This
Management's Discussion and Analysis of Results of Operations and Financial
Condition presents a review of the results of operations for the three months
ended September 30, 2008 and 2007 and the financial condition at September 30,
2008 and June 30, 2008. This discussion and analysis is intended to assist in
understanding the results of operations and financial condition of Northeast
Bancorp and its wholly-owned subsidiary, Northeast Bank. Accordingly, this
section should be read in conjunction with the consolidated financial statements
and the related notes and other statistical information contained herein. See
our annual report on Form 10-K, for the fiscal year ended June 30, 2008, for
discussion of the critical accounting policies of the
Company. Certain amounts in the prior year have been reclassified to
conform to the current-year presentation.
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 and Section 21E of the Securities
Exchange Act of 1934, such as statements relating to our 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". In addition, the
Company may from time to time make such oral or written "forward-looking
statements" in future filings with the Securities and Exchange Commission
(including exhibits thereto), in its reports to shareholders, and in other
communications made by or with the approval of the Company.
Such
forward-looking statements reflect our current views and expectations based
largely on information currently available to our management, and on our current
expectations, assumptions, plans, estimates, judgments, and projections about
our business and our industry, and they involve inherent risks and
uncertainties. Although we believe 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, we cannot give you any assurance
that our expectations will, in fact, occur or that our estimates or assumptions
will be correct. We caution you that actual results could differ materially from
those expressed or implied by such forward-looking statements due to a variety
of factors, including, but not limited to, those related to the current
disruptions in the financial and credit markets, the economic environment,
particularly in the market areas in which the Company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, changes in technology, changes in the securities
markets, and the availability of and the costs associated with sources of
liquidity. Accordingly, investors and others are cautioned not to place undue
reliance on such forward-looking statements. For a more complete discussion of
certain risks and uncertainties affecting the Company, please see "Item 1.
Business - Forward-Looking Statements and Risk Factors" set forth in our Form
10-K for the fiscal year ended June 30, 2008 and the additional risk factors in
Part II of this 10-Q. These forward-looking statements speak only as of the
date of this report and we do 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.
Overview
of Operations
This
Overview is intended to provide a context for the following Management's
Discussion and Analysis of the Results of Operations and Financial Condition,
and should be read in conjunction with our unaudited consolidated financial
statements, including the notes thereto, in this quarterly report on Form 10-Q,
as well as our audited consolidated financial statements for the year ended June
30, 2008 as filed on Form 10-K with the SEC. We have attempted to identify the
most important matters on which our management focuses in evaluating our
financial condition and operating performance and the short-term and long-term
opportunities, challenges, and risks (including material trends and
uncertainties) which we face. We also discuss the action we are taking to
address these opportunities, challenges, and risks. The Overview is not intended
as a summary of, or a substitute for review of, Management's Discussion and
Analysis of the Results of Operations and Financial Condition.
Northeast
Bank is faced with the following challenges: growing our loan portfolio,
improving net interest margins, executing our plan of increasing noninterest
income and improving the efficiency ratio.
Loans
have decreased compared to June 30, 2008, due principally to a decrease in
commercial loans. Competition for commercial loans is intense and we are not
competing for relationships where we believe transactions do not reflect pricing
or structure for risk.
To
improve net interest income, we leveraged our balance sheet using investment
securities during the three months ended September 30, 2008. During
the quarter ended September 30, 2008, we purchased $11 million of
mortgage-backed securities funded with short-term advances from the Fed Discount
Window. For the three months ended September 30, 2008, the Bank
borrowed $10 million using $11 million of mortgage-backed securities as
collateral. The proceeds were used to repay the Fed Discount Window
short-term advances. This leveraging of our balance sheet increased
overall earning assets at September 30, 2008 compared to prior
periods.
Net
interest margins are expected to continue to improve modestly over the near
term. This increase will be due to the volume of certificates of deposits that
is expected to reprice in the next quarter to interest rates lower than one year
ago. Since our balance sheet was liability sensitive at June 30, 2008, the cost
of interest-bearing liabilities reprice more quickly than the yield of
interest-bearing assets and would generally be expected to result in an increase
in net interest income during a period of falling interest rates (and a
decrease in net interest income during a period of rising interest rates). We
believe that the prospect of additional decreases in prime rate in the immediate
future is likely based on the expectation that the Federal Reserve Bank will
lower the federal funds rate. Any significant improvement in net
interest income would also require an increased volume of new loan originations
in addition to the changes in market rates.
Management
believes that the allowance for loan losses as of September 30, 2008 was
adequate, under present conditions, for the known credit risk in the loan
portfolio. While non-accrual loans and loan delinquencies decreased compared to
the levels at June 30, 2008 and as the loan portfolio decreased
$435,339 during the three months ended September 30, 2008, we have
maintained our allowance for loan losses at $5,656,000.
We expect
to improve non-interest income primarily from increases in consumer and
commercial property and casualty insurance policies sold by Northeast Bank
Insurance Agency, Inc. through cross-sales to bank customers and sales to
new customers, thereby increasing insurance commission revenue, and sales
of investments by the wealth management division of our trust department and the
investment brokerage division, thereby increasing commission revenue.
Non-interest expense is expected to increase to support this
expansion.
Our
efficiency ratio, calculated by dividing noninterest expense by the sum of net
interest income and noninterest income, was 92% and 87% for the three months
ended September 30, 2008 and 2007, respectively. The ratio has
increased due to the increase in noninterest expense as compared to the same
period during the prior fiscal year, with this increase exceeding the increases
in net interest income and non interest income. The Company
recognized impairment expense of $267,976 on preferred stock securities of FNMA
and FHLMC and the common and preferred stock of AIG Insurance which the US
Treasury seized control of on September, 2008, contributing to the increase in
noninterest expense for the three months ended September 30, 2008.
Description
of Operations
Northeast
Bancorp (the "Company") is a Maine corporation and a bank holding company
registered with the Federal Reserve Bank of Boston ("FRB") under the Bank
Holding Company Act of 1956. The FRB is the primary regulator of the Company,
and it supervises and examines our activities. The Company also is a registered
Maine financial institution holding company under Maine law and is subject to
regulation and examination by the Superintendent of Maine Bureau of Financial
Institutions. We conduct business from our headquarters in Lewiston, Maine and,
as of September 30, 2008, we had eleven banking offices, one financial center
and fourteen insurance offices located in western and south-central Maine and
southeastern New Hampshire. At September 30, 2008, we had consolidated assets of
$605.2 million and consolidated stockholders' equity of $41.3
million.
The
Company's principal asset is all the capital stock of Northeast Bank (the
"Bank"), a Maine state-chartered universal bank. The Company's results of
operations are primarily dependent on the results of the operations of the Bank.
The Bank's 11 offices are located in Auburn, Augusta, Bethel, Brunswick,
Buckfield, Harrison, Lewiston (2), Mechanic Falls, Portland, and South
Paris, Maine. The Bank's financial center is located in Falmouth, Maine and
houses our investment brokerage division which offers investment, insurance and
financial planning products and services.
