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NBN > SEC Filings for NBN > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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

Form 10-Q for NORTHEAST BANCORP /ME/


14-Nov-2013

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, 2013, 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 continuing weakness 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, 2013 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"), which has ten banking branches. The Bank, which was originally organized in 1872 as a Maine-chartered mutual savings bank, 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, 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. On June 28, 2013, the Federal Reserve approved the amendment of the commitment to hold commercial real estate loans to within 300% of total risk-based capital to exclude owner-occupied commercial real estate loans. All other commitments made to the Federal Reserve in connection with the merger remain unchanged. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve. The Company's compliance ratios at September 30, 2013 follow.


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Condition                                               Ratios at September 30, 2013
(i)  Tier 1 leverage ratio                                                     17.23 %
(ii)  Total risk-based capital ratio                                           25.63 %
(iii) Ratio of purchased loans to total loans                                  36.29 %
(iv) Ratio of loans to core deposits                                           93.04 %
(v)  Ratio of commercial real estate loans to total
risk-based capital                                                            171.30 %

As of September 30, 2013, the Company, on a consolidated basis, had total assets of $725.0 million, total deposits of $532.1 million, and stockholders' equity of $113.8 million. The Company gathers retail deposits through its banking offices in Maine and its online affinity deposit program, ableBanking; originates loans through the Bank's Community Banking Division; and purchases and originates commercial loans through the Bank's Loan Acquisition and Servicing Group ("LASG"). The Community Banking Division, with ten full-service branches and six loan production offices, from the Bank's headquarters in Lewiston, Maine. The Company operates ableBanking and the LASG from its offices in Boston, Massachusetts.

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

Strategy

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 commercial loan portfolio. The Company's LASG purchases performing commercial real estate loans, on a nationwide basis, typically at a discount from their outstanding principal balances, producing yields higher than those normally achieved on our originated loan portfolio. 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. To a lesser extent, this group also originates, on a nationwide basis, commercial real estate and commercial business loans.

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

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, 2013 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 three months ended September 30, 2013.


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Overview

Net income was $320 thousand for the quarter ended September 30, 2013, compared to $1.0 million for the quarter ended September 30, 2012. Net income available to common stockholders was $320 thousand, or $0.03 per diluted common share, for the quarter ended September 30, 2013, compared to $936 thousand, or $0.09 per diluted common share, for the quarter ended September 30, 2012. The current quarter included $554 thousand of expenses related to severance and an insurance recovery of $250 thousand related to a lawsuit settled in the previous quarter. Excluding these items, which the Company considers to be non-core, net operating earnings were $521 thousand, or $0.05 per diluted common share.

Net interest income increased by $1.0 million, or 16.5%, to $7.1 million for the quarter ended September 30, 2013, compared to the quarter ended September 30, 2012, primarily due to growth in the purchased loan portfolio. This result is evident in the net interest margin, which increased to 4.24% for the quarter ended September 30, 2013, compared to 3.80% for the quarter ended September 30, 2012.

Noninterest income decreased by $1.2 million for the quarter ended September 30, 2013, compared to the quarter ended September 30, 2012, principally due to the lower securities gains of $792 thousand and a decrease in gains on sales of real estate owned of $489 thousand.

Noninterest expense increased by $1.0 million for the quarter ended September 30, 2013, compared to the quarter ended September 30, 2012, principally due to an increase of $1.0 million in salaries and employee benefits resulting from severance of $554 thousand and increased headcount in the LASG and mortgage lending division.

