Richard Wayne - President and CEO Brian Shaughnessy - CFO.

Jeff Kitsis - Sandler O'Neill.

Good day everyone, and welcome everyone to the Northeast Bancorp Fiscal Year 2017 Fourth 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 the presentation. Please note that this presentation contains forward-looking information for the Northeast Bancorp.

Such information constitutes 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..

Good morning and thank you all for joining us today. With me is, Brian Shaughnessy, our Chief Financial Officer and Treasurer. After the close of the market yesterday, we announced record earnings, with quarterly net income of $4 million or $0.45 per diluted common share and annual net income of $12.3 million or $1.38 per diluted common share.

Earnings for both the quarter and the year were positively affected by strong loan originations; transactional income from LASG purchased loans and gains on the sale of SBA loans originated by our SBA division, also while keeping our operating expenses in check.

This quarterly activity helped to drive our return on equity to 13.3%, our return on assets to 1.6% and our efficiency ratio to 56.3%.

Turning to slide 3, bank-wide, for the quarter, we generated $152.2 million of loans, including $67.9 million of LASG originated loans and $45.1 million of LASG purchased loans; $19 million of loans in our SBA division and $20.2 million of loans in our community banking division, while generating a net gain of $1.9 million on the sale of $19 million of SBA loans.

Net interest margin for the fourth quarter was 5.55%, up from 5.11% for the linked quarter ended March 31. Our purchased loan yield for the quarter was 13.6%, which included $3.5 million of transactional interest income. Net loan growth for the quarter was $37.5 million, representing a 5.1 increase over the linked quarter ending March 31.

For the year the company generated $516.5 million of loans which includes a $112.8 million of purchase loans, $237.7 million of LASG originated loans, $82 million of SBA originations. And $84 of community bank origination which included 76.4 million in residential loans and 7.6 million in commercial loan originations.

We sold $53.8 million of SBA loans for a gain of $5.3 million and the purchase loan portfolio yielded 12.2% for the year. Earnings for the year were 12.3 million with diluted earnings per share of $0.38 compared to $0.80 for the prior year ended June 30, 2016.

Turning to Slide 4, as we have discussed in the past, under our regulatory commitment made in connection with the 2010 merger, purchased loans are limited to 40% of total loans. Loan purchasing capacity was $111.9 million at June 30.

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

At June 30, capacity under this condition was $178.5 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 is not subject to this regulatory condition.

SBA loans secured by commercial real estate are typically considered owner-occupied for purposes of this regulatory condition. We have been focused on loans to borrowers with owner-occupied real estate collateral, with a $225.7 million portfolio at June 30, an increase of 28% over the prior 12 months.

Moving on to Slide 6, of the $113 million invested by LASG for the quarter, $45.1 million were purchased loans and $67.9 million were originated loans. Purchased loans for the quarter have unpaid principal balances of $50.2 million, representing a purchased price of 89.8%.

Since the merger in 2010, LASG has invested an aggregate of $1.2 billion consisting of $601 million of purchased loans and $586 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 $45.1 million, and an unpaid principal balance of $50.2 million.

During the past quarter, we reviewed loans with approximately 232 million of unpaid principal balances and bid on loans with approximately $64.6 million of interest in this quarter with purchases of loans with UPB of $50.2 million this represents a successful biding percentage of 78%, generally higher than 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 purchase loans was $33.5 million as compared with $31.1 million at March 31.

The change is primarily due to $45.1 million of purchases offset by approximately $35 million of purchase loan payoffs in the quarter. Purchase loan payoffs generated $3.5 million of transactional income.

Approximately 85% of the $33.5 million discount is expected to be realized over the remaining life of the purchase 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 detail on returns from the LASG portfolio.

For the quarter, the purchase portfolio generated a total return of 13.78%, reflecting transactional income of $3.5 million from unscheduled [late] loan payoffs, which was above the average of $2 million of transactional income for the prior four quarters.

As we discussed in the past, transactional income realized 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 6.5% in the quarter.

In addition, you will note a yield on the secured loan to broker-dealers, as these loans were paid off in the quarter.

Turning to Slide 9, while we have statistics on the LASG loan portfolio as of June 30 of significance, as noted in the chart on the top right, the purchased loan portfolio has a net investment basis of 88%, consistent with the linked quarter.

On an invested basis, the average loan size is approximately 750,000, and 77% of the portfolio consisted of loans with an investment size less than $4 million. The loan portfolio has a diverse collateral type primarily focused on retail, industrial, hospitality, multifamily and office.

By geography, the largest concentrations are in New York, and California with 23% and 19% of the portfolio respectively. Our collateral is geographically diverse with collateral in 39 different states. Turning to Slide 10, one of the benefits 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 $19 million of SBA loans, of which $18.4 million were fully funded in the quarter.

