Rick Wayne - President and CEO Brian Shaughnessy - CFO.

Alex Twerdahl - Sandler O’Neill.

Good day, everyone. And welcome to the Northeast Bancorp Fiscal Year 2017 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 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 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 information for the Northeast Bancorp.

Such information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve 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..

Thank you and good morning to everyone. Along with me is Brian Shaughnessy, our Chief Financial Officer and Treasurer. After the close of the market yesterday we announced our quarterly net income of $1.8 million, or $0.19 per diluted common share, and we were very pleased with our operating performance for the quarter.

I would like to point out that timing, as I will discuss, had an impact on our financial performance. For example, loan originations were strong and our loan book increased $29 million from June 30 to September 30.

However, due to the timing of loan payoffs and originations, average loan balances for the quarter compared to the linked quarter were relatively flat. Brian will expand on this. With respect to our SBA business we originated $15.2 million of loans during the quarter and sold only 55% of the guaranteed portion of such loans.

Finally, as frequently noted, transactional income from the early payoffs of purchased loans are lumpy and this quarter transactional income was $1.3 million compared to an average transactional income of $1.8 million over the four preceding quarters. Now I am going to start talking about some of the slides and if we can turn to Slide 3 first.

Bank-wide, for the quarter, we generated $99.2 million of loans, including $13.9 million of purchased loans and $42 million of originated loans in LASG; $28.1 million in our community banking division, including $26 million of residential loans and $2.1 million of commercial loans; and $15.2 million in our SBA division, while generating a net gain of $743,000 on the sale of $7.4 million of SBA loans.

Our purchased loan yield for the quarter was 10.4%, which includes $1.3 million of transactional interest income. During the quarter we repurchased 645,000 shares of our stock at an average price of $10.75 per share, bringing our cumulative share repurchases to 1.97 million shares at an average price of $10.05 per share.

Because we believe that stock repurchases can provide meaningful value to shareholders, the Board has approved the addition of 500,000 shares through our repurchase program. 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 limited to 40% of total loans.

Loan purchasing capacity was 90.6 million at September 30. 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. On Slide 5, under another regulatory commitment non-owner-occupied commercial real estate loans are limited to 300% of total capital.

At September 30, capacity under this condition was $165.8 million. It is important to note that owner-occupied commercial real estate is not subject to this regulatory condition, owner-occupied commercial real estate is, generally speaking, real estate collateral used in the business of the borrower.

SBA loans secured by commercial real estate are typically considered owner-occupied for purposes of the regulatory condition. We have been focused on loans to borrowers with owner-occupied real estate collateral, with $200.6 million portfolio at September 30, an increase of 68% over the prior 12 months. Moving on to Slide 6.

Of the $55.9 million invested by LASG for the quarter, 13.9 million were purchased loans and 42 million were originated loans. Purchased loans for the quarter have unpaid principal balances of $16.8 million, representing a purchase price of 82.5%.

Since the merger in 2010, LASGC has invested an aggregate of $892 million consisting of $502 million of purchased loans and $390 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 13.9 million with an unpaid principal balance of 16.8 million. During the past quarter, we reviewed loans with approximately $350 million of unpaid principal balances and bid on loans with approximately 30.6 million.

Of interest in this quarter, with purchases of loans with UPB of 16.8 million, this represents a successful bidding ratio of 55%, which is in line with prior quarters. As I have said before, we remain disciplined in our selection, underwriting, and bidding on loan pools and singularly focused on building a quality portfolio. Moving on to Slide 7.

At the end of the quarter the discount on purchased loans was $32.4 million, as compared to $31.6 million at June 30. The change is primarily due to $11.1 million of purchase loan payoffs offset by purchases in the quarter. Purchase loan payoffs generated $1.3 million of transactional income.

Approximately 84% of the $32.4 million of discount is expected to be realized over the remaining life of the purchased loans through scheduled accretion. The non-accretable portion of the discount represents contractual cash flows that, in our estimation, may not be collectible.

Turning to Slide 8, we provide details on returns from the LASG portfolio. For the quarter, the purchase portfolio generated a total return of 10.43%, reflecting transactional of $1.3 million from unscheduled loan payoffs, as compared with an average of $1.8 million for the prior four quarters.

As we have discussed in the past, transactional income on the purchased portfolio, as well as the amount of loans purchased, may not be consistent from quarter to quarter. The LASG-originated portfolio generated returns of 5.88% in the quarter. In addition, you will note a yield of 50% on secured loans to broker-dealers.

