Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2014

 

Commission File Number: 1-14588

 

Northeast Bancorp

(Exact name of registrant as specified in its charter)

 

Maine

 

01-0425066

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

500 Canal Street, Lewiston, Maine

 

04240

(Address of Principal executive offices)

 

(Zip Code)

 

(207) 786-3245

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30, 2014 the registrant had outstanding 9,550,031 shares of voting common stock, $1.00 par value per share and 880,963 shares of non-voting common stock, $1.00 par value per share.

 

 

 



Table of Contents

 

Part I.

Financial Information

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Consolidated Balance Sheets
March 31, 2014 and June 30, 2013

 

 

 

 

 

 

 

Consolidated Statements of Income
Three Months Ended March 31, 2014 and 2013
Nine Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2014 and 2013
Nine Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2014 and 2013

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

 

 

 

 

 

Item 5.

Other Information

 

 

 

 

 

 

Item 6.

Exhibits

 

 

2



Table of Contents

 

PART 1- FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share and per share data)

 

 

 

March 31, 2014

 

June 30, 2013

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

2,677

 

$

3,238

 

Short-term investments

 

71,686

 

62,696

 

Total cash and cash equivalents

 

74,363

 

65,934

 

Available-for-sale securities, at fair value

 

112,732

 

121,597

 

Loans held for sale

 

9,827

 

8,594

 

Loans

 

 

 

 

 

Commercial real estate

 

299,898

 

264,448

 

Residential real estate

 

153,972

 

127,829

 

Construction

 

 

42

 

Commercial and industrial

 

49,554

 

29,720

 

Consumer

 

10,828

 

13,337

 

Total loans

 

514,252

 

435,376

 

Less: Allowance for loan losses

 

1,345

 

1,143

 

Loans, net

 

512,907

 

434,233

 

Premises and equipment, net

 

9,211

 

10,075

 

Real estate owned and other possessed collateral, net

 

2,000

 

2,134

 

Federal Home Loan Bank and Federal Reserve Bank stock, at cost

 

5,721

 

5,721

 

Intangible assets, net

 

2,962

 

3,544

 

Bank owned life insurance

 

14,726

 

14,385

 

Other assets

 

6,444

 

4,422

 

Total assets

 

$

750,893

 

$

670,639

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits

 

 

 

 

 

Demand

 

$

43,294

 

$

46,425

 

Savings and interest checking

 

100,961

 

90,970

 

Money market

 

86,735

 

84,416

 

Time

 

332,320

 

262,812

 

Total deposits

 

563,310

 

484,623

 

Federal Home Loan Bank advances

 

42,878

 

28,040

 

Wholesale repurchase agreements

 

10,240

 

25,397

 

Short-term borrowings

 

2,585

 

625

 

Junior subordinated debentures issued to affiliated trusts

 

8,396

 

8,268

 

Capital lease obligation

 

1,604

 

1,739

 

Other liabilities

 

7,872

 

8,145

 

Total liabilities

 

636,885

 

556,837

 

Commitments and contingencies

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2014 and June 30, 2013

 

 

 

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 9,551,531 and 9,565,680 shares issued and outstanding at March 31, 2014 and June 30, 2013, respectively

 

9,552

 

9,566

 

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 880,963 shares issued and outstanding at March 31, 2014 and June 30, 2013

 

881

 

881

 

Additional paid-in capital

 

93,371

 

92,745

 

Retained earnings

 

11,856

 

12,524

 

Accumulated other comprehensive loss

 

(1,652

)

(1,914

)

Total stockholders’ equity

 

114,008

 

113,802

 

Total liabilities and stockholders’ equity

 

$

750,893

 

$

670,639

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

8,403

 

$

9,601

 

$

27,142

 

$

25,209

 

Interest on available-for-sale securities

 

253

 

234

 

797

 

929

 

Other interest and dividend income

 

61

 

85

 

208

 

283

 

Total interest and dividend income

 

8,717

 

9,920

 

28,147

 

26,421

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,022

 

1,084

 

3,048

 

3,090

 

Federal Home Loan Bank advances

 

324

 

232

 

975

 

750

 

Wholesale repurchase agreements

 

93

 

135

 

285

 

515

 

Short-term borrowings

 

6

 

4

 

17

 

15

 

Junior subordinated debentures issued to affiliated trusts

 

140

 

190

 

525

 

574

 

Obligation under capital lease agreements

 

