Rick Wayne - President and CEO Brian Pinheiro - Interim CFO and Chief Risk Officer.

Jeff Kitsis - Sandler O’Neill.

Good day everyone, and welcome to the Northeast Bancorp Fiscal Year 2018 First Quarter Earnings Results Conference Call. This call is being recorded. With us today from the Company are Rick Wayne, President and Chief Executive Officer; and Brian Pinheiro, Interim Chief Financial Officer and Chief Risk 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 statements about Northeast Bancorp.

Forward-looking statements are based upon current expectations of Northeast Bancorp’s management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bancorp, does not undertake any obligation to update any forward-looking statements.

At this time, I would 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. With me on the call is Brian Pinheiro, our Chief Risk Officer and who is also serving as our Interim Chief Financial Officer. After the close of the market yesterday, we announced net income of $3.8 million or $0.42 per diluted common share for the first quarter of fiscal 2018.

Earnings were positively affected by strong transactional income from LASG purchased loans and gains on the sale of SBA loans originated by our SBA Division, while keeping operating expenses in check.

This quarterly activity helped drive our return on equity to 12%, our return on assets to 1.4%, our efficiency ratio to 57.1%; this is compared to a return on equity of 6%, return on assets of 0.7%, and an efficiency ratio of 74.5% in the first quarter of fiscal 2017. Turning to slide three.

For the quarter, we generated $74.4 million of loans, which included $40.8 million of LASG originated loans and $3.7 million of LASG purchased loans; $7.8 million of loans in our SBA Division and $22.1 million of loans in our Community Banking Division. We generated a net gain of $1 million on the sale of $9.1 million of SBA loans.

Net interest margin for the first fiscal quarter was 5.13%, and our purchase loan yield for the quarter was 12.3%, which included $2.8 million of transactional interest income. Turning to slide four.

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 has increased to $126.5 million at September 30th due to purchased loan payoffs and LASG originations.

Loan purchasing 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 five. Under another regulatory commitment, non-owner-occupied commercial real estate loans are limited to 300% of total capital.

At September 30th, capacity under this condition was $204.6 million. It is important to note that owner occupied commercial real estate is not subject to this regulatory condition. Owner occupied commercial real estate or 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. We have been focused on loans to borrowers with owner occupied real estate collateral with a $217 million portfolio at September 30th, an increase of 8% over the prior 12 months. Moving on to slide six.

Of the $44.5 million invested by LASG for the quarter, $3.7 million were purchased loans and $40.8 million were originated loans. Purchased loans for the quarter have unpaid principal balances of $4.3 million, representing a purchase price of 84.6%.

As frequently mentioned in these calls, loan purchasing is transactional and can vary sometimes significantly from quarter-to-quarter. As indicated on slide six, purchase volumes were also relatively low in the first and third quarters of fiscal year 2017 and relatively high in the second and fourth quarters of fiscal year 2017.

Since the merger in 2010, LASG has invested an aggregate of $1.2 billion, consisting of approximately $603 million of purchased loans and approximately $625 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 invested amount of $3.7 million and an unpaid principal balance of $4.3 million. During the past quarter, we reviewed loans with approximately a $183 million of unpaid principal balances and bid on loans with approximately $15.1 million of UPB.

As I 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 seven. At the end of the quarter, the discount on purchased loans was $30.9 million compared to $33.5 million at June 30th.

The change is primarily due to purchased loan payoffs and sales in the quarter offset by $3.7 million of purchases. Purchased loan payoffs generated $2.8 million of transactional income. Approximately 86% of the $30.9 million discount is expected to be realize over the remaining life of the purchased loans through scheduled accretion.

The non-accretible portion of the discount represents contractual cash flows that in our estimation may not be collectable. Turning to slide eight. We provide detail on returns from the LASG portfolio.

For the quarter, the purchased portfolio generated a total return of 12.28%, reflecting transactional income of $2.8 million from unscheduled loan payoffs, which was above the average of $2.5 million of transactional income for the prior four quarters.

As we have discussed in the past, transactional income realized on the purchase portfolio as well as the amount of loans purchased, may not be consistent from quarter to quarter. The LASG originated portfolio generated returns of 6.35% in the quarter. Turning to slide nine.

We provide statistics on the LASG loan portfolio as of September 30th, of significance. As noted in the chart in the top right, the purchased loan portfolio has a net investment basis of 88%, which is consistent with the linked quarter.

On an invested basis, the average loan size is approximately 760,000, and 85% of the portfolio consists of loans with an investment size less than $6 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 22% and 18% of the portfolio, respectively. Our collateral is geographically diverse with collateral in 38 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, 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 $7.8 million of SBA loans, of which $5.9 million were fully funded in the quarter.

