Rick Wayne - President, CEO & Director Brian Shaughnessy - CFO & Treasurer.

Alex Twerdahl - Sandler O'Neill.

Good day, everyone. And welcome to the Northeast Bancorp Fiscal Year 2016 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 Brian Shaughnessy, 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 & 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 this 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 now like to turn the call over to Rick Wayne.

Please go ahead, sir..

Thank you. Good morning and thank you all for joining us today. As indicated I am requiring Rick Wayne, the chief executive officer of Northeast Bancorp and with me on the call is Brian Shaughnessy, is our chief financial officer and treasurer. Let's start a Slide 3 which provides the highlights of both the second fiscal quarter in year-to-date.

Bank wise we originated $84.4 million and loans including $21.9 million of purchase loans and $27.8 million dollars of originated loans in LASG, $24.2 million in our community banking division including $15.9 million of residential mortgages and $8.3 million dollars of commercial loans.

And $10.4 million dollars in our SBA division while generating a net gain of $1.2 million on the sale of SBA loans. Net interest margin for the third fiscal quarter it Was 4.25% down from 4.87% for the previous quarter ended in December 31.

The decreasing the interest margin was due to $1.7 million of decrease in transactional income in the third fiscal quarter as compare to the second fiscal quarter.

For the quarterly repurchased 184,400 shares of our stock at an average price of $10.22 all of the above coupled with strong non-interest income the company generated quarterly earnings of $1.8 million or $0.19 per share.

Turning to Slide 4, as we had discussed in the past under the regulatory commitment to remain in connection with the 2010 merger, purchased loans are limited to 40% of total loans. Loan purchasing capacity was $80.2 million on March 31.

Want purchasing capacity increases or decreases depending upon the relative amount of purchase and originated loans on our balance sheet at any point in time. Now on Slide 5 and another regulatory commitment non-owner occupied commercial real estate loans are limited to 300% of total capital.

At March 31 capacity under this condition was $104.4 million. It is important to note that owner occupied commercial real estate is not subject to this this regulatory condition. Owner occupied commercial real estate generally speaking, real estate collateral used in the business of the borrower.

SBA loans Secure by commercial real estate are typically considered owner occupied purposes of the regulatory conditions. We have in focus of loans to borrowers of owner occupied commercial real estate collateral $150 million portfolio of March 31, an increase of 30% over the prior 12 months.

Moving on to Slide 6, of the $49.7 million invested by LASG for quarter $21.9 million were purchased loans and $27.8 million work originated loans. Purchase loans for the quarter have unpaid principal balances of $24.4 million representing the purchase price of 89.9%.

Since the merger in 2010 LASG has invested an aggregate of $785 million consisting of $469 million of purchase loans and $316 million of originated loans.

I would like to briefly comment and what we saw in the small balance performing in the commercial loan purchase market during the quarter as I noticed the purchased loans in the invested amount of $21.9 million.

During the past quarter be reviewed loans of approximately $143 million of unpaid principle balances and did our loans with approximately $67 million of unpaid principle balances of interest in this quarter purchases with loans of unpaid principle balances of $24.4 million.

This represents a successful bidding of 37% which is generally higher than that in prior quarters. As I mentioned before remain disciplined in our selection of underwriting and bidding and loan pools and singularly focused on building quality portfolio.

Moving on to Slide 7 at the end of the quarter at the discount on purchase loans was $32.6 million, an increase of approximately $500,000 dollars from the prior quarter. And increases primarily due to the purchases in the quarter offset by $14.3 million of purchase loans payoffs. Purchase loans payoff generated $912,000 of transactional income.

I would like to point out that approximately 81% of $32.6 million discount is expected to be realized over the remaining life I've purchase loans through scheduled accretion. The non-accretion portion of the discount this represents contractual cash flows that in our estimation may or may not be collectable.

Turning to Slide 8 providing details of returns from the LASG portfolio. For the quarter the purchase portfolio generated a total return of 9.88% reflecting transactional income of $912,000 from unscheduled loan payoffs.

As compared with an average of $2.3 million of transactional incomes during the price four quarters, as we discussed the past transactional income realized on the purchase portfolio as well as the amount of loans is purchased, may not be consistent from quarter to quarter.

With respect to the LASG originated portfolio which does not benefit from purchase discount the portfolio generated returns of approximately 5.8% in the quarter. In addition you will know the yield of 0.5% on loans to brokered dealers by securities. Turning to Slide 9, we provide some statistics on the LASG loan portfolio as of March 31.

Of significance as noted in the charts in the top- right the purchase loan portfolio has a weighted average net investment of 88%. On an investor basis the average loan size is approximately $787,000 with the largest individual loan at $12 million. Excluding loans to brokered dealers 19% of the portfolio consisted of loans of more than $4 million.