20

 

22

 

63

 

69

 

Total interest expense

 

1,605

 

1,667

 

4,913

 

5,013

 

 

 

 

 

 

 

 

 

 

 

Net interest and dividend income before provision for loan losses

 

7,112

 

8,253

 

23,234

 

21,408

 

Provision for loan losses

 

180

 

346

 

407

 

821

 

Net interest and dividend income after provision for loan losses

 

6,932

 

7,907

 

22,827

 

20,587

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Fees for other services to customers

 

385

 

430

 

1,246

 

1,202

 

Net securities gains

 

 

 

 

792

 

Gain on sales of loans held for sale

 

265

 

625

 

1,145

 

2,295

 

Gain on sales of portfolio loans

 

373

 

1,228

 

603

 

2,226

 

Gain recognized on real estate owned and other repossessed collateral, net

 

165

 

230

 

50

 

681

 

Bank-owned life insurance income

 

108

 

118

 

342

 

599

 

Other noninterest income

 

12

 

12

 

46

 

68

 

Total noninterest income

 

1,308

 

2,643

 

3,432

 

7,863

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,759

 

4,687

 

12,624

 

12,170

 

Occupancy and equipment expense

 

1,450

 

1,218

 

4,075

 

3,341

 

Professional fees

 

366

 

388

 

1,115

 

1,210

 

Data processing fees

 

257

 

239

 

770

 

671

 

Marketing expense

 

86

 

249

 

225

 

678

 

Loan acquisition and collection expense

 

440

 

352

 

1,203

 

1,285

 

FDIC insurance premiums

 

127

 

125

 

354

 

364

 

Intangible asset amortization

 

162

 

205

 

582

 

735

 

Legal settlement recovery

 

 

 

(250

)

 

Other noninterest expense

 

869

 

665

 

2,284

 

2,034

 

Total noninterest expense

 

7,516

 

8,128

 

22,982

 

22,488

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax expense

 

724

 

2,422

 

3,277

 

5,962

 

Income tax expense

 

287

 

792

 

1,119

 

1,913

 

Net Income from continuing operations

 

437

 

1,630

 

2,158

 

4,049

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income tax expense (benefit)

 

 

55

 

(12

)

253

 

Income tax expense (benefit)

 

 

19

 

(4

)

87

 

Net income (loss) from discontinued operations

 

 

36

 

(8

)

166

 

Net income

 

$

437

 

$

1,666

 

$

2,150

 

$

4,215

 

Net income available to common stockholders

 

$

437

 

$

1,666

 

$

2,150

 

$

3,860

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

10,432,494

 

10,425,576

 

10,435,300

 

10,397,280

 

Diluted

 

10,432,494

 

10,425,576

 

10,435,300

 

10,397,280

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.35

 

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.02

 

Net Income

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.37

 

Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.35

 

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.02

 

Net Income

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.37

 

Cash dividends declared per common share

 

$

0.09

 

$

0.09

 

$

0.27

 

$

0.27

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

437

 

$

1,666

 

$

2,150

 

$

4,215

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Change in net unrealized gain or loss on available-for-sale securities

 

579

 

(164

)

449

 

(318

)

Reclassification adjustment for net gains included in net income

 

 

 

 

(792

)

Total available-for-sale securities

 

579

 

(164

)

449

 

(1,110

)

Derivatives and hedging activities:

 

 

 

 

 

 

 

 

 

Change in accumulated loss on effective cash flow hedges

 

(528

)

62

 

56

 

127

 

Reclassification adjustments for net gains included in net income

 

(72

)

(17

)

(108

)

(54

)

Total derivatives and hedging activities

 

(600

)

45

 

(52

)

73

 

Total other comprehensive (loss) income, before tax

 

(21

)

(119

)

397

 

(1,037

)

Income tax (benefit) expense related to other comprehensive (loss) income

 

(7

)

(40

)

135

 

(353

)

Other comprehensive (loss) income, net of tax

 

(14

)

(79

)

262

 

(684

)

Comprehensive income

 

$

423

 

$

1,587

 

$

2,412

 

$

3,531

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Preferred Stock

 

Voting Common Stock

 

Non-voting Common Stock

 

Additional

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-in Capital

 

Earnings

 

Income (Loss)

 

Equity

 

Balance at June 30, 2012

 

4,227

 

$

4

 

9,307,127

 

$

9,307

 

1,076,314

 

