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NBN > SEC Filings for NBN > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for NORTHEAST BANCORP /ME/ | Request a Trial to NEW EDGAR Online Pro



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in Northeast Bancorp's Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the Securities and Exchange Commission.

A Note about Forward Looking Statements

This report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to the Company's financial condition, prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy, simulation of changes in interest rates, capital spending and finance sources and revenue sources. These statements relate to expectations concerning matters that are not historical facts. Accordingly, statements that are based on management's projections, estimates, assumptions, and judgments constitute forward-looking statements. These forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology such as "believe", "expect", "estimate", "anticipate", "continue", "plan", "approximately", "intend", "objective", "goal", "project", or other similar terms or variations on those terms, or the future or conditional verbs such as "will", "may", "should", "could", and "would". Although the Company believes that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, the Company cannot give you any assurance that its expectations will, in fact, occur or that its estimates or assumptions will be correct. The Company cautions you that actual results could differ materially from those expressed or implied by such forward-looking statements as a result of, among other factors, changes in interest rates and real estate values; competitive pressures from other financial institutions; the effects of a continuing deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers' ability to service and repay the Company's loans; changes in loan defaults and charge-off rates; changes in the value of securities and other assets, adequacy of loan loss reserves, or deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; the risk that the Company may not be successful in the implementation of its business strategy; the risk that intangibles recorded in the Company's financial statements will become impaired; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012 as updated in the Company's Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this report and the Company does not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Description of Business and Strategy

Business Overview

Northeast Bancorp ("we," "our," "us," "Northeast" or the "Company"), a Maine corporation chartered in April 1987, is a bank holding company registered with the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended. The Company's primary subsidiary and principal asset is its wholly-owned banking subsidiary, Northeast Bank (the "Bank" or "Northeast Bank"). The Bank, which was originally organized in 1872 as a Maine-chartered mutual savings bank and was formerly known as Bethel Savings Bank F.S.B., is a Maine state-chartered bank and a member of the Federal Reserve System. As such, the Company and the Bank are currently subject to the regulatory oversight of the Federal Reserve and the State of Maine Bureau of Financial Institutions (the "Bureau").

On December 29, 2010, the merger of the Company and FHB Formation LLC, a Delaware limited liability company ("FHB"), was consummated. As a result of the merger, the surviving company received a capital contribution of $16.2 million (in addition to the approximately $13.1 million in cash consideration paid to former shareholders), and the former members of FHB collectively acquired approximately 60% of the Company's outstanding common stock. The Company applied the acquisition method of accounting, as described in Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805") to the merger, which represents an acquisition by FHB of Northeast, with Northeast as the surviving company.

In connection with the transaction, as part of the regulatory approval process, the Company and the Bank made certain commitments to the Federal Reserve and the Bureau, the most significant of which are (i) to maintain a Tier 1 leverage ratio of at least 10%, (ii) to maintain a total risk-based capital ratio of at least 15%, (iii) to limit purchased loans to 40% of total loans, (iv) to fund 100% of the Company's loans with core deposits (defined as non-maturity deposits and non-brokered insured time deposits), and (v) to hold commercial real estate loans (including owner-occupied commercial real estate) to within 300% of total risk-based capital. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve and the Bureau.

As of March 31, 2013, the Company, on a consolidated basis, had total assets of $699.6 million, total deposits of $505.6 million, and stockholders' equity of $115.7 million. The Company gathers retail deposits through its Community Banking Division's banking offices in Maine and through its online affinity deposit program, ableBanking; originates loans through its Community Banking Division; and purchases primarily performing commercial real estate loans at a discount and, to a lesser extent, originates commercial loans through the

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Bank's Loan Acquisition and Servicing Group ("LASG"). The Company operates the Community Banking Division from Lewiston, Maine, which operates ten full-service branches, some with investment centers, and five loan production offices that serve individuals and businesses located in western and south-central Maine, southern New Hampshire, and southeastern Massachusetts. The Company operates ableBanking and the LASG from its offices in Boston, Massachusetts.

In August of 2011, the Company sold the customer lists and certain other assets of its insurance agency division, Northeast Bank Insurance Group ("NBIG"). The operations of NBIG have been reported as discontinued operations in the consolidated financial statements and in the discussion herein.

In May of 2012, the Company raised net proceeds of $52.7 million through the sale of shares of its common stock.