The company sold $90 million of the guaranteed portion of the loans in the secondary market, of which $10.2 million were originated in the current quarter and $8.8 million were originated or purchased in prior quarters. For the quarter ended June 30, the net gain on sale including the capitalized servicing asset was $1.9 million.

On Slide 11, we show detail of the SBA sale pipeline as it stands at June 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 $200,000 million in SBA loans held for sale, which represents the guaranteed portion of the SBA loans, which have closed and are fully funded at quarter end. Next you will note an additional $12 million in the guaranteed portion of the SBA loans that have closed as of June 30 but were not fully funded.

The $12 million consists of 11 loans with an average guaranteed balance of approximately $1.1 million. These 11 loans have a combined amount of approximately $1.2 million that has yet to be dispersed.

In total, this represents an additional $12.2 million in future SBA loan sales before considering any loan production in the first quarter of fiscal 2018 or thereafter. And now I'd like to turn it over to Brian who will 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'm picking it up on the Slide 12 to provide a little more color on our financial results. As Rick noted, it was a record quarter for earnings with net income of approximately $4 million or $0.45 per share.

Diluted earnings per share were up $0.06 from the linked quarter and up $0.21 from the comparable fiscal year of 2016 quarter.

The solid results were largely driven by purchased loan transactional interest income of $3.5 million, the gain on the sale of SBA loans into the secondary market of $1.9 million, and the benefit of a larger average balance sheet. These changes partially offset by an increase in noninterest expense compared to the linked quarter.

Turning to Slide 13, over the past year we have seen net loan portfolio growth of approximately $87 million.

Excluding the broker deal loans pay offs of $48 million and the sale of the community bank commercial portfolio of $18.3 million in Q3 of this fiscal year, the loan portfolio had net growth of approximately $153 million or 24% over the trailing 12-month period.

The majority of the growth comes from our LASG portfolio with approximately $351 million of purchases and originations in the current year.

As shown in the chart, in the trailing 12-month period since June 30, 2016, we have closed approximately $82 million of SBA loans and we've sold approximately $52 million of the guaranteed portion of these loans into the secondary market. These loan sales have contributed $5.3 million to revenue in the current fiscal year.

While bank-wide loan production has been strong, increases have been significantly offset by the following. A high level of pay downs and amortization in the LASG purchased and originated portfolios, which were $188 million over the past fiscal year and the pay-down of four secured loans to broker-dealers for $48 million in the same period.

These results are further detailed on Slide 14, which shows the composition of net loan growth over the past four quarters. The net loan growth is primarily driven by the strength of purchases and originations by LASG, which had net growth of approximately $162 million or 39% since June 30, 2016.

In the current fiscal year, loans generated by LASG totaled $350.5 million, which consisted of $112.8 million of purchase loans at an average price of 89% of the unpaid principal balance and $237.7 million of originated loans.

As noted on the previous slide, offsetting this total loan growth was the pay down of the broker-dealer loans and the sale of the community bank commercial loans in the current fiscal year. Turning to funding on Slide 15, we've had net deposit growth of approximately $90 million or 11% over the trailing 12-month period.

Over the past year, all of the growth is due to an increase in our non-maturity accounts, which consisted of our money market savings and demand deposit products.

The growth in these products has strengthened our overall deposit mix where non-maturity accounts represent approximately 62% of total deposits as of June 30, 2017 compared to approximately 56% of total deposits in the comparable prior year quarter ended June 30, of 2016. Slide 16 shows trends in the main components of our income.

Compared to the linked quarter, the increase in net interest income before loan-loss provision is largely attributable to higher transactional interest income from the purchased portfolio. The purchased portfolio had a yield of 13.64% in the current quarter compared to 11.89% in the linked quarter.

Base net interest income increased slightly due to higher average balances in the LASG originated portfolio offset by a prepayment penalty of $203,000 on certain community bank loan payoffs in the linked quarter ended March 31, and higher average balances and yield in our deposit portfolio in the current quarter.

These results are further detailed on Slide 17, which shows trends in total revenue and non-interest expense over the past five quarters. Compared to the linked quarter ended March 31, total revenue has increased by approximately $1.8 million, while non-interest expense has increased by $600,000.

The increase in revenue is primarily due to an increase in purchase loan transactional income and increased gains from sale of SBA loans. The increase in non-interest expense in the same period is primarily due to increased incentive compensation offset by lower loan acquisition and collection expense.

The increase in revenue in the current quarter has helped us to achieved an annualized return on equity of 13.3% and ROA of 1.57% and an efficiency ratio of 56.3%.

When compared to the full prior year ended June 30, 2016 revenue in the current year has increased by approximately 10.4 million while non-interest expense has increased by approximately $2 million in the same period. Our non-interest expenses average approximately $9 million in the trailing five quarters.