$

1,076

 

$

96,359

 

$

12,235

 

$

158

 

$

119,139

 

Net income

 

 

 

 

 

 

 

 

4,215

 

 

4,215

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

(684

)

(684

)

Conversion of non-voting common stock to voting common stock

 

 

 

195,351

 

195

 

(195,351

)

(195

)

 

 

 

 

Dividends on preferred stock

 

 

 

 

 

 

 

 

(113

)

 

(113

)

Dividends on common stock at $0.27 per share

 

 

 

 

 

 

 

 

(2,809

)

 

(2,809

)

Offering costs

 

 

 

 

 

 

 

(59

)

 

 

(59

)

Stock-based compensation

 

 

 

 

 

 

 

374

 

 

 

374

 

Issuance of restricted common stock

 

 

 

63,202

 

64

 

 

 

(64

)

 

 

 

Redemption of preferred stock and warrants

 

(4,227

)

(4

)

 

 

 

 

(4,322

)

 

 

(4,326

)

Accretion of preferred stock

 

 

 

 

 

 

 

268

 

(268

)

 

 

Balance at March 31, 2013

 

 

$

 

9,565,680

 

$

9,566

 

880,963

 

$

881

 

$

92,556

 

$

13,260

 

$

(526

)

$

115,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

 

$

 

9,565,680

 

$

9,566

 

880,963

 

$

881

 

$

92,745

 

$

12,524

 

$

(1,914

)

$

113,802

 

Net income

 

 

 

 

 

 

 

 

2,150

 

 

2,150

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

262

 

262

 

Dividends on common stock at $0.27 per share

 

 

 

 

 

 

 

 

(2,818

)

 

(2,818

)

Stock-based compensation

 

 

 

 

 

 

 

612

 

 

 

612

 

Forfeiture of restricted common stock

 

 

 

(14,149

)

(14

)

 

 

14

 

 

 

 

Balance at March 31, 2014

 

 

$

 

9,551,531

 

$

9,552

 

880,963

 

$

881

 

$

93,371

 

$

11,856

 

$

(1,652

)

$

114,008

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

Operating activities:

 

 

 

 

 

Net income

 

$

2,150

 

$

4,215

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

407

 

821

 

Gain on sale and impairment of real estate owned and other repossessed collateral, net

 

(50

)

(681

)

Accretion of fair value adjustments on loans, net

 

(5,048

)

(6,805

)

Accretion of fair value adjustments on deposits, net

 

(489

)

(758

)

Accretion of fair value adjustments on borrowings, net

 

(191

)

(877

)

Originations of loans held for sale

 

(62,911

)

(106,770

)

Net proceeds from sales of loans held for sale

 

62,823

 

111,179

 

Gain on sales of loans held for sale

 

(1,145

)

(2,295

)

Gain on sales of portfolio loans

 

(603

)

(2,226

)

Amortization of intangible assets

 

582

 

735

 

Bank-owned life insurance income, net

 

(342

)

(599

)

Depreciation of premises and equipment

 

1,540

 

1,283

 

Loss on disposal of premises and equipment

 

16

 

 

Net gain on sale of available-for-sale securities

 

 

(792

)

Stock-based compensation

 

612

 

374

 

Amortization of securities, net

 

972

 

1,253

 

Changes in other assets and liabilities:

 

 

 

 

 

Other assets

 

(1,978

)

1,828

 

Other liabilities

 

(460

)

737

 

Net cash (used in) provided by operating activities

 

(4,115

)

622

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of available-for-sale securities

 

 

159,579

 

Purchases of available-for-sale securities

 

(42,340

)

(167,294

)

Proceeds from maturities and principal payments on available-for-sale securities

 

50,682

 

10,858

 

Loan purchases

 

(46,267

)

(75,227

)

Loan originations and principal collections, net

 

(33,757

)

49,759

 

Purchases of premises and equipment

 

(703

)

(2,361

)

Proceeds from sales of premises and equipment

 

11

 

 

Proceeds from sales of real estate owned and other repossessed collateral

 

1,160

 

2,758

 

Proceeds from life insurance benefits

 

 

628

 

Proceeds from redemption of regulatory stock

 

 

352

 

Proceeds from sales of portfolio loans

 

5,575

 

6,749

 

Net cash used in investing activities

 

(65,639

)

(14,199

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net increase in deposits

 

79,176

 

84,156

 