The
Bank's wholly owned subsidiary, Northeast Bank Insurance Group Inc, is our
insurance agency. Its 14 offices are located in Anson, Auburn, Augusta,
Berwick, Bethel, Jackman, Livermore Falls, Mexico, Rangeley (its headquarters),
Thomaston, Turner, Scarborough, and South Paris, Maine and Rochester, New
Hampshire. Seven agencies have been acquired in the past twenty four
months : Hyler Agency of Thomaston, Maine was acquired on December 11, 2007,
Spence & Matthews, Inc of Berwick, Maine and Rochester, New Hampshire was
acquired on November 30, 2007; Hartford Insurance Agency of Lewiston, Maine was
acquired on August 30, 2007; Russell Agency of Madison, Maine was acquired on
June 28, 2007; Southern Maine Insurance Agency of Scarborough, Maine was
acquired on March 30, 2007; Sturtevant and Ham, Inc. of Livermore,
Maine was acquired on December 1, 2006; and Palmer Insurance of Turner, Maine
was acquired on November 28, 2006. Following the acquisitions, the
Russell Agency was moved to our existing agency office in Anson, Maine and
the Hartford Insurance Agency was moved to our existing agency office in Auburn,
Maine. All of our insurance agencies offer personal and commercial
property and casualty insurance products. See Note 6 in our June 30,
2008 audited consolidated financial statements and Note 10 of the September 30,
2008 unaudited consolidated financial statements for more information regarding
our insurance agency acquisitions.
Bank
Strategy
The
principal business of the Bank consists of attracting deposits from the general
public and applying those funds to originate or acquire residential mortgage
loans, commercial loans, commercial real estate loans and a variety of consumer
loans. The Bank sells, from time to time, fixed rate residential mortgage loans
into the secondary market. The Bank also invests in mortgage-backed securities,
securities issued by United States government sponsored enterprises, corporate
and municipal securities. The Bank's profitability depends primarily on net
interest income. It continues to be our largest source of revenue and is
affected by the level of interest rates, changes in interest rates and by
changes in the amount and composition of interest-earning assets(i.e. loans and
investments) and interest-bearing liabilities (i.e. customer deposits and
borrowed funds). The Bank also emphasizes the growth of non-interest
sources of income from investment and insurance brokerage, trust management and
financial planning to reduce its dependency on net interest income.
Our goal
is to continue modest, but profitable, growth by increasing our loan and deposit
market share in our existing markets in western and south-central Maine, closely
managing the yields on interest-earning assets and rates on interest-bearing
liabilities, introducing new financial products and services, increasing the
number of bank services sold to each household, increasing non-interest income
from expanded trust services, investment and insurance brokerage services, and
controlling the growth of non-interest expenses. Additional
acquisitions of insurance agencies are not planned for the near
term.
Results of
Operations
Comparison
of the three months ended September 30, 2008 and 2007
General
The
Company reported consolidated net income of $69,116, or $0.03 per diluted share,
for the three months ended September 30, 2008 compared to $430,565, or $0.18 per
diluted share, for the three months ended September 30, 2007, a decrease of
$361,449, or 84%. Net interest and dividend income increased $448,360, or 12%,
as a result of a higher net interest margin and increased earning assets. The
provision for loan losses increased $330,441, or 173%, compared to the quarter
ended September 30, 2007, from increased net credit
losses. Noninterest income increased $571,273, or 29%, primarily from
increased insurance commissions partially offset by net securities losses.
Noninterest expense increased $1,247,238, or 26%, primarily due to increased
salaries and employee benefits and other noninterest expenses related to
insurance agency acquisitions and impairment expense from available for sale
securities.
Annualized
return on average equity ("ROE") and return on average assets ("ROA") were 0.68%
and 0.05%, respectively, for the quarter ended September 30, 2008 as compared to
4.17% and 0.31%, respectively, for the quarter ended September 30,
2007. The decreases in the returns on average equity and average
assets were primarily due to the decrease in net income for the most recent
quarter.
Net Interest and Dividend
Income
Net
interest and dividend income for the three months ended September 30, 2008
increased to $4,041,207 as compared to $3,592,847 for the same period in 2007.
The increase in net interest and dividend income of $448,360, or 12%, was
primarily due to a 17 basis point increase in net interest margin, on a tax
equivalent basis, and by an increase in average earning assets of $30,710,197,
or 6%, for the quarter ended September 30, 2008 as compared to the quarter ended
September 30, 2007. The increase in average earning assets was
primarily due to an increase in average available-for-sale securities of
$43,325,615, or 46%, from the purchase of mortgage-backed securities, and an
increase in average interest-bearing deposits and regulatory stock of
$2,199,171, or 28%, reduced by a decrease in average loans of $14,814,589, or
3%. Average loans as a percentage of average earning assets was 73%
and 81% for quarters ended September 30, 2008 and 2007,
respectively. Our net interest margin, on a tax equivalent basis, was
2.92% and 2.75% for the quarters ended September 30, 2008 and 2007,
respectively. Our net interest spread, on a tax equivalent basis, for
the three months ended September 30, 2008 was 2.69%, an increase of 27 basis
points from 2.42% for the same period a year ago. Comparing the three months
ended September 30, 2008 and 2007, the yields on earning assets decreased 64
basis points and the cost of interest-bearing liabilities decreased 91 basis
points. The decrease in our yield on earning assets reflects the 275 basis point
decrease in prime rate during the twelve months ended September 30, 2008. The
decrease in the cost of interest-bearing liabilities reflects the lower interest
rates paid on a significant volume of maturing certificates of deposits, and
decreases in interest rates paid on interest-bearing non-maturing
deposits.
The
changes in net interest and dividend income, on a tax equivalent basis, are
presented in the schedule below, which compares the three months ended September
30, 2008 and 2007.
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Difference
Due to
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Volume
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Rate
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Total
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Total
Interest-earnings Assets
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Securities
sold under Repurchase Agreements
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Total
Interest-bearing Liabilities
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Net
Interest and Dividend Income
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Rate/volume
amounts which are partly attributable to rate and volume are spread
proportionately between volume and rate based on the direct change
attributable to rate and volume. Borrowings in the table include junior
subordinated notes, FHLB borrowings, structured repurchase agreements,
capital lease obligation and other borrowings. The adjustment to interest
income and yield on a fully tax equivalent basis was $51,331 and $49,577
for the three months ended September 30, 2008 and 2007,
respectively.
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The
Company's business primarily consists of the commercial banking activities of
the Bank. The success of the Company is largely dependent on its ability to
manage interest rate risk and, as a result, changes in interest rates, as well
as fluctuations in the level of assets and liabilities, affecting net interest
and dividend income. This risk arises from our core banking activities: lending
and deposit gathering. In addition to directly impacting net interest and
dividend income, changes in interest rates can also affect the amount of loans
originated and sold by the Bank, the ability of borrowers to repay adjustable or
variable rate loans, the average maturity of loans, the rate of amortization of
premiums and discounts paid on securities, the amount of unrealized gains and
losses on securities available-for-sale and the fair value of our saleable
assets and the resultant ability to realize gains. The interest sensitivity of
the Bank's balance sheet is currently a liability sensitive position, where the
costs of interest-bearing liabilities reprice more quickly than the yield of
interest-bearing assets. As a result, the Bank is generally expected to
experience a decrease in its net interest margins during a period of increasing
interest rates, or an increase in its net interest margin during a period of
decreasing interest rates.
As of
September 30, 2008 and 2007, 42% and 43%, respectively, of the Bank's loan
portfolio was composed of adjustable rate loans based on a prime rate index or
short-term rate indices such as the one-year U.S. Treasury bill. Interest income
on these existing loans would increase if short-term interest rates increase. An
increase in short-term interest rates would also increase deposit and FHLB
advance rates, increasing the Company's interest expense. The impact on future
net interest and dividend income from changes in market interest rates will
depend on, among other things, actual rates charged on the Bank's loan
portfolio, deposit and advance rates paid by the Bank and loan
volume.