Financial Condition

Overview

Total assets increased by $54.3 million, or 8.1%, to $725.0 million at September 30, 2013, compared to June 30, 2013. The principal components of the change in the balance sheet were as follows:

The loan portfolio grew by $48.1 million, or 11.1%, compared to June 30, 2013, principally due to net growth of $35.4 million in commercial loans purchased or originated by the LASG and $12.7 million of net growth in loans originated by the Community Banking Division. Growth in the Community Banking Division during the quarter was principally due to $27.7 million of residential loan originations held in portfolio to increase the Bank's loan purchasing capacity under regulatory conditions. As has been discussed in the Company's prior SEC filings, the Company made certain commitments to the Board of Governors of the Federal Reserve System in connection with the merger of FHB Formation LLC with and into the Company in December 2010. The Company's loan purchase capacity under these conditions follows.

Basis for                                                          Purchased Loan Capacity at
Regulatory Condition                  Condition                        September 30, 2013
                                                                     (Dollars in millions)
Total Loans             Purchased loans may not exceed 40% of
                        total loans                               $                       30.2
Regulatory Capital      Commercial real estate loans may not
                        exceed 300% of total risk-based
                        capital                                   $                      157.3

An overview of the LASG portfolio follows.

                                                  Three Months Ended September 30,
                                           2013                                       2012
                         Purchased     Originated     Total LASG    Purchased     Originated     Total LASG
                                                       (Dollars in thousands)
Purchased or
originated during the
period:
Unpaid principal
balance                  $   18,331   $     26,426   $     44,757   $   42,273   $      8,799   $     51,072
Net investment basis         16,348         26,426         42,774       31,349          8,799         40,148

Totals as of period
end:
Unpaid principal
balance                  $  214,159   $     63,588   $    277,747   $  133,510   $     12,594   $    146,104
Net investment basis        177,412         63,618        241,030      107,440         12,594        120,034

Returns during the
period:
Yield                         10.16 %         5.71 %         9.21 %      15.13 %         9.54 %        14.58 %
Total Return (1)              10.62 %         5.71 %         9.57 %      17.41 %         9.54 %        16.63 %



(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.

Deposits and borrowings increased by $47.4 million and $6.2 million, respectively, from June 30, 2013. Growth in each was tied to the Company's strategy for funding its loan growth, and in particular to mitigate the interest rate risk associated with the increase in its residential loan portfolio. To date, the Company has duration-matched such growth with a mix of term funding raised through deposit listing services and Federal Home Loan Bank advances, the latter in conjunction with interest rate swaps.


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Assets

Cash, Short-term Investments and Securities

Cash and short-term investments were $77.4 million as of September 30, 2013, an increase of $11.4 million, or 17.3%, from $65.9 million at June 30, 2013. This increase is principally the result of the following: (i) growth in deposits and borrowings of $47.5 million and $6.2 million, respectively, (ii) net decreases in securities and loans held for sale of $3.4 million and $3.2 million, respectively, offset by (iii) an increase in portfolio loans of $48.1 million.

Available-for-sale securities, consisting of securities issued by government agencies and government-sponsored enterprises, totaled $118.2 million as of September 30, 2013. At September 30, 2013, securities with a fair value of $42.9 million were pledged for outstanding borrowings.

Loans

Total loans, excluding loans held for sale, amounted to $483.5 million as of September 30, 2013, an increase of $48.1 million, or 11.1%, from $435.4 million as of June 30, 2013. The increase consisted of net growth in loans purchased or originated by the LASG of $35.4 million and net growth in loans originated by the Community Banking Division of $12.7 million. The composition of the Company's loan portfolio follows.

                                                      September 30, 2013
                                        Community                                  Percent
                                    Banking Division       LASG         Total      of Total
                                                    (Dollars in thousands)
Originated loans:
Residential real estate             $         110,570    $     150    $ 110,720       22.90 %
Home equity                                    33,255            -       33,255        6.88 %
Commercial real estate:
non-owner occupied                             47,137       32,212       79,349       16.41 %
Commercial real estate: owner
occupied                                       27,244        2,733       29,977        6.20 %
Construction                                       42            -           42        0.01 %
Commercial business                            11,697       28,523       40,220        8.32 %
Consumer                                       12,511            -       12,511        2.59 %
Subtotal                                      242,456       63,618      306,074       63.31 %
Purchased loans:
Residential real estate                             -        2,645        2,645        0.55 %
Commercial business                                 -           21           21        0.00 %
Commercial real estate:
non-owner occupied                                  -      127,995      127,995       26.47 %
Commercial real estate: owner
occupied                                            -       46,751       46,751        9.67 %
Subtotal                                            -      177,412      177,412       36.69 %
Total                               $         242,456    $ 241,030    $ 483,486      100.00 %