Net increase in short-term borrowings

 

1,960

 

1,151

 

Dividends paid on preferred stock

 

 

(113

)

Dividends paid on common stock

 

(2,818

)

(2,809

)

Proceeds from (repayment of) FHLB advances

 

15,000

 

(10,000

)

Stock offering costs

 

 

(59

)

Repayment of wholesale repurchase agreements

 

(15,000

)

(40,000

)

Redemption of preferred stock and warrants

 

 

(4,326

)

Repayment of capital lease obligation

 

(135

)

(128

)

Net cash provided by financing activities

 

78,183

 

27,872

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

8,429

 

14,295

 

Cash and cash equivalents, beginning of period

 

65,934

 

128,274

 

Cash and cash equivalents, end of period

 

$

74,363

 

$

142,569

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Transfers from loans to real estate owned and other repossessed collateral

 

$

2,174

 

$

4,066

 

Transfers from real estate owned and other repossessed collateral to loans

 

1,155

 

1,055

 

Transfers from premises and equipment to real estate owned and other repossessed collateral

 

 

270

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

 

1.  Basis of Presentation

 

The accompanying unaudited condensed and consolidated interim financial statements include the accounts of Northeast Bancorp (“Northeast” or the “Company”) and its wholly-owned subsidiary, Northeast Bank (the “Bank”).

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods presented.  These financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2013 (“Fiscal 2013”) included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

2.  Recent Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of this guidance did not have a material impact on the consolidated financial statements.

 

In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”). The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The new standards are effective for annual periods beginning January 1, 2013 and for interim periods within those annual periods. Retrospective application is required. The adoption of this guidance did not have a material impact on the consolidated financial statements.

 

In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2013-30”). The amendments in ASU 2013-30 permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges.  The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  ASU 2013-30 may impact the accounting for interest rate hedging relationships entered into after July 17, 2013.

 

In January 2014, the FASB issued ASU No. 2014-04, Receivables (Topic 310): Troubled Debt Restructurings by Creditors (“ASU 2014-04”).  The amendments clarify that when an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (i) the amount of foreclosed residential real estate property held by the creditor and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments ASU 2014-04 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  An entity can elect to adopt the amendments in ASU 2014-04 using either a modified retrospective transition method or a prospective transition method.  Under the modified retrospective transition method, an entity should apply the amendments by means of a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual period for which the amendments are effective.  The Company does not expect ASU 2014-04 to have material impact on the consolidated financial statements.

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360):  Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”).  Under

 

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ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations.  In addition, ASU 2014-08 (1) expands the disclosure requirements for disposals that meet the definition of a discontinued operation, (2) requires entities to disclose information about disposals of individually significant components, and (3) updates the current definition of “discontinued operations.”  The amendments are effective prospectively within annual periods beginning on or after December 15, 2014.  The Company does not expect ASU 2014-08 to have a material impact on the consolidated financial statements.

 

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3.  Securities Available-for-Sale

 

The following presents a summary of the amortized cost, gross unrealized holding gains and losses, and fair value of securities available for sale.

 

 

 

March 31, 2014

 

 

 

Amortized

 

Gross Unrealized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

45,327

 

$

11

 

$

(47

)

$

45,291

 

Agency mortgage-backed securities

 

69,592

 

 

(2,151

)

67,441

 

 

 

$

114,919

 

$

11

 

$

(2,198

)

$

112,732

 

 

 

 

June 30, 2013

 

 

 

Amortized

 

Gross Unrealized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

45,289

 

$

44

 

$

 

$

45,333

 

Agency mortgage-backed securities

 

78,944

 

 

(2,680

)

76,264

 

 

 

$

124,233

 

$

44

 

$

(2,680

)

$

121,597

 

 

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale. The following table summarizes realized gains and losses on available-for-sale securities.

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Dollars in thousands)

 

Gross realized gains

 

$

 

$

 

$

 

$

831

 

Gross realized losses

 

 

 

 

(39

)

Net security gains

 

$

 

$

 

$

 

$

792

 

 

At March 31, 2014, investment securities with a fair value of approximately $30.0 million were pledged as collateral to secure outstanding borrowings.