Provision for Loan
Losses
The
provision for loan losses for the three months ended September 30, 2008 was
$520,724, an increase of $330,441, or 174%, from $190,283 for the three months
ended September 30, 2007. We maintained the allowance for loan losses
flat to its June 30, 2008 balance by recognizing a provision equal to net
charge-offs. For our internal analysis of adequacy of the
allowance for loan losses, we considered: the decrease in net loans during the
three months ended September 30, 2008; the increase in net
charge-offs of $330,441 for the three months ended September 30, 2008 compared
to the same period in 2007; the increase in net charge-offs of $341,801 for the
quarter ended September 30, 2008 compared to the quarter ended June 30, 2008; a
decrease in loan delinquency to 2.69% at September 30, 2008 compared to 3.03% at
June 30, 2008 and 2.82% at September 30, 2007; a decrease of $1,142,000 in
non-performing loans ( 90 days or more past due) at September 30, 2008 compared
to June 30, 2008; and a decrease in internally classified and criticized loans
at September 30, 2008 compared to June 30, 2008. Management deemed
the allowance for loan losses adequate for the risk in the loan portfolio. See
Financial Condition for a discussion of the Allowance for Loan Losses and the
factors impacting the provision for loan losses. The allowance as a percentage
of outstanding loans increased to 1.38% at September 30, 2008 and June 30, 2008,
respectively, compared to 1.37% at September 30, 2007.
Noninterest
Income
Total
noninterest income was $2,560,647 for the quarter ended September 30, 2008, an
increase of $571,273, or 29%, from $1,989,374 for the quarter ended September
30, 2007. This increase reflected the combined impact of a $651,405, or 75%,
increase in insurance agency commissions due to full year impact of insurance
agency acquisitions, an increase in fees for other services to customers of
$37,658, or 14%, and an increase in investment brokerage commission revenue
of $22,692, or 6%, partially offset by a increase in net securities losses of
$102,190 from the sale of preferred and trust preferred stock of Wachovia Bank,
and a decrease of $41,631 in gain on sales of residential real estate loans due
to lower volume.
Noninterest
Expense
Total
noninterest expense for the three months ended September 30, 2008 was
$6,088,842, an increase of $1,247,238, or 26%, from $4,841,604 for the three
months ended September 30, 2007. This increase was primarily due to a $582,773,
or 20%, increase in salaries and employee benefits from the full year impact of
full-time staff from our insurance agency acquisitions, increase in medical plan
benefits expenses, and accruals for a bank-wide incentive
program. The increase in occupancy expense of $29,457, or 7%, was due
to the increase in maintenance, utilities expense and real estate taxes
partially offset by lower rent expense from the three insurance agency offices
acquired in fiscal 2008. Equipment expense increased
$31,553, or 8%, primarily due to increased computer hardware and software
depreciation expense and software licensing expense. Intangible
amortization increased $91,095, or 88%, from the customer list and non-compete
intangibles added from the three insurance agencies acquired since September 30,
2007. Other noninterest expense increased $512,360, or 47%, primarily from
$267,976 of impairment expense recognized on common and preferred stocks,
including 1,000 shares of FNMA preferred stock and 4,000 shares of FHLMC
preferred stock, increased professional fees for conversions and managing the
disposal of repossessed loan collateral, increased collections expenses,
increased FDIC insurance expense due to the expiration of credits, and an
increase in computer services expense from core system conversions in our
insurance division.
Income
Taxes
For the
three months ended September 30, 2008, the decrease in income tax expense was
primarily due to the decrease in income before income taxes as compared to the
same periods in 2007. For the three months ended September 30, 2008,
the income benefit was due to the mix of tax-exempt interest from loans and
municipal securities and BOLI income.
Efficiency
Ratio
Our
efficiency ratio, which is total non interest expense as a percentage of the sum
of net interest and dividend income and non-interest income, was 92% and 87% for
the three months ended September 30, 2008 and 2007, respectively. The
increase in the efficiency ratio for the three months ended September 30, 2008
was due to an increase in noninterest expense compared to the three months ended
September 30, 2007.
Financial
Condition
Our
consolidated assets were $605,169,601 and $598,273,650 as of September 30, 2008
and June 30, 2008, respectively, an increase of $6,895,951, or 1%. This increase
was primarily due to increases of $8,961,658, or 7%, in available-for-sale
securities, $1,026,516, or 30%, in interest-bearing
deposits and $560,666, or 115%, in loans held for sale partially
offset by a decrease of $435,339, or less than 1%, in net loans primarily from a
decrease in commercial loans, a decrease in cash and due from banks
of $2,782,156, or 31%, and a net decrease in the combination of premises and
equipment, acquired assets accrued interest receivable, goodwill, intangible
assets, bank owned life insurance and other assets of $435,394. For the three
months ended September 30, 2008, average total assets were $598,928,259, an
increase of $39,248,883, or 7%, from $559,679,376 for the same period in 2007.
This average asset increase was primarily attributable to an increase in
interest-bearing deposits, available-for-sale securities, fixed assets, goodwill
and intangibles and BOLI.
Total
stockholders' equity was $41,324,446 and $40,273,312 at September 30, 2008 and
June 30, 2008, respectively, an increase of $1,051,134, or 3%, due to net income
for the three months ended September 30, 2008 and a decrease in accumulated
other comprehensive loss partially offset by dividends paid. Book
value per outstanding share was $17.80 at September 30, 2008 and $17.40 at June
30, 2008. Tangible book value per outstanding share was $12.36 at
September 30, 2008 and $11.85 at June 30, 2008. This increase in
tangible book value was due to a decrease in total goodwill and other
intangibles deducted from capital. This decrease in goodwill and other
intangibles was due to the amortization of other intangibles during the quarter
ended September 30, 2008.
Investment
Activities
The
available-for-sale investment portfolio was $143,444,635 as of September 30,
2008, an increase of $8,961,658, or 7%, from $134,482,977 as of June 30,
2008. This increase was primarily due to leveraging transactions in
July and September, 2008 in which $22 million of mortgage-backed securities were
acquired, through available funds and structured repurchase agreements of $20
million with an average interest rate of 4.37% and a spread of approximately
1.34%. To reduce the balance sheet exposure to rising interest rates,
$20 million of interest rate caps were imbedded in these transactions with a
strike rate based on three month LIBOR. See note 7 for additional
information.
The
investment portfolio as of September 30, 2008 consisted of debt securities
issued by U.S. government-sponsored enterprises and corporations,
mortgage-backed securities, municipal securities and equity securities.
Generally, funds retained by the Bank as a result of increases in deposits or
decreases in loans, which are not immediately used by the Bank, are invested in
securities held in its investment portfolio. The investment portfolio is used as
a source of liquidity for the Bank. The investment portfolio is structured so
that it provides for an ongoing source of funds for meeting loan and deposit
demands and for reinvestment opportunities to take advantage of changes in the
interest rate environment. The investment portfolio averaged $137,991,330
for the three months ended September 30, 2008 as compared to $94,665,715 for the
three months ended September 30, 2007, an increase of $43,325,615, or 45%. This
increase was due primarily to the leveraging strategy purchasing of
mortgage-backed securities funded with structured repurchase agreements noted
above.