During the quarter ended December 31, 2012, the Company redeemed, at par value, all shares of preferred stock issued to the U.S. Department of the Treasury (the "UST") under the Troubled Asset Relief Program ("TARP"). The Company also repurchased the warrant for 67,958 shares of common stock issued to the UST in connection with TARP for $95 thousand during the quarter ended December 31, 2012.

Unless the context otherwise requires, references herein to the Company include the Company and its subsidiary, the Bank, on a consolidated basis.


The Company's goal is to prudently grow its franchise, while maintaining sound operations and risk management, by implementing the following strategies:

Measured growth of the purchased loan portfolio. The LASG purchases primarily performing commercial real estate loans, on a nationwide basis, at a discount from their outstanding principal balances, producing yields higher than those normally achieved on our originated loan portfolio. To a lesser extent, the LASG originates commercial loans opportunistically on a nationwide basis.

Loans are purchased on a nationwide basis from a variety of sources, including banks, insurance companies, investment funds and government agencies, either directly or indirectly through a broker. We expect that loans purchased by the LASG will, subject to compliance with applicable regulatory commitments, represent an increasing percentage of our total loan portfolio in the future.

Focus on core deposits. The Bank offers a full line of deposit products to customers in the Community Banking Division's market area through its ten-branch network. In addition, we launched our online affinity deposit program, ableBanking, a division of Northeast Bank, to the public in the quarter ended June 30, 2012. One of the Company's strategic goals is for ableBanking to provide an additional channel through which to raise core deposits to fund the acquisition of loans by the LASG.

Continuing our community banking tradition. The Community Banking Division retains a high degree of local autonomy and operational flexibility to better serve its customers. The Community Banking Division's focus on sales and service is expected to allow us to attract and retain core deposits in support of balance sheet growth, and to continue to generate new loans, particularly through the efforts of the residential mortgage origination team.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. The reader is encouraged to review each of the policies included in Form 10-K for the year ended June 30, 2012 to gain a better understanding of how Northeast's financial performance is measured and reported. There has been no material change in critical accounting policies during the nine months ended March 31, 2013.

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Net income was $1.7 million for the quarter ended March 31, 2013, compared to $168 thousand for the quarter ended March 31, 2012. Net income for the nine months ended March 31, 2013 was $4.2 million, compared to $1.1 million for the nine months ended March 31, 2012. Net income for the nine months ended March 31, 2012 included $1.1 million from discontinued operations.

Net income available to common stockholders was $1.7 million, or $0.16 per diluted common share, for the quarter ended March 31, 2013, compared to $70 thousand, or $0.02 per diluted common share, for the quarter ended March 31, 2012. Net income available to common stockholders for the nine months ended March 31, 2013 was $3.9 million, or $0.37 per diluted common share, compared to $821 thousand, or $0.23 per diluted common share, for the nine months ended March 31, 2012. Weighted average shares outstanding increased to 10.4 million shares in each of the current year periods from 3.5 million shares in the Fiscal 2012 periods principally as a result of the Company's public offering of common stock in May 2012.

Net interest and dividend income increased by $3.5 million, or 73.6%, to $8.3 million for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012, principally due to growth in the purchased loan portfolio. This result is evident in the net interest margin, which increased to 5.07% for the quarter ended March 31, 2013, compared to 3.44% for the quarter ended March 31, 2012.

Noninterest income increased by $653 thousand, or 23.8%, to 3.4 million for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012, principally due to gains of $1.2 million from sales of LASG-purchased loans partially offset by lower security gains of $731 thousand.

Noninterest expense increased by $1.6 million, or 22.1%, to $8.8 million for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012, principally due to an increase of $1.2 million in employee compensation resulting from higher incentive compensation and staffing levels.

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Financial Condition


Total assets increased by $30.4 million, or 4.5%, to $699.6 million at March 31, 2013, compared to June 30, 2012. The principal components of the change in the balance sheet were as follows:

1. The loan portfolio grew by $24.1 million, or 6.8%, principally due to net growth of $58.9 million in commercial loans purchased or originated by the LASG, offset by net amortization and payoffs of $34.8 million in the Community Banking Division loan portfolio.

2. Deposits increased by $83.4 million, or 19.8%, due primarily to a $68.0 million increase in deposits raised through ableBanking. At March 31, 2013, ableBanking deposits stood at $70.8 million, consisting of $37.2 million of time deposits and $33.5 million of money market accounts.