 

The following summarizes the Company’s gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

 

 

 

March 31, 2014

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

33,273

 

$

(47

)

$

 

$

 

$

33,273

 

$

(47

)

Agency mortgage-backed securities

 

32,147

 

(654

)

35,294

 

(1,497

)

67,441

 

(2,151

)

 

 

$

65,420

 

$

(701

)

$

35,294

 

$

(1,497

)

$

100,714

 

$

(2,198

)

 

 

 

June 30, 2013

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

 

$

 

$

 

$

 

$

 

$

 

Agency mortgage-backed securities

 

76,264

 

(2,680

)

 

 

76,264

 

(2,680

)

 

 

$

76,264

 

$

(2,680

)

$

 

$

 

$

76,264

 

$

(2,680

)

 

There were no other-than-temporary impairment losses on securities during the three and nine months ended March 31, 2014 or 2013.

 

At March 31, 2014, the Company had eleven securities in a continuous loss position for greater than twelve months.  At March 31, 2014, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or government-sponsored enterprises.  The decline in fair value of the Company’s available-for-sale securities at March 31, 2014 is attributable to changes in interest rates.

 

Management of the Company, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company’s investment portfolio, also considers the Company’s ability and intent to hold such securities to maturity or recovery of cost.  Management does not believe any of the Company’s available-for-sale securities are other-than-temporarily impaired at March 31, 2014.

 

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The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of March 31, 2014. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations without penalties.

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

(Dollars in thousands)

 

Due within one year

 

$

3,004

 

$

3,005

 

Due after one year through five years

 

42,323

 

42,286

 

Due after five years through ten years

 

35,719

 

35,045

 

Due after ten years

 

33,873

 

32,396

 

 

 

$

114,919

 

$

112,732

 

 

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Table of Contents

 

4.  Loans, Allowance for Loan Losses and Credit Quality

 

Loans are carried at the principal amounts outstanding, or amortized acquired fair value in the case of acquired loans, adjusted by partial charge-offs and net of deferred loan costs or fees.  Loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method.  When a loan is paid off, the unamortized portion is recognized in interest income.  Interest income is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status.

 

Loans purchased by the Company are accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).  At acquisition, the effective interest rate is determined based on the discount rate that equates the present value of the Company’s estimate of cash flows with the purchase price of the loan.  Prepayments are not assumed in determining a purchased loan’s effective interest rate and income accretion.  The application of ASC 310-30 limits the yield that may be accreted on the purchased loan, or the “accretable yield,” to the excess of the Company’s estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company’s initial investment in the loan.  The excess of contractually required payments receivable over the cash flows expected to be collected on the loan represents the purchased loan’s “nonaccretable difference.”  Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase to the loan’s effective yield through a reclassification of some, or all, of the nonaccretable difference to accretable yield.  The effect of subsequent credit-related declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses.

 

Loans are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when in management’s judgment the collectability of interest or principal of the loan has been significantly impaired.  Loans accounted for under ASC 310-30 are placed on nonaccrual when it is not possible to reach a reasonable expectation of the timing and amount of cash flows to be collected on the loan.  When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans.  Interest on nonaccrual loans is accounted for on a cash-basis or using the cost-recovery method when collectability is doubtful.  A loan is returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a reasonable period of time.

 

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”), and therefore by definition is an impaired loan.  Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral.  For loans accounted for under ASC 310-30, the Company evaluates whether it has granted a concession by comparing the restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition.  As a result, if an ASC 310-30 loan is modified to be consistent with, or better than, the Company’s expectations at acquisition, the loan would not qualify as a TDR. 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. With limited exceptions, loans classified as TDRs remain classified as such until the loan is paid off.

 

The composition of the Company’s loan portfolio follows.

 

 

 

March 31, 2014

 

June 30, 2013

 

 

 

Originated

 

Purchased

 

Total

 

Originated

 

Purchased

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate

 

$

121,155

 

$

3,740

 

$

124,895

 

$

89,734

 

$

2,706

 

$

92,440

 

Home equity

 

29,077

 

 

29,077

 

35,389

 

 

35,389

 

Commercial real estate

 

118,684

 

181,214

 

299,898

 

100,402

 

164,046

 

264,448

 

Construction

 

 

 

 

42

 

 

42

 

Commercial business

 

49,549

 

5

 

49,554

 

29,686

 

34

 

29,720

 

Consumer

 

10,828

 

 

10,828

 

13,337

 

 

13,337

 

Total loans

 

$

329,293

 

$

184,959

 

$

514,252

 

$

268,590

 

$

166,786

 

$

435,376

 

 

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Table of Contents

 