Our
entire investment portfolio was classified as available-for-sale at September
30, 2008 and June 30, 2008, and is carried at market value. Changes in market
value, net of applicable income taxes, are reported as a separate component of
stockholders' equity. Gains and losses on the sale of securities are recognized
at the time of the sale using the specific identification method. The amortized
cost and market value of available-for-sale securities at September 30, 2008
were $143,694,440 and $143,444,635, respectively. The difference between the
carrying value and the cost of the securities of $249,805 was primarily
attributable to the increase in market value of mortgage-backed securities above
their cost. The net unrealized loss on equity securities was $776,985, and the
net unrealized gains on U.S. government-sponsored enterprises, corporate debt,
mortgage-backed and municipal securities were $527,181 at September 30, 2008.
The U.S. government-sponsored enterprises, corporate debt and mortgage-backed
securities have increased in market value due to the recent decreases in
long-term interest rates as compared to June 30, 2008. Substantially all of the
U.S. government-sponsored enterprises, mortgage-backed and municipal securities
held in our portfolio are high investment grade securities. The single corporate
bond in the bank’s portfolio has been downgraded by credit rating agencies below
our investment grade. We did not consider it impaired at September
30, 2008 due to the short maturity of the bond. Management believes
that the yields currently received on this portfolio are satisfactory.
Management reviews the portfolio of investments on an ongoing basis to determine
if there have been any other than temporary declines in value. Some of the
considerations management takes into account in making this determination are
market valuations of particular securities and an economic analysis of the
securities' sustainable market values based on the underlying company's
profitability. Management plans to hold the equity, U.S. government-sponsored
enterprises, corporate debt, mortgage-backed and municipal securities which have
market values below cost until a recovery of market value occurs or until
maturity.
Loan
Portfolio
Total
loans, excluding loans held-for-sale, of $408,758,630 as of September 30, 2008
decreased $435,339, or less than 1%, from $409,193,969 as of June 30, 2008.
Compared to June 30, 2008, commercial real estate loans increased $2,397,402, or
2%, construction loans increased $1,032,845, or 23%, and consumer and other
loans increased $303,252, or less than 1%. Residential real estate loans
decreased $414,694, or less than 1%, and commercial loans decreased $3,705,766,
or 11%. Net deferred loan origination costs decreased $48,378. The total loan
portfolio averaged $407,879,138 for the three months ended September 30, 2008, a
decrease of $14,188,593, or 3%, compared to $422,067,731 for the three months
ended September 30, 2007.
The Bank
primarily lends within its local market areas, which management believes helps
it to better evaluate credit risk. The Bank's local market, as well as the
secondary market, continues to be very competitive for loan volume.
Residential
real estate loans consisting of primarily owner-occupied residential loans as a
percentage of total loans were 35% as of September 30, 2008, and 34% as of June
30, 2008 and September 30, 2007, respectively. The variable rate product as a
percentage of total residential real estate loans was 33%, 34% and 36% for the
same periods, respectively. Generally, management has pursued a strategy of
increasing the percentage of variable rate loans as a percentage of the total
loan portfolio to help manage interest rate risk. We currently plan to continue
to sell all newly originated fixed-rate residential real estate loans into the
secondary market to manage interest rate risk. Average residential real estate
mortgages of $139,606,727 for the three months ended September 30, 2008
decreased $3,609,240, or 3%, from $143,215,967 for the three months ended
September 30, 2007. This decrease was due to the origination of more fixed rate
loans for sale. Purchased loans included in our loan portfolio are pools of
residential real estate loans acquired from and serviced by other financial
institutions. These loan pools are an alternative to mortgage-backed securities,
and represented 3% of residential real estate loans at September 30, 2008. The
Bank has not pursued a similar strategy recently.
Commercial
real estate loans increased and commercial loans decreased at September 30, 2008
compared to the same period in the prior year. These changes reflect
the intense competition for new and renewing commercial real estate and
commercial loans. The Bank tightened its credit underwriting
standards as delinquencies and classified and criticized loans increased over
the past twelve months, and priced new commercial real estate and commercial
loans to reflect risk.
Commercial
real estate loans as a percentage of total loans were 28%, 27%, and 26% as of
September 30, 2008, June 30, 2008 and September 30, 2007, respectively.
Commercial real estate loans have minimal interest rate risk because the
portfolio consists primarily of variable rate products. The variable rate
products as a percentage of total commercial real estate loans were 91% as of
September 30, 2008, 95% as of June 30, 2008 and September 30, 2007,
respectively. The Bank tries to mitigate credit risk by lending in
its market area, as well as by maintaining a well-collateralized position in
real estate. Average commercial real estate loans of $111,880,322 for the three
months ended September 30, 2008 increased $958,921, or 1%, from the same period
in 2007.
Construction
loans as a percentage of total loans were 1% as of September 30, 2008, June 30,
2008 and September 30, 2007, respectively. Limiting disbursements to the
percentage of construction completed controls risk. An independent consultant or
appraiser verifies the construction progress. Construction loans have maturity
dates of less than one year. Variable rate products as a percentage of total
construction loans were 37% as of September 30, 2008 and June 30, 2008,
respectively, and 56% as of September 30, 2007. Average construction loans were
$4,693,502 and $5,526,716 for the three months ended September 30, 2008 and
2007, respectively, a decrease of $833,214, or 15%.
Commercial
loans as a percentage of total loans were 7% as of September 30, 2008, 8% as of
June 30, 2008 and 9% as of September 30, 2007. The variable rate products as a
percentage of total commercial loans were 67% as of September 30, 2008 and June
30, 2008, respectively, and 60% as of September 30, 2007. The repayment ability
of commercial loan customers is highly dependent on the cash flow of the
customer's business. The Bank mitigates losses by strictly adhering to the
Company's underwriting and credit policies. Average commercial loans of
$31,282,945 for the three months ended September 30, 2008 decreased $7,079,234,
or 18%, from $38,362,179 for the same period in 2007.
Effective
October 31, 2008, we terminated all consumer indirect lending. Our
decision to exit this line of business was based on its low profitability and
our expectation that an acceptable level of returns was not likely to be
attained in future periods.
Consumer
and other loans as a percentage of total loans were 29% for the period ended
September 30, 2008, and 30% for the periods ended June 30, 2008 and September
30, 2007, respectively. At September 30, 2008 and June 30, 2008, indirect auto,
indirect recreational vehicle, and indirect mobile home loans represented 30%,
47%, and 18% of total consumer loans, respectively. Since these loans
are primarily fixed rate products, they have interest rate risk when market
rates increase. The consumer loan department underwrites all the indirect
automobile, recreational vehicle loans and mobile home loans to mitigate credit
risk. The Bank typically pays a one-time origination fee to dealers of indirect
loans. The fees are deferred and amortized over the life of the loans as a yield
adjustment. Management attempts to mitigate credit and interest rate risk by
keeping the products with average lives of no longer than five years, receiving
a rate of return commensurate with the risk, and lending to individuals in the
Bank's market areas. Average consumer and other loans were $117,794,691 and
$121,227,351 for the three months ended September 30, 2008 and 2007,
respectively. The $3,432,660, or 3%, decrease was due to decreased indirect auto
and mobile home loans. The composition of consumer loans is detailed in the
following table.