Additionally, the Company sold $9.1 million of the guaranteed portion of loans in the secondary market, of which $3.1 million were originated in the current quarter and $6 million were originated or purchased in prior quarters. For the quarter ending September 30th, the net gain on sale including the capitalized servicing asset was $1 million.

On slide 11, we show detail of the SBA sale pipeline as it stands at September 30th. 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 $2.4 million of SBA loans held for sale, which represents the guaranteed portion of the SBA loans, which have closed and are fully funded as of quarter-end. Next, you will note an additional $5.7 million in the guaranteed portion of SBA loans that have closed as of September 30th, but were not fully funded.

The $5.7 million consists of 7 loans with an average guaranteed balance of approximately $800,000. These 7 loans have a combined balance of $1.5 million yet to be dispersed. In total, this represents an additional $8.1 million of future SBA guarantee loan sales before considering any loan production in the second quarter of fiscal 2018.

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 slide 12 to provide more information on our financial results. Net income for the quarter was $3.8 million or $0.42 per share.

Diluted earnings per share were down $0.03 from the quarter ending June 30, 2017, which I will refer to as a linked quarter and up $0.23 from the comparable fiscal year 2017 quarter.

These results were largely driven by purchased loan transactional interest income of $2.8 million in the current quarter compared to $3.5 million in the linked quarter and $1.3 million in the comparable fiscal year 2017 quarter, the gain on sale of SBA loans into the secondary market of $1 million in the current quarter compared to $1.9 million in the linked quarter and $700,000 in the comparable fiscal 2017 quarter and the benefit of our larger average balance sheet compared to the linked quarter in comparable fiscal year 2017 quarter.

Non-interest expense for the quarter decreased by approximately $700,000 compared to the linked quarter and increased by approximately $100,000 compared to the comparable fiscal year 2017 quarter.

The decrease in non-interest expense for the quarter compared to the linked quarter was as a result of increased incentive compensation recognized in the linked quarter. Turning to slide 13.

Over the past year, we have seen net loan portfolio growth of approximately $38 million or $104 million, excluding the broker-dealer loan payoffs of $48 million and the sale of the Community Bank commercial loan portfolio of $18.3 million in Q3 of last fiscal year.

The majority of the growth over the last 12 months comes from our LASG portfolio with approximately $339 million of purchases and originations.

As shown in the chart, in the trailing 12-month period since September 30, 2016, we have closed approximately $74.6 million of SBA loans and we have sold approximately $56 million of the guaranteed portion of these loans into the secondary market.

While bank-wide loan production has been strong over the trailing 12 months, increases have been significantly offset by pay-downs and amortization in the LASG purchased and originated portfolios totaled approximately $211 million over the trailing 12 months and the pay-off 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 $128 million or 29% since September 30, 2016.

In the current quarter, loans generated by LASG totaled $44.5 million, which consisted of $3.7 million of purchased loans at an average price of 84.6% of unpaid principal balance and $40.8 million of originated loans. Turning to funding on slide 15. We have had net deposit growth of approximately $58 million or 7% over the trailing 12 months period.

Over the past year, the growth is primarily due to an increase in our money market products.

The growth in these products has strengthened our overall deposit mix, where non-maturity accounts, which include money market, savings and demand deposit products, represent approximately 65% of total deposits as of September 30, 2017 as compared to approximately 60% of total deposits in the comparable prior year quarter ended September 30, 2016.

Slide 16 shows trends and the main components of our income. Compared to the linked quarter, base net interest income increased slightly due to higher average balances in the LASG portfolio and total net interest income before loss provision is decreased due to lower transactional interest income from the purchased portfolio.

The purchased portfolio had a yield of 12.28% in the current quarter, compared to 13.64% in the linked quarter.

Compared to the comparable fiscal year 2017 quarter, the increase in net interest income become loan loss provision is largely attributable to an increase in base net interest income due to higher average balances in the LASG originated portfolio and higher transactional interest income from the purchased portfolio.

The purchased portfolio had a yield of 12.28% in the current quarter compared to 10.04% in the comparable -- or comparable prior quarter ended September 30, 2016. This was partially offset by higher average balance and yield in our deposit portfolio compared to the prior year quarter ended September 30, 2016.

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, total revenue has decreased by approximately $1.3 million, while non-interest expense has decreased by $700,000.

The decrease in revenue is primarily due to decrease in purchased loan transactional interest income and decreased gains from sale of SBA loans. The decrease in non-interest expense compared to the linked quarter is primarily due to increased incentive compensation recognized in the linked quarter.

Compared to the prior year quarter ended September 30, 2016, total revenue has increased by approximately $3.7 million while non-interest expense has only increased by $100,000.

The increase in revenue was primarily due to an increase in purchased loan, transactional interest income and higher base net interest income, as described on the previous slide.