Allowance for Loan Losses and Impaired Loans

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  For residential and consumer loans, a charge-off is recorded no later than the point at which a loan is 180 days past due if the loan balance exceeds the fair value of the collateral, less costs to sell.  For commercial loans, a charge-off is recorded on a case-by-case basis when all or a portion of the loan is deemed to be uncollectible.  Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses consists of general, specific, and unallocated reserves and reflects management’s estimate of probable loan losses inherent in the loan portfolio at the balance sheet date.  Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for loan losses on a quarterly basis.  The calculation of the allowance for loan losses is segregated by portfolio segments, which include:  commercial real estate, commercial business, consumer, residential real estate, and purchased loans.  Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate:  All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality of the individual borrower.  The overall health of the economy, particularly unemployment rates and housing prices, has a significant effect on the credit quality in this segment.  For purposes of the Company’s allowance for loan loss calculation, home equity loans and lines of credit are included in residential real estate.

 

Commercial real estate:  Loans in this segment are primarily income-producing properties. For owner-occupied properties, the cash flows are derived from an operating business, and the underlying cash flows may be adversely affected by deterioration in the financial condition of the operating business.  The underlying cash flows generated by non-owner occupied properties may be adversely affected by increased vacancy rates.  Management periodically obtains rent rolls, with which it monitors the cash flows of these loans.  Adverse developments in either of these areas will have an adverse effect on the credit quality of this segment.  For purposes of the allowance for loan losses, this segment also includes construction loans.

 

Commercial business:  Loans in this segment are made to businesses and are generally secured by the assets of the business. Repayment is expected from the cash flows of the business.  Continued weakness in national or regional economic conditions, and a corresponding weakness in consumer or business spending, will have an adverse effect on the credit quality of this segment.

 

Consumer:  Loans in this segment are generally secured, and repayment is dependent on the credit quality of the individual borrower.  Repayment of consumer loans is generally based on the earnings of individual borrowers, which may be adversely impacted by regional labor market conditions.

 

Purchased:  Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the Bank’s Loan Acquisition and Servicing Group (“LASG”).  Loans acquired by the LASG are, with limited exceptions, performing loans at the date of purchase.  Loans in this segment acquired with specific material credit deterioration since origination are identified as purchased credit-impaired.  Repayment of loans in this segment is largely dependent on cash flow from the successful operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied property.  Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the real estate market, such as geographic location or property type.

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by loan segment.  The Company does not weight periods used in that analysis to determine the average loss rate in each portfolio segment.  This historical loss factor is adjusted for the following qualitative factors:

 

·                  Levels and trends in delinquencies and nonperforming loans

 

·                  Trends in the volume and nature of loans

 

·                  Trends in credit terms and policies, including underwriting standards, procedures and practices, and the experience and ability of lending management and staff

 

·                  Trends in portfolio concentration

 

·                  National and local economic trends and conditions

 

·                  Effects of changes or trends in internal risk ratings

 

·                  Other effects resulting from trends in the valuation of underlying collateral

 

There were no significant changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three and nine months ended March 31, 2014 or 2013.

 

The allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial business and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment based on the group’s historical loss experience adjusted for qualitative factors.  Accordingly, the Company does not

 

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Table of Contents

 

separately identify individual consumer and residential loans for individual impairment and disclosure.  However, all TDRs are individually reviewed for impairment.

 

For all portfolio segments, except loans accounted for under ASC 310-30, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to realize cash flows as estimated at acquisition.  For loans accounted for under ASC 310-30 for which cash flows can reasonably be estimated, loan impairment is measured based on the decrease in expected cash flows from those estimated at acquisition, excluding changes due to changes in interest rate indices and other non-credit related factors, discounted at the loan’s effective rate assumed at acquisition.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of the collecting scheduled principal and interest payments when due.

 

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Table of Contents

 

The following table sets forth activity in the Company’s allowance for loan losses.

