commercial loans..

We will certainly break it out. Depending on the nature of the transaction, it could end up in non-interest income; it could end up above the line….

But we’ll provide you and others with the ability to take a look at the SBA program and understand how we are doing on originations and gains, etcetera..

Okay, great. And then just final question, I think I understood you correctly.

You said the volume of shares that you repurchased during the quarter, about 14,000, that was mainly just a function of the volume that was available to you to repurchase or it was below your appetite?.

No, it was exactly what you said. It was based on our ability to find volume when we could. .

Okay. Thank you very much for taking my questions..

Thank you, Alex..

Thank you. (Operator Instructions) Our next question comes from Marc Heilweil with Spectrum Advisory. Your line is now open..

Congratulations on the correct pronunciation of my name. Good morning..

Good morning Marc..

Good morning Marc..

Yes, I think some smart strategic moves are going to start bringing up the earnings. I have one question for Claire.

What was the average purchase price of shares in either this quarter or for the five-month period?.

For the quarter it was $9.33 and since inception it was $9.68..

Okay. And respecting your reluctance to give prospects in the future, but is there – can you share with us your outlook for a more normalized efficiency ratio looking out perhaps in 18 to 12, 24 months. Is there a target that you’d be comfortable with? I know there are lots of variables..

There are. I think for the month or the quarter we were at 72 and just a hair above 72% and as we continue to lever the balance sheet and lever our infrastructure we’d expect to do better than that. I’m reluctant to comment on just how much better, but we think it will be meaningful..

Well, how about in the predecessor bank. What was the efficiency ratio in 2005 or ’06 for that bank? I realize your probably going to be smaller, but….

No, we don’t have that in front of us. I assume it was public, so that’s probably available, because it’s the same entity of course. So I suspect that that information is available, we don’t have that..

Can you give me – I’m not going to go into the specs (ph) and look it up, so can you just give me an idea of where it came out?.

You know if I knew, I would tell you. I’d love to be able to give the answers, but I just don’t know. Let me point out to you Mark that there was a very – the company then was very different and not only, but even apart from the business lines we have any with the loan purchasing and the SBA and the funding.

That bank had also, the bank at that time had an investing group, an insurance group. It was much more of a small supermarket in Maine, so it wouldn’t even be an apples-to-oranges..

Oh! I’m sorry. What I refer, yes I misstated my question. I didn’t mean the predecessor bank. I meant the bank that you ran Rick..

That one, we were brilliant on that one. I don’t know the – that I don’t know either, but I can tell you for a long run we had ROEs in the 16%, 17% range. ROEs in the 1.6% to 1.8% range again, and even what we are doing now is a different model and that was just to amplify it slightly or briefly Claire’s point.

You saw the efficiency ratio for this quarter. We have said on the conference call many times that we think we have a lot of operating leverage, meaning we can grow our balance sheet significantly with just small amounts of increases in our operating expenses.

Our loan book doing some rounding at the end of last quarter was $500 million and we had the capital to grow it to $900 million and so we had the ability to increase our loan book by $400 million is what I just described.

So I think the math would suggest that it ought to be as that gets fully levered less than it is now and you (inaudible) with that information, I think do some good analysis..

Thank you very much and good luck..

Thank you, Mark..

Thank you. Our next question comes from David Minkoff with DCM Asset Management. Your line is now open..

Good morning Claire and Rick.

How are you?.

Good morning David..

Good morning David..

There was an article written recently. It was a SeekingAlpha article.

SeekingAlpha is sometimes right, sometimes not right, but in that – have you seen the article by the way?.

Unfortunately yes..

Okay. So there were a couple of items in there that probably deserve some further comment.

One of which was the allowance for loan losses and they point out there that the non-performing assets were $9 million, the total impaired loans were $9.8 million, special mention $14 million, substandard $7.4 million and past due $5.9 million and we only have a reserve against those loans of $1.3 million.