                                                          June 30, 2013
                                        Community                                  Percent of
                                    Banking Division       LASG         Total        Total
                                                     (Dollars in thousands)
Originated loans:
Residential real estate             $          89,584    $     150    $  89,734         20.61 %
Home equity                                    35,389            -       35,389          8.13 %
Commercial real estate:
non-owner occupied                             48,428       18,126       66,554         18.29 %
Commercial real estate: owner
occupied                                       30,487        3,361       33,848          7.77 %
Construction                                       42            -           42          0.01 %
Commercial business                            12,444       17,242       29,686          6.82 %
Consumer                                       13,337            -       13,337          3.06 %
Subtotal                                      229,711       38,879      268,590         61.69 %
Purchased loans:
Residential real estate                             -        2,706        2,706          0.62 %
Commercial business                                 -           34           34          0.01 %
Commercial real estate:
non-owner occupied                                  -      125,496      125,496         28.83 %
Commercial real estate: owner
occupied                                            -       38,550       38,550          8.85 %
Subtotal                                            -      166,786      166,786         38.31 %
Total                               $         229,711    $ 205,665    $ 435,376        100.00 %

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


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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 status 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 September 30, 2013 and June 30, 2013. The net increase in nonperforming assets during the three months ended September 30, 2013 was principally due to two purchased loan relationships. 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 September 30, 2013
                                             Community Banking
                                                 Division                LASG                Total
                                                              (Dollars in thousands)
Loans:
Residential real estate                     $             1,795     $           150     $         1,945
Home equity                                                 229                   -                 229
Commercial real estate                                      471               2,553               3,024
Construction                                                  -                   -                   -
Commercial business                                          62                   -                  62
Consumer                                                    259                   -                 259
Subtotal                                                  2,816               2,703               5,519
Real estate owned and other repossessed
collateral                                                2,383               1,030               3,413
Total                                       $             5,199     $         3,733     $         8,932

Ratio of nonperforming loans to total
loans                                                                                              1.15 %
Ratio of nonperforming assets to total
assets                                                                                             1.23 %
Ratio of loans past due to total loans                                                             1.38 %
Nonperforming loans that are current                                                    $         1,079
Commercial loans risk rated substandard
or worse                                                                                $         3,722
Troubled debt restructurings:
On accrual status                                                                       $         2,781
On nonaccrual status                                                                    $         1,308




                                                   Non-Performing Assets at June 30, 2013
                                             Community Banking
                                                 Division              LASG             Total
                                                           (Dollars in thousands)
Loans:
Residential real estate                     $             2,346    $           -    $       2,346
Home equity                                                 334                -              334
Commercial real estate                                      473            1,457            1,930
Construction                                                  -                -                -
Commercial business                                         110                -              110
Consumer                                                    136                -              136
Subtotal                                                  3,399            1,457            4,856
Real estate owned and other repossessed
collateral                                                2,134                -            2,134
Total                                       $             5,533    $       1,457    $       6,990

Ratio of nonperforming loans to total
loans                                                                                        1.12 %
Ratio of nonperforming assets to total
assets                                                                                       1.04 %
Ratio of loans past due to total loans                                                       1.68 %
Nonperforming loans that are current                                                $         887
Commercial loans risk rated substandard
or worse                                                                            $       2,890
Troubled debt restructurings:
On accrual status                                                                   $       2,632
Nonaccrual status                                                                   $       1,110


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Allowance for Loan Losses

. . .

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