 

 

 

Three Months Ended March 31, 2014

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

649

 

$

321

 

$

52

 

$

112

 

$

207

 

$

9

 

$

1,350

 

Provision

 

151

 

 

41

 

25

 

(28

)

(9

)

180

 

Recoveries

 

1

 

1

 

1

 

5

 

 

 

8

 

Charge-offs

 

(123

)

 

(43

)

(27

)

 

 

(193

)

Ending balance

 

$

678

 

$

322

 

$

51

 

$

115

 

$

179

 

$

 

$

1,345

 

 

 

 

Three Months Ended March 31, 2013

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

492

 

$

102

 

$

47

 

$

234

 

$

 

$

 

$

875

 

Provision

 

186

 

117

 

 

(4

)

47

 

 

346

 

Recoveries

 

2

 

5

 

 

5

 

 

 

12

 

Charge-offs

 

(102

)

(43

)

 

(8

)

(47

)

 

(200

)

Ending balance

 

$

578

 

$

181

 

$

47

 

$

227

 

$

 

$

 

1,033

 

 

 

 

Nine Months Ended March 31, 2014

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

594

 

$

173

 

$

70

 

$

189

 

$

76

 

$

41

 

$

1,143

 

Provision

 

233

 

148

 

17

 

(53

)

103

 

(41

)

407

 

Recoveries

 

7

 

1

 

7

 

36

 

 

 

51

 

Charge-offs

 

(156

)

 

(43

)

(57

)

 

 

(256

)

Ending balance

 

$

678

 

$

322

 

$

51

 

$

115

 

$

179

 

$

 

$

1,345

 

 

 

 

Nine Months Ended March 31, 2013

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

214

 

$

93

 

$

292

 

$

225

 

$

 

$

 

$

824

 

Provision

 

598

 

126

 

(42

)

92

 

47

 

 

821

 

Recoveries

 

3

 

5

 

 

12

 

 

 

20

 

Charge-offs

 

(237

)

(43

)

(203

)

(102

)

(47

)

 

(632

)

Ending balance

 

$

578

 

$

181

 

$

47

 

$

227

 

$

 

$

 

1,033

 

 

15



Table of Contents

 

The following table sets forth information regarding the allowance for loan losses by portfolio segment and impairment methodology.

 

 

 

March 31, 2014

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

221

 

98

 

 

6

 

139

 

 

464

 

Collectively evaluated

 

457

 

224

 

51

 

109

 

 

 

841

 

ASC 310-30

 

 

 

 

 

40

 

 

40

 

Total

 

$

678

 

$

322

 

$

51

 

$

115

 

$

179

 

$

 

$

1,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

2,379

 

$

2,259

 

$

65

 

$

221

 

$

5,657

 

$

 

$

10,581

 

Collectively evaluated

 

147,853

 

116,425

 

49,484

 

10,607

 

 

 

324,369

 

ASC 310-30

 

 

 

 

 

179,302

 

 

179,302

 

Total

 

$

150,232

 

$

118,684

 

$

49,549

 

$

10,828

 

$

184,959

 

$

 

$

514,252

 

 

 

 

June 30, 2013

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

235

 

$

85

 

$

63

 

$

23

 

$

65

 

$

 

$

471

 

Collectively evaluated

 

359

 

88

 

7

 

166

 

 

41

 

661

 

ASC 310-30

 

 

 

 

 

11

 

 

11

 

Total

 

$

594

 

$

173

 

$

70

 

$

189

 

$

76

 

$

41

 

$

1,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

2,626

 

$

1,558

 

$

110

 

$

149

 

$

1,129

 

$

 

$

5,572

 

Collectively evaluated

 

122,497

 

98,886

 

29,576

 

13,188

 

 

 

264,147

 

ASC 310-30

 

 

 

 

 

165,657

 

 

165,657

 

Total

 

$

125,123

 

$

100,444

 

$

29,686

 

$

13,337

 

$

166,786

 

$

 

$

435,376

 

 

The following table sets forth information regarding impaired loans.  Loans accounted for under ASC 310-30 that have performed based on cash flow and accretable yield expectations determined at date of acquisition are not considered impaired assets and have been excluded from the tables below.

 

 

 

March 31, 2014

 

June 30, 2013

 

 

 

 

 

Unpaid

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Principal

 

Related

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

 

 

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

1,227

 

$

1,253

 

$

 

$

1,158

 

$

1,225

 

$

 

Consumer

 

181

 

187

 

 

88

 

93

 

 

Commercial real estate

 

1,280

 

1,280

 

 

434

 

479

 

 

Commercial business

 

65

 

103

 

 

47

 

101

 

 

Purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

3,743

 

5,896

 

 

928

 

1,279

 

 

Total

 

6,496

 

8,719

 

 

2,655

 

3,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

1,152

 

1,134

 

221

 

1,468

 

1,420

 