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Consumer
Loans as of
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September
30, 2008
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June
30, 2008
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Classification of
Assets
Loans are
classified as non-performing when reaching 90 days or more delinquent or,
when less than 90 days past due, when we judge that the loan is likely to
present future principal and/or interest repayment problems. In both situations,
we cease accruing interest. The Bank had non-performing loans totaling
$6,561,000 and $7,703,000 at September 30, 2008 and June 30, 2008, respectively,
or 1.61% and 1.88% of total loans, respectively. The Bank's allowance for loan
losses was equal to 86% and 73% of the total non-performing loans at September
30, 2008 and June 30, 2008, respectively. The following table represents the
Bank's non-performing loans as of September 30, 2008 and June 30,
2008:
Description
|
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September
30,
2008
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June
30, 2008
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Non-performing
loans decreased in the three months ended September 30, 2008 compared to June
30, 2008. Of total non-performing loans at September 30, 2008, $3,046,000 of
these loans were current and paying as agreed compared to $2,510,000 at June 30,
2008, an increase of $536,000. The Bank maintains these loans as non-performing
until the respective borrowers have demonstrated a sustainable period of
performance. At September 30, 2008, the Bank had $881,000 in loans classified
special mention or substandard that management believes could potentially become
non-performing due to delinquencies or marginal cash flows. These special
mention and substandard loans decreased by $1,799,000 when compared to the level
of $2,680,000 at June 30, 2008.
The
following table reflects the quarterly trend of total delinquencies 30 days or
more past due and non-performing loans for the Bank as a percentage of total
loans:
9/30/08
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6/30/08
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3/30/08
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12/31/07
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9/30/07
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Excluding
loans classified as non-performing but whose contractual principal and interest
payment are current, the Bank's total delinquencies 30 days or more past due, as
a percentage of total loans, were 2.69% as of September 30, 2008.
Allowance for Loan
Losses
The
Bank's allowance for loan losses was $5,656,000 as of September 30, 2008,
unchanged from the level at June 30, 2008, representing 1.38% of total loans for
each of the periods. Management maintains this allowance at a level that it
believes is reasonable for the overall probable losses inherent in the loan
portfolio. The allowance for loan losses represents management's estimate of
this risk in the loan portfolio. This evaluation process is subject to numerous
estimates and judgments. The frequency of default, risk ratings, and the loss
recovery rates, among other things, are considered in making this evaluation, as
are the size and diversity of individual large credits. Changes in these
estimates could have a direct impact on the provision and could result in a
change in the allowance. The larger the provision for loan losses, the greater
the negative impact on our net income. Larger balance, commercial and commercial
real estate loans representing significant individual credit exposures are
evaluated based upon the borrower's overall financial condition, resources, and
payment record, the prospects for support from any financially responsible
guarantors and, if appropriate, the realizable value of any collateral. The
allowance for loan losses attributed to these loans is established through a
process that includes estimates of historical and projected default rates and
loss severities, internal risk ratings and geographic, industry and other
environmental factors. Management also considers overall portfolio indicators,
including trends in internally risk-rated loans, classified loans, non accrual
loans and historical and forecasted write-offs and a review of industry,
geographic and portfolio concentrations, including current developments. In
addition, management considers the current business strategy and credit process,
including credit limit setting and compliance, credit approvals, loan
underwriting criteria and loan workout procedures. Within the allowance for loan
losses, amounts are specified for larger-balance, commercial and commercial real
estate loans that have been individually determined to be impaired. These
specific reserves consider all available evidence including, as appropriate, the
present value of the expected future cash flows discounted at the loan's
contractual effective rate and the fair value of collateral. Each portfolio of
smaller balance, residential real estate and consumer loans is collectively
evaluated for impairment. The allowance for loan losses is established pursuant
to a process that includes historical delinquency and credit loss experience,
together with analyses that reflect current trends and conditions. Management
also considers overall portfolio indicators, including historical credit losses,
delinquent, non-performing and classified loans, trends in volumes, terms of
loans, an evaluation of overall credit quality and the credit process, including
lending policies and procedures and economic factors. For the three months ended
September 30, 2008, we have not changed our approach in the determination of the
allowance for loan losses. There have been no material changes in the
assumptions or estimation techniques as compared to prior periods in determining
the adequacy of the allowance for loan losses.
Management
believes that the allowance for loan losses as of September 30, 2008 was
adequate considering the level of risk in the loan portfolio. While management
believes that it uses the best information available to make its determinations
with respect to the allowance, there can be no assurance that the Company will
not have to increase its provision for loan losses in the future as a result of
changing economic conditions, adverse markets for real estate or other factors.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
These agencies may require the Bank to recognize additions to the allowance for
loan losses based on their judgments about information available to them at the
time of their examination. The Bank's most recent joint examination by the
Federal Reserve Bank of Boston and the Maine Bureau of Financial Institutions
was completed in March, 2008. At the time of the examination, the regulators
proposed no adjustments to the allowance for loan losses.
Other
Assets
Bank
owned life insurance (BOLI) is invested in the general account of three
insurance companies and in separate accounts of a fourth insurance company. We
rely on the creditworthiness of each insurance company for general account BOLI
policies. For separate account BOLI policies, the insurance company holds the
underlying bond and stock investments in a trust for the Bank. Standard and
Poor's rated these companies AA- or better at September 30, 2008. Interest
earnings, net of mortality costs, increase cash surrender value. These interest
earnings are based on interest rates reset at least annually, and are subject to
minimum interest rates. These increases were recognized in other income and are
not subject to income taxes. Borrowing on or surrendering the policy may subject
the Bank to income tax expense on the increase in cash surrender value. For this
reason, management considers BOLI an illiquid asset. BOLI represented 27.2% of
the Bank’s total risk-based capital as of September 30, 2008, which exceeds our
25% policy limit and was attributable to the deduction of goodwill and
intangibles from the insurance agency acquisitions in calculating the Bank’s
total risk-based capital.
Goodwill
of $4,390,340 as of September 30, 2008 was unchanged from the balance as of June
30, 2008. Goodwill resulted from consideration paid in excess of identified
tangible and intangible assets from the seven insurance agency acquisitions that
occurred during the two fiscal years ended June 30, 2008.
Intangible
assets of $8,249,792 as of September 30, 2008 decreased $194,632, or 2%, from
$8,444,424 as of June 30, 2008 from amortization. This asset consists
of customer lists and non-compete intangibles from the insurance agency
acquisitions. See Note 1 of the audited consolidated financial statements as of
June 30, 2008 for additional information on intangible assets.
Capital Resources and
Liquidity
The Bank
continues to attract new local core and certificates of deposit relationships.
As alternative sources of funds, the Bank utilizes FHLB advances and brokered
time deposits ("brokered deposits") when their respective interest rates are
less than the interest rates on local market deposits. FHLB advances are used to
fund short-term liquidity demands and supplement the growth in earning
assets.
Total
deposits of $356,592,447 as of September 30, 2008 decreased $6,781,324, or 2%,
from $363,373,771 as of June 30, 2008. Brokered deposits were virtually
unchanged. The overall decrease in customer deposits was due to the
decrease in certificates of deposit of $9,299,701, or 4%. With
approximately $90 million of certificates of deposit maturing through September
30, 2008, management did not promote certificate of deposits with above market
rates, allowing these maturing certificates of deposit to roll-over at lower
rates. The lack of promotion caused a number of certificates to be
lost to competitors. Overall, this lowered our cost of
funds. NOW account balances decreased $1,453,422, or
3%. Partially offsetting the decrease in certificates of deposit and
NOW accounts, demand deposit accounts increased $2,736,148, or 8%, money market
accounts increased $1,011,084, or 5%, and savings accounts increased $217,624,
or 1%, during the three months ended September 30, 2008. Management's
strategy is to offer non-maturing, interest-bearing deposits with interest rates
near the top of the market to attract new relationships and cross sell
additional deposit accounts and other bank services.
