Northeast Bank (NASDAQ:NBN) Q3 2020 Earnings Conference Call April 23, 2020 10:00 AM ET Company Participants Richard Wayne - President, CEO & Director Jean-Pierre Lapointe - CFO & Treasurer Conference Call Participants Alexander Twerdahl - Piper Sandler & Co. Operator Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2020 Third Quarter Earnings Results Conference Call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer; JP Lapointe, ...

Financial Data and Key Metrics Changes - For Q2 2020, the company reported a net income of $4.9 million, or $0.53 per diluted common share, with a return on average equity of 12.1% and a return on average assets of 1.7% [6][17] - The net interest margin for the quarter was 5.6%, reflecting a decrease from the linked quarter [47] - The company experienced a decrease in non-interest expense by $565,000 compared to the linked quarter, primarily due to lower sales and employee benefits expenses [18][37] Business Line Data and Key Metrics Changes - The LASG portfolio saw strong loan growth of $75.4 million, or 10% over the linked quarter, with total loans generated reaching a record $175.4 million [7][8] - The weighted average yield of LASG loans originated in the quarter was 7.4%, with 82% being variable loans [9] - The total return on purchased loans for the quarter was 10.2%, while the originated portfolio generated a return of 7.7% [14] Market Data and Key Metrics Changes - The company’s loan portfolio at the end of the quarter exceeded $1 billion, a significant increase from the average loan balance of $946 million in the second quarter [8] - The company’s deposits decreased by $47 million, or 5%, over the trailing 12-month period, but increased compared to the linked quarter to fund loan growth [31][32] Company Strategy and Development Direction - The company is focused on leveraging its capital effectively to support loan growth, with no shares repurchased in the last quarter [70][73] - Management emphasized the importance of monitoring market conditions and adjusting loan strategies accordingly, particularly in response to changes in regulations such as rent control in New York [66] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the stability of the portfolio despite an increase in non-performing loans, attributing it to specific loans rather than a broader economic issue [66][68] - The company anticipates that it will manage its delinquency levels effectively and maintain low charge-off rates [63][66] Other Important Information - The effective tax rate for the current quarter was 28.9%, slightly up from 28.7% in the linked quarter [21][27] - The company has seen a shift in focus away from SBA originations, impacting non-interest income [22][24] Q&A Session Summary Question: Concerns about the increase in non-performing loans - Management clarified that the increase in non-performing loans was primarily due to two specific loans and emphasized the importance of charge-offs over delinquency levels [57][66] Question: Inquiry about share buybacks - Management confirmed that no shares were purchased in the last quarter and reiterated their focus on leveraging capital for loan growth [70][73] Question: Clarification on past due loans percentage increase - Management acknowledged the increase in past due loans but reassured that the underlying loans are well-secured and expected to resolve without losses [68][66]

FY 2020 Q2 Investor Call Northeast BANK Forward-Looking Statement | --- | --- | |---------------------------------------------------------------------------------------------------------------------------- ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2019 Commission File Number: 1-14588 Northeast Bancorp | (Exact name of registrant as specified in its charter) | | | --- | --- | | Maine | 01-0425066 | | (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | | organization) | | | 500 Canal Stree ...