Alone portfolio a diverse collateral type primarily focused on retail, hospitality, Office, industrial and multi-family. By geography the largest concentrations are in California at 19% of the portfolio, in New York at 16% of the portfolio. Our collaterals are geographically diverse, what collateral in 37 states.

Turning to Slide 10, for the SBA division activity as discussed earlier origination for the quarter was $10.4 million. One of the benefits of the SBA program is the ability to sell the guarantee portion of a loan at a substantial premium. For a variety of reasons SBA loans closed in one quarter or sometimes sold in the subsequent quarter.

In the current quarter we closed $10.4 million of SBA loans offered only $9.4 million dollars were sold in the March 31 quarter with the remaining able to be sold in subsequent quarters.

In the quarter ended March 31 the next gain on sale including the capitalized servicing assets was $1.2 million and now I'd like to turn it over to Brian to discuss in more detail our financial results after which we will be happy to answer your questions, Brian?.

Thanks, Rick and good morning, everyone. I am picking it up on Slide 11 to provide a little more color on our financial results. As Rick noted it was good quarter net income of approximately $1.8 million of $0.1 comparable 2015 year quarter. Results were driven in part by gaining loan sales from our SBA division.

Transactional interest income of $913,000 from our purchase portfolio to benefit of our larger started in keeping our operating expenses in check. Turning to Slide 12, over the past year we have seen net loan portfolio growth of $120 million or 21%.

And with majority of which comes from our LASG portfolio the $214 million of purchases and originations. As shown in the chart since March 31, 2015 yellow is a native $59 million dollars of SBA loans and we have sold approximately $40 million of the guarantee portion of these loans into the secondary market.

These loan seals have contributed approximately $4.5 million to revenue in the same 12 month period. Why bank wise loan production has been small, increases have been offset by the following.

In high level of paid out in the purchase portfolio which averaged approximately $20 million per quarter in the prior 12 months, and The impact of SBA loan sales in other run-off and amortization in the originated portfolios. These results are further details on Slide 13 which shows the composition of net long growth for the past 5 quarters.

And does merely on the strait of purchases and originations by LASG which had net growth of approximately $116 million or 40% of Q3 since fiscal 2015. In the current quarter loans generated by LASG grew $7 million which consisted of $21.9 million of purchase loans and $27.8 million of originated loans.

In addition the SBA loan portfolio has decreased slightly to $23 million at March 31 a large portion of these loans are sold into the secondary markets. Turning to funding on Slide 14 we've had net deposit growth of approximately $98 million or 15% over the past year in rough approximately $26 million or 4% as compared to the previous quarter.

For the full year comparison the majority off the growth is due to an increase in our community in money market products of $63 million and demand deposit of $10 million. As compared to the previous quarter the growth is attributable to our community banks money market Products which had net growth of approximately $26 million in the current quarter.

This growth in the community bank has strengthened the overall deposit where a non-majority holds approximately 53% of solid deposits. Slide 15 shows trends in the main components of our income.

Compare to the linked quarter the decrees and net interest income before loan division is largely attributable to the decrease in transactional income from the link LASG purchased portfolio offset by an increase the base net interest income due to the benefit of the larger bank wise average loan portfolio.

The next interest margin excluding transactional income has increased by 44 basis points as compare to Q3 of fiscal 2015 and 21 basis points as compared to the linked quarter. The average value sell-off portfolio has increased by $44 million or 7% as compared to the linked quarter.

Slide 16 shows trends in total revenue in non-interest expense over the past 5 quarters. Compare to the linked quarter ending December 31 total revenue has decreased by approximately $500,000.

The main components of this change are primarily due to the fall on a decrease in the transactional income for our purchase portfolio of $1.7 million are offset by the increase in again on sale off SBA loans of approximately $500,000 in any increase in the base net interest income of approximately 780,000 due to the benefit of larger balance sheet.

The increase of $200,000 in non-interest expense compared to the linked quarter is its primarily attributable to an increase in professional fees and the higher legal expense related to loan acquisitions and collections.

Non-interest expense have remained relatively consistent over the past five quarters with average non-interest expense of $80.3 million. Slide 17 shows the origination in associated gains in the residential portfolio over the five quarters.

The current quarters is seasonally slower due to the winter however the gains continued to be a positive contribution to non-interest income. We sell substantially all residential loan production into the secondary market.

Slide 18 provide additional information on the trends in yields, average balances, and interest which was 4.25% compared to 4.87% in the linked quarter in 4.79% in the comparable prior year quarter. Slide 19 provides a snapshot of our asset quality metrics.

Compared to the prior quarter non-performing loans has increased to 1.25% from 90 basis points in non-performing assets has increased to 1.2% from 82 basis points. Increases primarily attributable to several loans been placed on a non-accrual in the current quarter. One of the lawns that came on non-accrual quarter for $1.2 million is now current.