Total
average deposits of $361,586,605 for the three months ended September 30, 2008
decreased $282,619, or less than 1%, compared to the average for the three
months ended September 30, 2007 of $361,869,224. This decrease in total average
deposits compared to September 30, 2007 was attributable to a decrease in
average NOW accounts of $5,809,086, or 11%, a decrease in average savings of
$713,323, or 3%, a $7,772,207, or 38%, decrease in average brokered time
deposits, and a $2,381,020, or 1%, decrease in average certificates of deposits.
These decreases were partially offset by a $1,421,063, or 4%, increase in demand
deposit accounts, and a $14,971,954, or 185%, increase in money market accounts.
These increases in core account balances reflect customers moving funds to
higher yielding deposit accounts. Excluding average brokered deposits, average
customer deposits increased $7,489,588, or 2%, for the three months ended
September 30, 2008 compared to the same period one year ago.
Even
though deposit interest rates have remained competitive, the rates of return are
potentially higher than with other financial instruments such as mutual funds
and annuities. All interest-bearing non-maturing deposit accounts have market
interest rates. Like other companies in the banking industry, the Bank will be
challenged to maintain or increase its core deposits and improve its net
interest margin as the mix of deposits shifts to deposit accounts with higher
interest rates.
We use
brokered deposits as part of our overall funding strategy and as an alternative
to customer certificates of deposits, FHLB advances and junior subordinated
debentures to fund the growth of our earning assets. Policy limits the use of
brokered deposits to 25% of total assets. We use five national brokerage firms
to source brokered deposits. Each brokerage company utilizes a system of agents
who solicit customers throughout the United States. The terms of these deposits
allow for withdrawal prior to maturity only in the case of the depositor's
death, have maturities generally beyond one year, have maturities no greater
than $5 million in any one month and bear interest rates equal to or slightly
above comparable FHLB advance rates. Brokered deposits carry the same risk as
local certificates of deposit, both are interest rate sensitive with respect to
the Bank's ability to retain the funds. At September 30, 2008 and
June 30, 2008, brokered time deposits as a percentage of total assets were 2.1%,
respectively, and 3.3% at September 30, 2007. The weighted average maturity for
the brokered deposits was approximately 0.4 years.
Advances
from the Federal Home Loan Bank of Boston (FHLB) were $66,480,000 as of
September 30, 2008, a decrease of $24,095,000, or 27%, from $90,575,000 as of
June 30, 2008. At September 30, 2008, we had pledged U.S. government agency and
mortgage-backed securities of $33,017,486 as collateral for FHLB advances. We
plan to continue to purchase additional mortgage-backed securities to pledge as
collateral for advances. These purchases will be funded from the cash flow from
mortgage-backed securities and residential real estate loan principal and
interest payments, and promotion of certificate of deposit accounts and brokered
deposits. Newly originated adjustable residential real estate loans will be held
in portfolio and will qualify as collateral. In addition to U.S. government
agency and mortgage-backed securities, pledges of residential real estate loans,
certain commercial real estate loans and certain FHLB deposits free of liens,
pledges and encumbrances are required to secure FHLB advances. Municipal
securities cannot be pledged. Average advances from the FHLB were $77,683,587
for the three months ended September 30, 2008, a decrease of $8,536,992, or 10%,
compared to $86,220,579 average for the same period last year.
Structured
repurchase agreements were $60,000,000 at September 30, 2008, an increase of
$20,000,000, or 50%, from $40,000,000 as of June 30, 2008. We pledged
$67,087,489 of mortgage-backed securities and cash, which resulted from margin
calls, as collateral. In addition to leveraging our balance sheet to
improve net interest income, three of the four structured repurchase agreements
have imbedded purchased interest rate caps to reduce the risk to net interest
income in periods of rising interest rates. Our balance sheet is liability
sensitive, where interest-bearing liabilities reprice more quickly than our
interest-earning assets. Average structured repurchase
agreements were $50,000,000 as of September 30, 2008, an increase of $38,913,043
compared to $11,086,957 as of September 30, 2007. See note 7 for
additional information.
Short-term
borrowings, consisting of securities sold under repurchase agreements and other
sweep accounts, were $39,641,911 as of September 30, 2008, an increase of
$6,801,074, or 21%, from $32,840,837 as of June 30, 2008. Market interest rates
are offered on this product. At September 30, 2008, we had pledged U.S.
government agency and mortgage-backed securities of $28,420,763 as collateral
for repurchase agreements. Sweep accounts had excess deposit insurance coverage
of $7,630,000. Average short-borrowings were $35,300,069 for the
three months ended September 30, 2008, an increase of $1,405,035, or 4%,
compared to the average for the three months ended September 30, 2007 of
$33,895,034.
The Bank
has a line of credit under the Borrower-in-Custody program offered through the
Federal Reserve Bank Discount Window. Under the terms of this credit line, the
Bank has pledged its indirect auto loans, and the line bears a variable interest
rate equal to the then current federal funds rate plus 0.25%. At September 30,
2008, there was $15,000,000 outstanding under this credit line and none at June
30, 2008. Due to the volatility of overnight FHLB interest rates
during the month of September, 2008, this line of credit was used to replace
FHLB overnight advances. The interest rate on the line of credit is
1.75% and matures January 7, 2009.
The
following table is a summary of the liquidity the Bank has the ability to access
as of September 30, 2008 in addition to the traditional retail deposit
products:
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Subject
to policy limitation of 25% of total assets
|
Federal
Home Loan Bank of Boston
|
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|
|
Unused
advance capacity subject to eligible and qualified
collateral
|
Federal
Reserve Bank Discount Window
Borrower-in-Custody
|
|
|
|
Unused
credit line subject to the pledge of indirect auto
loans
|
Total
Unused Borrowing Capacity
|
|
|
|
|
Brokered
time deposits, retail deposits and FHLB advances are used by the Bank to manage
its overall liquidity position. While we closely monitor and forecast our
liquidity position, it is affected by asset growth, deposit withdrawals and
meeting other contractual obligations and commitments. The accuracy of our
forecast assumptions may increase or decrease the level of brokered time
deposits.
Management
believes that there are adequate funding sources to meet its liquidity needs for
the foreseeable future. Primary among these funding sources are the repayment of
principal and interest on loans, the renewal of time deposits, the potential
growth in the deposit base, and the credit availability from the Federal Home
Loan Bank of Boston and the Fed Discount Window Borrower-in-Custody program.
Management does not believe that the terms and conditions that will be present
at the renewal of these funding sources will significantly impact the Company's
operations, due to its management of the maturities of its assets and
liabilities.
The
following table summarizes the outstanding junior subordinated notes as of
September 30, 2008:
Affiliated
Trusts
|
|
Outstanding
Balance
|
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Rate
|
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First
Call Date
|
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The
excess funds raised from the issuance of trust preferred securities are
available for capital contributions to the Bank. The annual interest expense is
approximately $1,010,000 based on the current interest rates.
See Note
2 for more information on NBN Capital Trusts II, III and IV and the related
junior subordinated debt.
Under the
2006 Stock Repurchase Plan, the Company may purchase up to 200,000 shares of its
common stock from time to time in the open market at prevailing prices. Common
stock repurchased pursuant to the plan will be classified as issued but not
outstanding shares of common stock available for future issuance as determined
by the Board of Directors, from time to time. For the three months ended
September 30, 2008, the Company repurchased no shares of stock. Total stock
repurchases under the 2006 Plan since inception were 141,600 shares for
$2,232,274, an average of $15.76 per share, through September 30,
2008. The remaining repurchase capacity of the plan was 58,400 shares
at quarter end. Management believes that these and future purchases
have not and will not have a significant effect on the Company's liquidity. The
repurchase program may be discontinued by Northeast Bancorp at any
time.