Part I. Financial Information This section covers unaudited financial statements, management's analysis, market risk, and internal controls [Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited consolidated financial statements for December 31, 2018, show increased total assets and net income, driven by loan portfolio growth and higher net interest income [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section presents the company's financial position, highlighting asset growth driven by the loan portfolio and increased shareholders' equity | Financial Metric | Dec 31, 2018 (in thousands) | June 30, 2018 (in thousands) | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$1,194,127** | **$1,157,736** | **+3.1%** | | Total Loans, Gross | $938,286 | $871,802 | +7.6% | | Total Deposits | $985,591 | $954,940 | +3.2% | | **Total Shareholders' Equity** | **$148,491** | **$138,430** | **+7.3%** | - The growth in total assets was primarily driven by a **7.6% increase** in the total loan portfolio, which grew from **$871.8 million to $938.3 million** between June 30, 2018, and December 31, 2018[8](index=8&type=chunk) [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) This section presents the company's financial performance, showing significant increases in net interest income and net income year-over-year | Metric (in thousands, except EPS) | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $15,643 | $12,457 | +25.6% | | Provision for Loan Losses | $101 | $437 | -76.9% | | **Net Income** | **$5,125** | **$3,304** | **+55.1%** | | **Diluted EPS** | **$0.56** | **$0.36** | **+55.6%** | | Metric (in thousands, except EPS) | Six Months Ended Dec 31, 2018 | Six Months Ended Dec 31, 2017 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $30,001 | $25,768 | +16.4% | | Provision for Loan Losses | $633 | $792 | -20.1% | | **Net Income** | **$9,659** | **$7,890** | **+22.4%** | | **Diluted EPS** | **$1.05** | **$0.86** | **+22.1%** | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section outlines comprehensive income, reflecting net income adjusted for other comprehensive gains or losses | Metric (in thousands) | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net Income | $5,125 | $3,304 | | Other Comprehensive (Loss) Income, net of tax | ($316) | ($68) | | **Comprehensive Income** | **$4,809** | **$3,236** | [Consolidated Statements of Changes in Shareholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) This section details changes in shareholders' equity, primarily driven by net income for the six-month period - Total shareholders' equity increased from **$138.4 million** at June 30, 2018, to **$148.5 million** at December 31, 2018. The increase was primarily driven by **net income of $9.7 million** for the six-month period[15](index=15&type=chunk)[16](index=16&type=chunk) [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section details cash flows, showing significant investing activities funded by deposits and operating cash | Cash Flow Activity (in thousands) | Six Months Ended Dec 31, 2018 | Six Months Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $5,766 | $1,008 | | Net Cash from Investing Activities | ($55,746) | $11,465 | | Net Cash from Financing Activities | $30,194 | ($47,533) | | **Net Decrease in Cash** | **($19,786)** | **($35,060)** | - The primary use of cash in investing activities for the six months ended Dec 31, 2018, was for loan purchases (**$84.1 million**) and net loan originations, significantly higher than the prior year period. This was funded by a net increase in deposits (**$30.7 million**) and cash from operations[18](index=18&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) This section provides detailed disclosures on the loan portfolio, allowance for loan losses, and a significant merger agreement - The loan portfolio is composed of originated loans (**$607.6 million**) and purchased loans (**$330.6 million**) as of December 31, 2018. Commercial real estate loans represent the largest segment at **$572.7 million**[50](index=50&type=chunk) - The allowance for loan losses increased to **$5.3 million** at December 31, 2018, from **$4.8 million** at June 30, 2018. The allowance as a percentage of total loans was **0.57%**[66](index=66&type=chunk)[196](index=196&type=chunk)[198](index=198&type=chunk) - On January 7, 2019, the Company entered into an Agreement and Plan of Merger to merge the parent holding company (Northeast Bancorp) into its wholly-owned subsidiary, Northeast Bank. The bank will become the surviving, publicly-traded entity[147](index=147&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses strong fiscal 2019 performance, driven by loan growth and increased net interest income, alongside a strategic corporate reorganization - The company's strategy focuses on three core areas: - Growing the national originated and purchased loan business through its Loan Acquisition and Servicing Group (LASG) - Expanding its national SBA loan origination business - Maintaining its community banking operations for local deposit gathering and lending[166](index=166&type=chunk)[167](index=167&type=chunk)[168](index=168&type=chunk) | Loan Portfolio Change (Six Months Ended Dec 31, 2018) | Balance (in thousands) | Change vs June 30, 2018 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | LASG Purchased | $330,643 | +$39,671 | +13.63% | | LASG Originated | $435,817 | +$38,454 | +9.68% | | SBA | $67,282 | +$7,126 | +11.85% | | Community Banking | $104,544 | -$18,767 | -15.22% | | **Total** | **$938,286** | **+$66,484** | **+7.63%** | - Nonperforming assets decreased to **$13.8 million** (**1.16% of total assets**) as of December 31, 2018, from **$14.2 million** (**1.23% of total assets**) as of June 30, 2018[191](index=191&type=chunk)[193](index=193&type=chunk) - The company and the bank are considered "well capitalized" under all regulatory definitions. The company's Tier 1 leverage ratio was **13.20%** and its total capital ratio was **19.42%** as of December 31, 2018[160](index=160&type=chunk)[219](index=219&type=chunk)[220](index=220&type=chunk) - A planned corporate reorganization will eliminate the bank holding company structure. If completed, regulatory commitments to the Federal Reserve will no longer apply, potentially permitting more growth in the bank's loan portfolio[162](index=162&type=chunk)[179](index=179&type=chunk) [Quantitative and Qualitative Disclosure about Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosure%20about%20Market%20Risk) This section is not applicable as the company qualifies as a smaller reporting company - Disclosure about market risk is not required for smaller reporting companies[258](index=258&type=chunk) [Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[261](index=261&type=chunk) - There were no changes in internal controls over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[262](index=262&type=chunk) Part II. Other Information This section includes disclosures on legal proceedings, risk factors, equity sales, defaults, and other relevant information [Legal Proceedings](index=46&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no material legal proceedings during the period - There are no legal proceedings to report[264](index=264&type=chunk) [Risk Factors](index=46&type=section&id=Item%201A.%20Risk%20Factors) This section is not applicable as the company qualifies as a smaller reporting company - Disclosure of risk factors is not required for smaller reporting companies[265](index=265&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company made no common stock repurchases during the quarter, as the repurchase program expired in October 2018 - No purchases of the company's common stock were made during the quarter. The stock repurchase program expired in October 2018[266](index=266&type=chunk) [Defaults Upon Senior Securities](index=46&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[267](index=267&type=chunk) [Mine Safety Disclosures](index=46&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company - Not applicable[268](index=268&type=chunk) [Other Information](index=46&type=section&id=Item%205.%20Other%20Information) The company reported no other information - None[269](index=269&type=chunk) [Exhibits](index=46&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including the merger agreement and required certifications - Key exhibits filed include the Agreement and Plan of Merger dated January 7, 2019, and certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act[271](index=271&type=chunk)