The increase in revenue in the current quarter while maintaining a consistent level of non-interest expense, has helped us achieved an annualized return on equity of 12%, a return on assets of 1.4%, and efficiency ratio of 57.1% in the current quarter.

Slide 18 shows originations and the associated gains in the residential portfolio over the past five quarters. These gains continue 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 and our net interest margin, which was 5.13% as compared to 5.55% in the linked quarter and 4.07% in the comparable prior year quarter.

As previously discussed, the increase in net interest margin compared to the comparable prior year quarter is largely due to an increase in the higher base net interest income and higher transactional interest income from the purchased 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, non-performing loans to total loans has increased to 2.19% from 1.79% and non-performing assets to total assets has increased to 1.78% from 1.37%.

The increase compared to June 30th is primarily due to the addition of two loan relationships with an aggregate principal balance of $3.4 million. As of September 30th, the two loan relationships are well-secured and primarily consist of loans less than 30 days past due or loans recently acquired.

In the top right hand corner, classified commercial loans were $9.6 million as of September 30th, which increased from $7 million in the linked quarter.

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 that past several years and were 3 basis points in the quarter. That concludes our prepared remarks. At this time, we would like to open up the call to Q&A..

[Operator Instructions] Our first question comes from Alex Twerdahl with Sandler O’Neill. Your line is now open..

Good morning..

Good morning..

This is Jeff Kitsis on for Alex this morning. To start off with, I want to touch on NPLs.

Could you give us some color on what contributed to the increase this quarter?.

Yes. Jeff, as I mentioned earlier, it’s largely attributable to two loan relationships with an aggregate principal balance of $3.4 million. So, as described before, primarily loans that consist -- primarily consists of loans less than 30 days past due or loans that we recently acquired..

Got it, thanks.

And also, I was wondering if you could give us an update on how the pipelines look at the end of September going into next quarter?.

Let me talk about -- this is Rick, three business lines. First on, our originated loans pipeline is really strong. We had $41 million of originations in the quarter ending September 30th, there were some number of transactions that just closed that rolled into the following quarter. We are seeing a lot of traction in our origination business.

In the purchase business, summer quarter was slow. If you look on page six, slide six, it was also slow -- more but slower in the first quarter of 2017 where we did $14 million as compared to $46 million in the second quarter, then down $8 million and up to $45 million. It’s a very lumpy business.

We -- in our experience, as I said, summer has been slow.

From what we can tell, this far into the quarter, the pipeline for purchased loans is picking up significantly, just so none of us get in trouble, I would point to that gigantic forward-looking statement, we have that going and underwrite them and bid them and win, but we are starting to see more action, which is not surprising as you get to the fourth quarter and the calendar year.

Again, looking at slide number six, you can see that was a significant quarter for us and FY17. Finally, with regard to the SBA loans, we did a little bit less than $8 million in the quarter compared to about $15 million last year.

One of the things and I believe we’ve talked about this in prior call, we are in the process of changing our business model for originating SBA loans. We started with a BDO model, business development officer model with BDOs in different cities around the country working locally and generating business.

And after sometime, we concluded that that didn’t provide for us the best franchise value for the bank.

And over the last, call it four or five months, we’ve switched to an inside sales model where all our business development officers are now paid salary and bonus, not on commission, they mostly work -- although one of them works in Boston and is part of our team. And we have now -- and we have them on the calls talking to brokers continually.

And so, there is somewhat of a building process here and somewhat of a -- the summer is a slower quarter for us as well. And so, I’m reasonably optimistic, again referring you to the giant forward-looking statement that, as the quarters proceed, that volume will increase..

Got it. Thank you. That’s helpful color. And then, last thing I want to ask about is, what were the moving parts in the LASG originations? So, specifically a breakdown of loans to non-bank lenders versus SBA 504 versus other categories.

I understand that slide nine touches on this to some extent but I was wondering if you could add anything else to that?.

We don’t have that; I’m getting past the note. This is like a big production here we have, I got a note. It’s about half were to non-bank lenders and half were loans that were directly to the borrower..

Thank you..

And just to put that in context, I’m speaking some from memory here. So, let’s say, this will be more directionally helpful than to the penny accurate. Last year, out of the $250 million we originated, about a $160 million were to non-bank lenders. And so, that’s a little bit more than 60%. And so, this quarter, it was 50%; that can obviously change.

And we have a fair amount in the pipeline setting up loan facilities with non-bank lenders. And we can provide -- it’s a hopeful point, Jeff, on our next call, we will provide a little bit more granularity on the composition of those loans. So, thank you for that suggestion..

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

Thank you. And for those on the call, thank you for listening and supporting us. For those who will listen to this call later, thank you as well, we appreciate it.

And we endeavor every quarter to provide better financial information and more visibility into the Company on matters that we think are important to you and matters that you bring to our attention. And with that, I wish you all a very good day. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day..