So what they were pointing out was that they felt that the allowance for loan losses should at least equal 100% of the past due items, which would be $5.9 million. And on slide 20, it kind of shows the same thing today. The total of it with the allowance for loan losses are 0.28% of total losses and as the non-performers are 1.3% to say.

What’s your comment on that? Are we under reserved?.

Well, I of course sign off on these financial statements, so no, I don’t believe we are under reserved.

But there are really two very important points I think to make and one is that when we acquired Northeast back at the beginning of 2011, as part of purchase accounting, the allowance at that point was set to zero and all of the assets, all of the loans in particular were mark-to-market and so each of them included a credit mark that lived with the loan itself, not in an allowance.

And that credit mark and any other marks have been full accreted since the date of the merger and some of that still remains. So it’s a bit of balance sheet geography for that piece of the equation.

But the other very important thing is that the purchase loan book is accounted for under what’s known as – I hate to be super technical, but its called ASC 310-30 and what that means is effectively those loans are brought on at market as well, and if there is any credit impairment in the loan, we recognize that again, at the loan level itself as what’s called non-accreteable discount.

So kind of a short summary is that both, for the loans that existed at the date of merger and all the purchase loans that we’ve brought on since, they effectively have credit marks sitting with them and not in the allowance.

And so the allowance itself has in fact built up some since the date of the merger and it reflects provisions for new loans that we brought on since merger that are not purchase loans, and it also reflects any changes in that book that existed at the date of merger.

If the credit experience is worse, then when we mark them to market, then that would also be reflected in the current allowance. Sorry, that was a very long winded answer, but did that….

Oh no, it was a good answer though. Of course they point out that a lot of the loans are the commercial real estate loans, which are more risky perhaps than others, and that a lot of the tenants are non-owner tenant and may not take care of the property as well.

I don’t know, are they valid points or is it just chatter?.

Well again, I think if it’s a purchase loan, any credit thing such as what you just described, that’s reflected in the price at which we carried the value or which we carried that loan. It’s just not in the allowance itself. .

Okay, that’s valid. And I’ll just bring up one other point that they made that might merit some discussion. They talk about the Northeast Bank as being the ten-branch bank and that we have 178 full time employees, and they compare it to a bank of their choosing, which I guess that’s always similar. It was a 12-branch bank.

It happened to be called Greene County Bancorp in New York State and they only have 115 employees. So what they are saying is, we’re spending $17 million for 178 employees or $99,000 per employee, whereas the other bank, its spending $9 million for 115 employees or $80,000 per employee.

That’s insinuating that we are not running that efficiently and may be that accounts for the 2.6% return on equity for 2014, which they felt was kind of low.

Any comments on that?.

Yes. It really goes back to that, we made a decision to staff up and add the resources in this bank to support where we want to get to with the capital that we have and so I think that if we had a $500 million loan book and we didn’t grow anymore, we wouldn’t have the expense low that we have.

But its our intention to grow the balance sheet with the capital, and then therefore as a business matter you ask yourself, are we better off staffing up or we can hire the people we want to hire and do it right in investing in the beginning or do you want to try and bring in the revenue and then see if you can staff up later.

We opted for the former which I think is much better and apropos of the conversation that we just had with Mark before, we had with you, as to what will happed to our efficiency ratio as we lever up. I think that if that article is rewritten and it was very length.

The person gave it a lot of thought, and I think he or she rewrites it a little bit in the future when we further levered up our capital, I think virtually every conclusion drawn there would be changed. .

That’s fair enough. Your saying your staffed up for the future growth that you anticipate rather than adding expenses at that time as your growing and trying to catch up. That could be valid, assuming we get the growth and then it’s profitable. Okay, fair enough. Wish you well. Well, we had a decent quarter this quarter and lets keep it up..

David, thank you very much..

Thank you..

Okay..

Thank you. And I’m showing no further questions. I’ll turn the call back over to Rick Wayne for closing remarks..

Thank you and thank you everyone for listening and participating and I look forward to talking to you again at our next call. Thank you all. .

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day..