3. Borrowings decreased by $49.9 million, or 41.2%, as a result of the repayment at maturity of structured repurchase agreements and FHLB advances.

4. Stockholders' equity decreased by $3.4 million, or 2.9%, primarily due to the redemption of TARP preferred stock and warrants totaling $4.3 million in the quarter ended December 31, 2012.


Cash, Short-term Investments and Securities

Cash and short-term investments were $142.6 million as of March 31, 2013, an increase of $14.3 million, or 11.1%, from $128.3 million at June 30, 2012. This increase is principally due to deposit growth of $83.4 million, offset by the result of the following: (i) net loan growth of $24.1 million, (ii) net reduction in borrowed funds of $49.9 million, and (iii) a net reduction in stockholders' equity of $3.4 million, principally due to the redemption of TARP preferred stock and warrants.

Available-for-sale securities, consisting of securities issued by government agencies and government-sponsored enterprises, totaled $128.5 million as of March 31, 2013. At March 31, 2013, securities with a fair value of $50.2 million were pledged for outstanding borrowings.

Loan Portfolio

Total loans, excluding loans held for sale, amounted to $380.3 million as of March 31, 2013, an increase of $24.1 million, or 6.8%, from $356.3 million as of June 30, 2012. The increase consisted of growth in the purchased loan portfolio of $46.0 million, partially offset by a $21.9 million decrease in originated loans. The net decrease in originated loans consisted of a $34.8 million decrease in loans originated by the Community Banking Division and a net increase of $12.9 million of LASG-originated commercial loans. The decrease in Community Banking Division loans was principally due to net runoff in residential and commercial real estate loan portfolios.

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The composition of the Company's loan portfolio follows.

                                                 March 31, 2013
                          Banking Division      LASG        Total     Percent of Total
                                             (Dollars in thousands)
Originated loans:
Residential real estate   $          82,058   $     150   $  82,208              21.62 %
Home equity                          37,848           0      37,848               9.95 %
Commercial real estate               84,812      12,364      97,176              25.56 %
Construction                             42           0          42               0.01 %
Commercial business                  13,070       5,390      18,460               4.85 %
Consumer                             14,075           0      14,075               3.70 %
Subtotal                            231,905      17,904     249,809              65.69 %
Purchased loans:
Residential real estate                   0       4,238       4,238               1.11 %
Commercial real estate                    0     126,264     126,264              33.20 %
Subtotal                                  0     130,502     130,502              34.31 %
Total                     $         231,905   $ 148,406   $ 380,311             100.00 %

                                                 June 30, 2012
                          Banking Division      LASG       Total     Percent of Total
                                            (Dollars in thousands)
Originated loans:
Residential real estate   $          90,793   $    151   $  90,944              25.53 %
Home equity                          42,696          0      42,696              11.98 %
Commercial real estate               97,146      3,050     100,196              28.12 %
Construction                          1,187          0       1,187               0.33 %
Commercial business                  17,732      1,880      19,612               5.51 %
Consumer                             17,149          0      17,149               4.81 %
Subtotal                            266,703      5,081     271,784              76.28 %
Purchased loans:
Residential real estate                   0      3,931       3,931               1.10 %
Commercial real estate                    0     80,539      80,539              22.62 %
Subtotal                                  0     84,470      84,470              23.72 %
Total                     $         266,703   $ 89,551   $ 356,254             100.00 %

Compared to the quarter ended December 31, 2012, the Bank's LASG loan portfolio declined $1.3 million, reflecting purchases and originations of $11.3 million and $2.8 million, respectively, offset by loan payoffs and asset sales totaling $15.4 million. Loan payoffs and asset sales during the quarter ended March 31, 2013 resulted in $4.1 million of transactional income, compared to $1.9 million in the quarter ended December 31, 2012 and $493 thousand in the quarter ended March 31, 2012.

Loan purchases by the LASG are subject to two regulatory conditions, which are summarized below, together with the remaining purchasing capacity available under each of these conditions:

Basis for Regulatory                                              Remaining Purchased Loan
Condition                            Condition                   Capacity at March 31, 2013
                                                                   (Dollars in millions)
                        Purchased loans may not exceed 40%
Total Loans             of total loans.                         $                       41.2
Regulatory Capital      Commercial real estate loans may not
                        exceed 300% of total risk-based
                        capital.                                $                      141.7

To increase its capacity under the "Total Loans" regulatory condition, the Company is currently holding in its portfolio, as necessary and on a duration-matched basis, residential fixed and adjustable rate loans that would otherwise be sold in the secondary market. The Company estimates that it will retain in portfolio approximately 75% of its future quarterly residential mortgage production. Total mortgage loan production over the past four quarters has averaged $36 million.