Turning to Slide 9, we provide some statistics on the LASG loan portfolio as of September 30. Of significance, as noted in the chart in the top right, the purchased loan portfolio has a net investment basis of 88%. On an invested basis, the average loan size is approximately $705,000 with the largest individual loan of $12 million.

Excluding loans to broker dealers, 85% of the portfolio consists of loans with an investment size of less than $4 million. The loan portfolio has a diverse collateral type, primarily focused on industrial, retail, hospitality, multifamily, and office.

By geography, the largest concentrations are in New York at 17% of the portfolio and California at 15% of the portfolio. The portfolio is geographically diverse with collateral in 37 states. Turning to Slide 10. For the SBA division activity, originations for the quarter were $15.2 million.

A benefit of the SBA program is the ability to sell the guaranteed portion of a loan and often at a substantial premium. For a variety of reasons, SBA loans closed in one quarter are sometimes sold in a subsequent quarter. In the current quarter we closed $15.2 million of loans of which $13.3 million were fully funded in the quarter.

We sold $7.4 million of the guaranteed portion of loans in the secondary market, of which $6.3 million were originated in the current quarter and $1.1 million was originated in prior quarters. For the quarter ended September 30, the net gain on sale, including the capitalized servicing asset, was $743,000.

On Slide 7, which is a new slide in our deck for this quarter, we showed the detail of the SBA sale pipeline as it stands at September 30. I would like to point out that these figures are a function of the timing of our SBA originations, their funding and subsequent sale.

The Bank holds $2.6 million in SBA loans held for sale, which represents the guaranteed portion of SBA loans which have closed and are fully funded at quarter end. Next, you will note an additional $7.5 million in the guaranteed portion of SBA loans that have closed as of September 30, but were not sold.

Of the $7.5 million, $6.6 million were funded at quarter-end and $900,000 was unfunded. In total, this represents an additional $10.1 million in future SBA loan sales before considering any loan production in the second or subsequent quarters.

Now I would like to turn this over to Brian who will discuss in more detail our financial results, after which we will be happy to answer your questions.

Brian?.

a high level of paydowns in the amortization and the LASG purchased and originated portfolios which averaged approximately $30 million per quarter over the past year and a paydown of one secured loan to a broker-dealer for $12 million in FY 2016.

Excluding this broker-dealer loan payoff, the loan portfolio had net growth of approximately $108 million, or 17%, over the trailing 12 month period. These results are further detailed on Slide 14, which shows the composition of net loan growth over the past five quarters.

The net loan growth is primarily driven by the strength of purchases and origination by LASG, which had net growth of approximately $110 million, or 33%, since September 30, 2015. In the current quarter, loans generated by LASG totaled 55.9 million, which consisted of 13.9 million of purchased loans and 42 million of originated loans.

In addition, the SBA loan portfolio has increased by $7 million as compared to the linked quarter. The increase is primarily due to funded originations in the current quarter offset by sales into the secondary market. Turning to funding on Slide 15. We have had net deposit growth of approximately $112 million, or 16%, over the trailing 12-month period.

Over the past year, the majority of the growth is due to an increase in our non-maturity accounts, which consists of money market, savings, and demand deposit products. The growth in these products represents all the net deposit growth for the year and all of the growth as compared to the winter quarter.

The growth in these stickier products has strengthened our overall deposit mix where non-maturity accounts represent approximately 60% of total deposits as of September 30, 2016. Slide 16, shows trends in the main components of our income.

Compared to the linked quarter, the decrease in net interest income before loan-loss provision is largely attributable to a flat average balance sheet, a decrease in transactional interest income from the LASG purchase portfolio, $385,000 of fees related to one loan which paid off in the LASG-originated portfolio in the prior quarter, and the effect in the current quarter of interest expense from the subordinated debt issued at the end of June 2016.

These results are further detailed on Slide 17, which shows trends in total revenue and noninterest expense over the past five quarters. The decrease in revenue is primarily attributable to the items I just noted on Slide 16 and also due to the decrease in SBA gains.

As noted previously, the decrease in SBA gains compared to the linked quarter is largely attributable to the timing of the originations and the ability to sell those loans into the secondary market. Also, as Rick noted, in the current quarter the company had net loan growth of $29 million.

However, the average balance of the loan portfolio remained flat compared to the same period. A large portion of the company’s loan portfolio growth occurred late in the first quarter and, therefore, our revenue did not benefit from a larger balance sheet.

In regard to expenses, the company has continued to control expenses where noninterest expenses averaged approximately $8.5 million over the trailing five quarters. Slide 18, shows originations and the associated gains in the residential portfolio over the past five quarters.