In addition as noted in the chart on the bottom right-hand corner of the slide net charge offs to average loan balances have remained at low-levels over the past several years. And we are 17 basis points in the current 12 months. That concludes our prepared remarks and we would like at this time to open up the call for Q&A..

[Operator Instructions] and our first question comes from Alex Twerdahl from Sandler O'Neill, your line is now open.

Good morning guys.

One portion I had is across the country and noticed certainly from commentary of management teams that there is higher screw into the commercial real estate right now and am wondering if that could potentially have an impact on the commercial real estate purchase market as some banks maybe look to shed various asset and whether or not that's something that you guys have noticed in the purchase trends even if not in the number yet just anecdotally that people are expecting.

Is it something that could potentially come up and be a tailwind for the system and purchase volumes in the future do you think?.

I am sorry Alex, could you repeat the premise where you were saying that some bankers have said I have heard the rest of your question and we have a little technical issue as you were saying.

You don't have to repeat the whole question but what is the cause and effect you are suggesting?.

I think there has been any increased scrutiny recently specifically surrounding commercial real estate on a national basis specially from regulators recently and commercial real estate has certainly been an asset class that has led a lot of loan growth for community banks so I am wondering if you have noticed in the purchase market, in any increase in volume or any expected increase in volume based on those that sort of anecdotal thought.

.

I can't really, I agree with the point that the other bankers have mentioned and you are saying which are regulators are paying attention to commercial real estate loans and as a part of their examination.

I haven't yet I would say I haven't yet seen a direct connection between that and the purchase market getting larger but it does seem certainly possible but I can't honestly say that I have seen that yet. I think we are, we didn't really see it last quarter.

Last quarter we mentioned based on the amount we looked at, it was sort of an average quarter roll over.

Hit-rate was higher but as we look out and we see what's coming along particularly with loan sale advisors there seems to be some pick up whether for the reasons you described or its part in function of some many originations that were done in the 2007 timeframe that are maturing and some of which are underwater causing sales policy, I am really not sure.

.

Okay. So you do seem some pick up the $142 million you reviewed in the march quarter seems light just sort of looking back at the history you have every quarter going back was made as much as $400 million a couple of years ago per quarter.

Now it's down to $143 million, that's something you see as a combination of seasonality in the first quarter of the calendar year combined with some other factors do you think that maybe it will pick up as the year progresses?.

I think in part it's a methodology we use in trying to describe to investors as what we are looking. I think in last quarter was $175 million, I think in part, that doesn't support to be the universe of loans that are available for sale.

We don't put out everything that comes across so we could -- theoretically could buy that numbers so you know multiple many times of $143 million. Its' kind of those that we think are worth spending some time on to really fit comfortably in our credit box meaning that loans that are paying cash flow collateral i.e.

landed construction and development with the right kind of values based on where we think we bid etcetera. I think this year the amount of purchases we have made are more than last year and relative to our size we are seeing up the share. .

Okay. And then switching gears a little bit and talking about expenses.

In the press release you referred to higher head count and wasn't sure what kind of higher you have been making, those sort of investments you have made over the past year, that would result in more people?.

Sure I can address that Alex, in the press release we were comparing, our salaries were compared to the comparable fiscal year 2015 quarter where they have increased, really where that has come from is building the division and the operational such as clothing, underwriting and as that division grows our head count is growing.

I would say most of the growth has come from SBA division. .

Okay.

And can you remind us how many SBA originators you have right now?.

Around 110. Alex one thing I wanted to say is Brian mentioned the data performance, in prior calls we ended we thought we would be somewhere in the $33 million of non-interest expense for the year.

for the first three quarter we are at $24.2 million, right on target for that and so this quarter as you pointed out in early report, and is disclosed in our press releases, the expenses in this quarter were a little higher than last quarter but some expenses like professional fees and collection fees they don't always come evenly throughout the year.

I would want to make you and others aware of that. .

Great and then final question, seems like the tax rate was a little lighter this quarter.

Did something change in the way things are taxed or what the tax rate used in subsequent quarters?.

I would say the right tax rate is the one we have in the books, about 35.5% the main driver of that this quarter is when we filed our tax returns in March for June 2015, there are some items that go in there as you file your tax returns you need to compare to what you provided for in the prior year and with the number of states that we do business and the portion of manufacturers we have from the tax perspective there were some changes there due to what we actually filed so looking to 35.5% is the effective tax rate.

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Okay. Thank you. .

[Operator Instructions] And this does conclude our question and answer session. I would like to turn the call back over to Rick Wayne for any concluding remarks. .

Thank you and thank you all of you for listening and participating and supporting us. I hope that we certainly tried to give you lots of information so you can have visibility into what we are doing and we look forward to talking to you in our next call. Thank you very much..

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