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An overview of the LASG portfolio follows:

                                                               LASG Portfolio Overview
                                   Three Months Ended March 31, 2013            Nine Months Ended March 31, 2013
                                 Purchased      Originated       LASG       Purchased      Originated     Total LASG
                                                               (Dollars in thousands)
Purchased or originated
during the period:
Unpaid principal balance        $     13,971    $     2,800    $  16,771   $    103,539    $    15,625   $    119,164
Net investment basis                  11,340          2,827       14,167         75,553         15,652         91,205

Totals as of period end:
Unpaid principal balance                                                   $    166,360    $    17,871   $    184,231
Net investment basis                                                            130,502         17,904        148,406

Returns during the period:
Yield                                  17.76 %         9.43 %      16.84 %        15.52 %         9.55 %        14.89 %
Total Return (1)                       22.02 %         9.43 %      20.64 %        18.66 %         9.55 %        17.70 %

(1) The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, and other noninterest income recorded during the period divided by the average invested balance, on an annualized basis.

Classification of Assets

Loans are classified as non-performing when 90 days past due, unless a loan is well-secured and in process of collection. Loans less than 90 days past due, for which collection of principal or interest is considered doubtful, also may be designated as non-performing. In both situations, accrual of interest ceases. The Company typically maintains such loans as non-performing until the respective borrowers have demonstrated a sustained period of payment performance.

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring ("TDR"). Concessionary modifications may include adjustments to interest rates, extensions of maturity, or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. Nonaccrual loans that are restructured generally remain on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. If the borrower's ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a nonaccrual loan. Loans classified as TDRs remain classified as such until the loan is paid off.

Other nonperforming assets include other real estate owned ("OREO") and other personal property securing loans repossessed by the Bank. The real estate and personal property collateral for commercial and consumer loans is written down to its estimated realizable value upon repossession. Revenues and expenses are recognized in the period when received or incurred on OREO and in substance foreclosures. Gains and losses on disposition are recognized in noninterest income.

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The following table details the Company's nonperforming assets and other credit quality indicators as of March 31, 2013 and June 30, 2012. The net increase in nonperforming assets during the nine months ended March 31, 2013 was principally due to a net increase in nonperforming LASG loans of $645 thousand. Management believes that, based on their carrying amounts, nonperforming assets are well secured based on the estimated fair value of underlying collateral.

                                                  Non-Performing Assets at March 31, 2013
                                             Banking Division         LASG             Total
                                                           (Dollars in thousands)
Residential real estate                     $            2,296    $           0    $       2,296
Home equity                                                405                0              405
Commercial real estate                                     631            1,700            2,331
Construction                                                 0                0                0
Commercial business                                        103                0              103
Consumer                                                   258                0              258
Subtotal                                                 3,693            1,700            5,393
Real estate owned and other repossessed
collateral                                               2,038                0            2,038
Total                                       $            5,731    $       1,700    $       7,431
Ratio of nonperforming loans to total
loans                                                                                       1.42 %
Ratio of nonperforming assets to total
assets                                                                                      1.06 %
Ratio of loans past due to total loans                                                      2.00 %
Nonperforming loans that are current                                               $         604
Commercial loans risk rated substandard
or worse                                                                           $       3,341

Troubled debt restructurings:
On accrual status                                                                  $       2,636
On nonaccrual status                                                               $         734

                                                   Non-Performing Assets at June 30, 2012
                                             Banking Division         LASG             Total
                                                           (Dollars in thousands)
Residential real estate                     $            3,090    $           0    $       3,090
Home equity                                                220                0              220
Commercial real estate                                     417            1,055            1,472
Construction                                                 0                0                0
Commercial business                                      1,008                0            1,008
Consumer                                                   324                0              324
Subtotal                                                 5,059            1,055            6,114
Real estate owned and other repossessed
collateral                                                 834                0              834
Total                                       $            5,893    $       1,055    $       6,948
Ratio of nonperforming loans to total
. . .
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