Total
stockholders' equity of the Company was $41,324,446 as of September 30, 2008, as
compared to $40,273,312 at June 30, 2008. The increase of $1,051,134, or 3%, was
due to net income for the three months ended September 30, 2008 of $69,116, a
decrease in other comprehensive loss of $1,139,200, and stock options exercised
of $50,500 that was partially offset by the payment of dividends of $207,682.
Book value per common share was $17.80 as of September 30, 2008, as compared to
$17.40 at June 30, 2008. Tier 1 capital to total average assets of
the Company was 7.20% as of September 30, 2008 and 7.31% at June 30,
2008.
The
Company's net cash provided by operating activities was $404,259 during the
three months ended September 30, 2008, which was a $43,534 decrease compared to
the same period in 2007, and was primarily attributable to an increase in loans
held for sale for the three months ended September 30,
2008. Investing activities were a net use of cash primarily due to
purchasing investment securities during the three months ended September 30,
2008 but less than the same period in 2007. Financing activities
resulted in a net source of cash from increases in short-term borrowings,
structured repurchase agreements, and Fed Discount Window Borrower-in-Custody
line of credit partially offset by net decreases in deposits and a net decrease
in FHLB advances compared to the same period in 2007. Overall, the
Company's cash and cash equivalents decreased by $1,755,640 during the three
months ended September 30, 2008.
The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
contains various provisions intended to capitalize the Bank Insurance Fund
("BIF") and also affects a number of regulatory reforms that impact all insured
depository institutions, regardless of the insurance fund in which they
participate. Among other things, FDICIA grants the FRB broader regulatory
authority to take prompt corrective action against insured institutions that do
not meet capital requirements, including placing undercapitalized institutions
into conservatorship or receivership. FDICIA also grants the FRB broader
regulatory authority to take corrective action against insured institutions that
are otherwise operating in an unsafe and unsound manner.
FDICIA
defines specific capital categories based on an institution's capital ratios.
Regulations require a minimum Tier 1 capital equal to 4.0% of adjusted total
average assets, Tier 1 risk-based capital of 4.0% and a total risk-based capital
standard of 8.0%. The prompt corrective action regulations define specific
capital categories based on an institution's capital ratios. The capital
categories, in declining order are "well capitalized", "adequately capitalized",
"under capitalized", "significantly undercapitalized", and "critically
undercapitalized". As of September 30, 2008, the most recent notification from
the FRB categorized the Bank as well capitalized. There are no conditions or
events since that notification that management believes has changed the
institution's category.
At
September 30, 2008, the Company's and Bank's regulatory capital was in
compliance with regulatory capital requirements as follows:
Northeast
Bancorp
|
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Actual
|
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|
Required
For Capital Adequacy Purposes
|
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|
Required
To Be "Well Capitalized" Under Prompt Corrective Action
Provisions
|
|
(Dollars
in Thousands)
|
|
Amount
|
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|
Ratio
|
|
|
Amount
|
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|
Ratio
|
|
|
Amount
|
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Ratio
|
|
As
of September 30, 2008:
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Total
capital to risk weighted assets
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|
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Tier
1 capital to risk weighted assets
|
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Tier
1 capital to total average assets
|
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Northeast
Bank
|
|
Actual
|
|
|
Required
For Capital
Adequacy
Purposes
|
|
|
Required
To Be "Well
Capitalized"
Under Prompt
Corrective
Action
Provisions
|
|
(Dollars
in Thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As
of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets
|
|
|
|
|
|
|
|
|
|
|
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|
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Tier
1 capital to total average assets
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Off-balance Sheet
Arrangements and Aggregate Contractual Obligations
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, unused lines of
credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amounts
recognized in the condensed consolidated balance sheet. The contract or notional
amounts of these instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, unused lines
of credit and standby letters of credit is represented by the contractual amount
of those instruments. To control the credit risk associated with entering into
commitments and issuing letters of credit, the Company uses the same credit
quality, collateral policies and monitoring controls in making commitments and
letters of credit as it does with its lending activities. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total committed amounts do not necessarily represent future cash
requirements.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers.
Unused
lines of credit and commitments to extend credit typically result in loans with
a market interest rate.
A summary
of the amounts of the Company's (a) contractual obligations, and (b) other
commitments with off-balance sheet risk, both at September 30, 2008,
follows:
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Payments
Due by Period
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Less
Than
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After
5
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Contractual
Obligations
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Total
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1
Year
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1-3
Years
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4-5
Years
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Years
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Fed
Discount Window Borrower-in-Custody
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Structured repurchase
agreements
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Junior
subordinated notes
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Operating
lease obligations (1)
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Total
contractual obligations
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Amount
of Commitment Expiration - Per Period
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Less
Than
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After
5
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Commitments with
off-balance sheet risk
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Total
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1
Year
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1-3
Years
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4-5
Years
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|
Years
|
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Commitments
to extend credit (2)(4)
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Commitments
related to loans held for sale(3)
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Unused
lines of credit (4)(5)
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Standby
letters of credit (6)
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(1)
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Represents
an off-balance sheet obligation.
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(2)
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Represents
commitments outstanding for residential real estate, commercial real
estate, and commercial loans.
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(3)
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Commitments
of residential real estate loans that will be held for
sale.
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(4)
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Loan
commitments and unused lines of credit for commercial and construction
loans expire or are subject to renewal in twelve months or
less.
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(5)
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Represents
unused lines of credit from commercial, construction, and home equity
loans.
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(6)
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Standby
letters of credit generally expire in twelve
months.
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Management
believes that the Company has adequate resources to fund all of its
commitments.
The Bank
has written options limited to those residential real estate loans designated
for sale in the secondary market and subject to a rate lock. These rate-locked
loan commitments are used for trading activities, not as a hedge. The fair value
of the outstanding written options at September 30, 2008 was a loss of
$14,055.
Impact of
Inflation
The
consolidated financial statements and related notes herein have been presented
in terms of historic dollars without considering changes in the relative
purchasing power of money over time due to inflation. Unlike industrial
companies, substantially all of the assets and virtually all of the liabilities
of the Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the general level of
inflation. Over short periods of time, interest rates may not necessarily move
in the same direction or in the same magnitude as inflation.
There
have been no material changes in the Company's market risk from June 30, 2008.
For information regarding the Company's market risk, refer to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2008.
The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports the Company files or submits under the
Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and that such information is
accumulated and communicated to the Company's management, including our Chief
Executive Officer and Chief Financial Officer (the Company's principal executive
officer and principal financial officer, respectively), as appropriate to allow
for timely decisions regarding timely disclosure. In designing and evaluating
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost/benefit relationship of
possible controls and procedures.
Our
management, with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under
the Exchange Act) as of the end of the period covered by this Form
10-Q.
Based on
this evaluation of our disclosure controls and procedures, our Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures were effective as of September 30, 2008.
There
were no significant changes in our internal controls over financial reporting
(as defined in Rule 13a - 15(f) of the Exchange Act) that occurred during the
first three months of our 2008 fiscal year that has materially affected, or in
other factors that could affect, the Company's internal controls over financial
reporting.
|
Legal
Proceedings
None.
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|
Risk
Factors
The
following risk factors are in addition to those risk factors set forth in
our Annual Report on Form10-K for the fiscal year ended June 30,
2008.