Slide 18 shows originations and the associated gains in the residential portfolio over the past five quarters. These gains continued to be a positive contribution to non-interest income. We sell substantially all residential loan production into the secondary market.

Slide 19 provides additional information on trends and yields, average balances in our net interest margin, which was 5.5% as compared to 5.11% in the linked quarter and 4.73% in the comparable prior year quarter.

As previously discussed the increase in interest margin in both period is largely due to an increase in transactional interest income from the purchase portfolio partially offset by an increase in deposit interest expense. Slide 20 provides a snapshot of our asset quality metrics.

Compared to the linked quarter, nonperforming loans to total loans has increased to 1.79% from 2% and nonperforming assets to total assets has increased to 1.37% from 1.81%. The decrease compared to March 31 is primarily due to the payoff of non-performing loans in the current quarter.

In the top right in the corner classified commercial loans were $7 million as of June 30, which decreased from $8.2 million in the linked quarter.

Finally, as noted in the chart in on the bottom right hand corner of the slide, net charge offs to average loan balances have remained at low levels over that past several years and were 4 basis points in the trailing 12 months. That concludes our prepared remarks. We would like at this time to open up the call for Q&A..

[Operator Instructions] And our first question comes from the line of Alex Twerdahl from Sandler O'Neill. Your line is now open. .

Its Jeff Kitsis for Alex this morning. Another very nice quarter for LASG originated loan. I was wondering if you could talk a little bit about completion of those origination and also that has to be above the particular part of the business might be going forward. .

Sure, a very significant portion of those loans in, well our corporate is called our portfolio finance category which are loans made to non-bank lenders to help them leverage their own lending activities all of which their loans are commercial.

So, an example of that kind of loan would be let us say that there is a borrower in New York that once that wants to acquire a rent controlled building of 10 or 15 units and the plan is to pay money to the tenants and then move them out so that they can renovate the building and rent the apartments at market rates.

For a variety of reasons that may not be a loan that that building owner could go directly to a bank and borrow money, so instead they go to a non-bank lender, and this is not what the numbers would be, but it might take easier for everyone to follow.

Let’s say that what I'm describing cost $1 million dollars, again obviously those are not the real numbers and the borrower puts, the owner puts in 250,000 of equity and the private lender owns, lends 750 and then we may lend 70% of that to the non-bank lender and get assignment of the note of mortgage.

So, in our collateral is the note and mortgage but the underlying real estate which secures all of that are 500,000 is 50% of the value of the underlying real estate.

And these borrowers if I were to describe them, they typically fund our family offices sometimes individuals with their own money but what we are doing is our product is a relatively low LTV product for us. And we are getting attractive pricing at an average front plus 2.5% or 3.

And the reason is those kinds of transactions are too small for the larger banks. And typically, the transaction described it more completely, is usually it’s a loan to someone where we have three or four pieces of collateral and could be in different geographic areas where we have expertise in underwriting that.

And as a result, that’s the kind of loan that are more traditional community bank would do. And so, we are finding a good niche in that, we did I want to say, Brian if I go up on the wrong number I'm sure you will correct me, $165 million of that in fiscal year for the record $167 Brian has pointed out, of that in fiscal year '16.

And we are finding a lot of demand for that product and its everything to like about it, low LTV, its good pricing, it's an area in which its right in our sweet spot for our skill set which is underwriting and from every perspective at our national real estate, in sizes that we like.

And so that was a big junk of that and it's an area that we want to build. And your question was how big is that market. I can't actually tell [ph] you to statistic from the government that says its X dollars but there seems to be a lot of demand for it. And it’s an area we want to build on..

And one last question here on the tax rate.

I was hoping you could give some color on that, the changes we saw their last quarter?.

As Rick described in our national lending platform, we have to consider amongst a lot of things, that the apportionments to certain states that we do business in. And if you considered a large regional bank that operates in 10 to 15 states they may, they have tax obligations in those states.

but they may have consistent apportionments because they are doing typical branch banking activities in those states. And they may not change from year to year.

It’s a little bit different from us because of our national lending platform and in our purchase platform where in one year we may have transactional income of $3 million in Florida and then the next year we may have $3 million in California or Arizona or some different state.

And so, our apportionments may change from year to year, part of our process we go through our yearend provision and work with the third-party tax compliance team. And some of the apportionments factors changed at the end of the year and we needed to provide for that.

And that’s really one of the big drivers is change of the apportionments from year to year..

[Operator Instructions] And I'm not showing any further questions over the phone lines. Now I would like to turn the call back over to Rick Wayne for any closing remarks. .

Thank you very much and thank you all on the line for listening today. As the numbers shows a great quarter and a great year for us. We appreciate you joining us quarterly and listening to our story and following us and investing with us. And I want to thank you all for that and wish you a very nice weekend as its coming up.

With that note, we will say good bye..