Our residential mortgage division had a solid quarter with originations of $26 million and sales of 25 million of loans into the secondary market. The gains from the sale of these loans continue to be a positive contribution to noninterest income.

Slide 19 provides additional information on trends in yields, average balances, and our net interest margin, which was 4.07% as compared to 4.73% in the linked quarter and 4.45% in the comparable prior-year quarter.

As compared to the linked quarter, the decrease in transactional interest income, the prior quarter benefit of 385,000 of loan fees from the LASG-originated portfolio, and the issuance of the sub debt accounted for approximately 57 basis points of the decrease in net interest margin. Slide 20, provides a snapshot of our asset quality metrics.

Compared to the linked quarter, nonperforming loans to total loans has increased to 1.24% from 1.13% and nonperforming assets to total assets has increased to 1.29% from 96 basis points.

The increase in the current quarter is largely due to one loan transferred to real estate owned in the current quarter and also due to the effect of certain loans acquired in the current quarter which were classified as nonperforming upon purchase.

In the top right-hand corner classified commercial loans were $3.9 million as of September 30, which have decreased over the past several years.

Finally, 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 were 18 basis points in the trailing 12 months. That concludes our prepared remarks. We would like at this time to open up the call to Q&A..

[Operator Instructions] Your first question comes from Alex Twerdahl. Your line is open..

Good morning, guys. I just, first, wanted to ask about Slide 11 here, which is kind of a cool new slide.

The difference between the 2.6 million and the 7.5 million; is that also just kind of a timing -- a function of timing for when you move fund stuff and then move it to held for sale?.

I can talk about the held for sale. Generally, our methodology has been for loans that have closed and have fully funded -- because when a loan has fully funded that is when you have the ability to sell it, that we will transfer it to loans held for sale because everything has been done to be able to sell it.

And from a timing perspective, we just didn’t have the ability and the time to sell it in the current quarter..

Okay. So the 6.6 million that is funded will then be moved to held for sale and then eventually be sold, presumably. And then the 0.9 million that is to be funded will be funded and then moved to held for sale and then sold presumably.

Am I reading that correctly?.

either they’re not fully funded or fully funded, but all of that has occurred late in the third month of the quarter without enough time to sell it in the quarter so we hold it.

With this new Slide 7, which the hope is it provides some more transparency into the SBA business as intended to do, is to kind of show what is on the balance sheet from what we have already closed but may not have been ready to sell yet that will, ultimately, be sold..

That is very helpful, thank you.

And then can you give us some commentary on what the premiums, are they pretty stable in the, when you do actually sell these things, the premiums that you get on sale?.

Yes, there wasn’t much change in the last quarter. When you look at the bids that come out daily from the various buyers of those loans that didn’t change much. What changes for us sometimes, if they are shorter term, depending upon the spread over prime and depending upon what the costs are in getting the loan sourced and closed. But not much change..

Okay. Then just a final question for me. It seems like during the quarter you were running with a bit more liquidity in short-term investments than normal.

Do you have plans to put that to work in anything beyond loans?.

I’m sorry; you said beyond loans?.

Yes, I mean like any other securities purchases or anything to get just a little bit more yield before loan production or before loan production needs to be funded..

We, of course, look at that from time to time and the short answer is, no, we will probably use that for loans. Investments are generally 100% risk-weighted for us, so they use up as much capital as the loan does. Others may have a different view.

Ours is where rates are now you don’t get paid either for taking risk, duration risk on interest rate or credit risk in that and so we are using it for loans.

One of the things we tried to do, and the nature of our business, as you know, because some part of it is transactional and you’ve mentioned it and explained it well in your reports, we to carry more liquidity than other banks because of the regulatory condition not allowing us to borrow. We have to fund ourselves with core deposits.

But one of the benefits which we expect to see kind of in the next quarter going forward is we wound up growing our loan book. By the end of the quarter it was almost $30 million higher than it was on day one.

But we just use the cash we have on board, on balance sheet and so we would expect that the net interest income from growing our balance sheet will go up a step. We don’t have incremental carrying costs for those loans..

[Operator Instructions] I am showing no further questions at this time. I will now turn the call back over to Rick Wayne for closing remarks..

Thank you all of you who have participated in the call. We try every quarter to take a look at our information that we provide and give our investors more information. Slide 11 was an example of that this quarter. Ask any of you that would like, have some thoughts on how we can provide more and better information let us know.

And again, we appreciate your support. Thank you very much..

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation and have a wonderful day. You may all disconnect..