Difficult
Conditions in the Capital Markets and the Economy Generally May Materially
Adversely Affect Our Business and Results of Operations and We Do Not
Expect These Conditions to Improve in the Near Future.
Our
results of operations are materially affected by conditions in the capital
markets and the economy generally. The capital and credit markets have
been experiencing extreme volatility and disruption for more than twelve
months. In recent weeks, the volatility and disruption have reached
unprecedented levels. In many cases, these markets have
produced downward pressure on stock prices of, and credit availability to,
certain companies without regard to those companies’ underlying financial
strength.
Recently,
concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining
U.S. real estate market have contributed to increased volatility and
diminished expectations for the economy and the capital and credit markets
going forward. These factors, combined with volatile oil prices, declining
business and consumer confidence and increased unemployment, have
precipitated an economic slowdown and induced fears of a possible
recession. In addition, the fixed-income markets are experiencing a period
of extreme volatility which has negatively impacted market liquidity
conditions. Initially, the concerns on the part of market participants
were focused on the subprime segment of the mortgage-backed securities
market. However, these concerns have since expanded to include a broad
range of mortgage-and asset-backed and other fixed income securities,
including those rated investment grade, the U.S. and international credit
and interbank money markets generally, and a wide range of financial
institutions and markets, asset classes and sectors. As a result, the
market for fixed income instruments has experienced decreased liquidity,
increased price volatility, credit downgrade events, and increased
probability of default. Securities that are less liquid are more difficult
to value and may be hard to dispose of. Domestic and international equity
markets have also been experiencing heightened volatility and turmoil,
with issuers (such as our company) that have exposure to the real estate,
mortgage and credit markets particularly affected. These events and the
continuing market upheavals, may have an adverse effect on us, in part
because we have a large investment portfolio and also because we are
dependent upon customer behavior. Our revenues are likely to decline in
such circumstances, and our profit margins could erode. In addition, in
the event of extreme and prolonged market events, such as the global
credit crisis, we could incur significant losses. Even in the absence of a
market downturn, we are exposed to substantial risk of loss due to market
volatility.
Factors
such as consumer spending, business investment, government spending, the
volatility and strength of the capital markets, and inflation all affect
the business and economic environment and, ultimately, the amount and
profitability of our business. In an economic downturn characterized by
higher unemployment, lower family income, lower corporate earnings, lower
business investment and lower consumer spending, the demand for our
financial products could be adversely affected. Adverse changes
in the economy could affect earnings negatively and could have a material
adverse effect on our business, results of operations and financial
condition. The current mortgage crisis has also raised the possibility of
future legislative and regulatory actions in addition to the recent
enactment of the Emergency Economic Stabilization Act of 2008 (the “EESA”)
that could further impact our business. We cannot predict whether or when
such actions may occur, or what impact, if any, such actions could have on
our business, results of operations and financial condition.
Recent
Negative Developments In The Financial Industry And The Credit Markets May
Subject Us To Additional Regulation.
As
a result of the recent global financial crisis, the potential exists for
new federal or state laws and regulations regarding lending and funding
practices and liquidity standards to be promulgated, and bank regulatory
agencies are expected to be active in responding to concerns and trends
identified in examinations, including the expected issuance of many formal
enforcement orders. Negative developments in the financial industry and
the domestic and international credit markets, and the impact of new
legislation in response to those developments, may negatively impact our
operations by restricting our business operations, including our ability
to originate or sell loans, and adversely impact our financial
performance.
Our
Future Growth May Require Us To Raise Additional Capital In The Future,
But That Capital May Not Be Available When It Is Needed.
We
are required by regulatory authorities to maintain adequate levels of
capital to support our operations. We anticipate that our current capital
levels will satisfy our regulatory requirements for the foreseeable
future. We may at some point, however, need to raise additional capital to
support our continued growth. Our ability to raise additional capital will
depend, in part, on conditions in the capital markets at that time, which
are outside our control, and our financial performance. Accordingly, we
may be unable to raise additional capital, if and when needed, on terms
acceptable to us, or at all. If we cannot raise additional capital when
needed, our ability to further expand our operations through internal
growth and acquisitions could be materially impaired. In addition, if we
decide to raise additional equity capital, your interest could be
diluted.
The
FDIC deposit insurance assessments that we are required to pay may
materially increase in the future, which would have an adverse effect on
our earnings.
As
a member institution of the FDIC, we are required to pay quarterly deposit
insurance premium assessments to the FDIC. Due to the recent failure of
several unaffiliated FDIC insurance depository institutions and the
increased deposit account insurance limit, we anticipate that the deposit
insurance premium assessments paid by all banks will increase. If the
deposit insurance premium assessment rate applicable to us increases, our
earnings could be adversely impacted.
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|
Unregistered
Sales of Equity Securities and Use of Proceeds
The
following table provides information on the purchases made by or on behalf
of the Company of shares of Northeast Bancorp common stock during the
indicated periods.
|
|
Period
(1)
|
Total
Number
Of
Shares
Purchased
(2)
|
Average
Price
Paid
per Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Program
|
Maximum
Number of
Shares
that May Yet be
Purchased
Under
The
Program (3)
|
|
Jul.
1 – Jul. 31
|
-
|
-
|
-
|
58,400
|
|
Aug
1 – Aug. 31
|
-
|
-
|
-
|
58,400
|
|
Sep.
1 – Sep. 30
|
-
|
-
|
-
|
58,400
|
|
|
|
|
|
|
(1)
|
Based
on trade date, not settlement date.
|
(2)
|
Represents
shares purchased in open-market transactions pursuant to the Company's
2006 Stock Repurchase Plan.
|
(3)
|
On
December 15, 2006, the Company announced that the Board of Directors of
the Company approved the 2006 Stock Repurchase Plan pursuant to which the
Company is authorized to repurchase in open-market transactions up to
200,000 shares from time to time until the plan expires on December 31,
2008, unless extended.
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|
Defaults
Upon Senior Securities
None
|
|
|
|
Submission
of Matters to a Vote of Security Holders
None
|
|
|
|
Other
Information
None.
|
|
|
|
Exhibits
|
|
List
of Exhibits:
|
|
Exhibits
No.
|
Description
|
|
3.1
|
Articles
(incorporated by reference to the Company’s June 30, 2007 10K filed on
September 27, 2007)
|
|
3.2
|
Bylaws
(incorporated by reference to the Company’s June 30, 2007 10K filed on
September 27, 2007)
|
|
11
|
Statement
Regarding Computation of Per Share Earnings.
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
|
32.1
|
Certificate
of the Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(b)).
|
|
32.2
|
Certificate
of the Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(b)).
|
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: November
13, 2008
|
|
NORTHEAST
BANCORP
|
|
By:
|
/s/
James D. Delamater
|
|
|
James D. Delamater
|
|
|
President and CEO
|
|
|
|
|
By:
|
/s/
Robert S. Johnson
|
|
|
Robert S. Johnson
|
|
|
Chief Financial Officer
|
|
|
|
NORTHEAST
BANCORP
Index to
Exhibits
EXHIBIT
NUMBER
|
DESCRIPTION
|
3.1
|
Articles
(incorporated by reference to the Company’s June 30, 2007 10K filed on
September 27, 2007)
|
3.2
|
Bylaws
(incorporated by reference to the Company’s June 30, 2007 10K filed on
September 27, 2007)
|
11
|
Statement
Regarding Computation of Per Share Earnings
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).
|
32.1
|
Certificate
of the Chief Executive Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule
13a-14(b)).
|
32.2
|
Certificate
of the Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(b)).
|