235

 

Consumer

 

40

 

40

 

6

 

61

 

61

 

23

 

Commercial real estate

 

979

 

1,013

 

98

 

1,124

 

1,131

 

85

 

Commercial business

 

 

 

 

63

 

98

 

63

 

Purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,914

 

2,225

 

139

 

201

 

276

 

65

 

Total

 

4,085

 

4,412

 

464

 

2,917

 

2,986

 

471

 

Total impaired loans

 

$

10,581

 

$

13,131

 

$

464

 

$

5,572

 

$

6,163

 

$

471

 

 

16



Table of Contents

 

The following tables set forth information regarding interest income recognized on impaired loans.

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Recognized

 

Investment

 

Recognized

 

 

 

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

1,032

 

$

16

 

$

1,097

 

$

18

 

Consumer

 

146

 

3

 

82

 

1

 

Commercial real estate

 

832

 

13

 

1,375

 

22

 

Commercial business

 

65

 

2

 

68

 

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

3,532

 

23

 

 

 

Total

 

5,607

 

57

 

2,622

 

41

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

1,262

 

13

 

1,459

 

19

 

Consumer

 

77

 

 

71

 

1

 

Commercial real estate

 

1,117

 

14

 

762

 

3

 

Commercial business

 

22

 

 

44

 

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,925

 

10

 

 

 

Total

 

4,403

 

37

 

2,336

 

23

 

Total impaired loans

 

$

10,010

 

$

94

 

$

4,958

 

$

64

 

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Recognized

 

Investment

 

Recognized

 

 

 

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

1,047

 

$

30

 

$

825

 

$

31

 

Consumer

 

115

 

5

 

52

 

3

 

Commercial real estate

 

635

 

27

 

1,370

 

61

 

Commercial business

 

64

 

8

 

169

 

3

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

2,584

 

71

 

264

 

 

Total

 

4,445

 

141

 

2,680

 

98

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

1,327

 

50

 

940

 

45

 

Consumer

 

84

 

3

 

54

 

3

 

Commercial real estate

 

1,119

 

59

 

656

 

16

 

Commercial business

 

38

 

1

 

221

 

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,062

 

58

 

 

 

Total

 

3,630

 

171

 

1,871

 

64

 

Total impaired loans

 

$

8,075

 

$

312

 

$

4,551

 

$

162

 

 

17



Table of Contents

 

Credit Quality

 

The Company utilizes a ten-point internal loan rating system for commercial real estate, construction, commercial business, and certain residential loans as follows:

 

Loans rated 1 — 6:  Loans in these categories are considered “pass” rated loans.  Loans in categories 1-5 are considered to have low to average risk.  Loans rated 6 are considered marginally acceptable business credits and have more than average risk.

 

Loans rated 7:  Loans in this category are considered “special mention.” These loans show signs of potential weakness and are being closely monitored by management.

 

Loans rated 8:  Loans in this category are considered “substandard.” Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt.

 

Loans rated 9:  Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in one graded 8 with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

Loans rated 10:  Loans in this category are considered “loss” and of such little value that their continuance as loans is not warranted.

 

On an annual basis, or more often if needed, the Company formally reviews the ratings of all loans subject to risk ratings. Semi-annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.  Risk ratings on purchased loans, with and without evidence of credit deterioration at acquisition, are determined relative to the Company’s recorded investment in that loan, which may be significantly lower than the loan’s unpaid principal balance.

 

The following tables present the Company’s loans by risk rating.

 

 

 

March 31, 2014

 

 

 

Originated Portfolio

 

 

 

 

 

 

 

Commercial

 

 

 

Commercial

 

 

 

Purchased

 

 

 

 

 

Real Estate

 

Construction

 

Business

 

Residential(1)

 

Portfolio

 

Total

 

 

 

(Dollars in thousands)

 

 

 

Loans rated 1- 6

 

$

107,003

 

$

 

$

49,272

 

$

11,859

 

$

169,507

 

$

337,641

 

Loans rated 7

 

8,720

 

 

42

 

763

 

8,282

 

17,807

 

Loans rated 8

 

2,961

 

 

235

 

657

 

7,170

 

11,023

 

Loans rated 9

 

 

 

 

 

 

 

Loans rated 10

 

 

 

 

 

 

 

 

 

$

118,684

 

$

 

$

49,549

 

$

13,279

 

$

184,959

 

$

366,471

 

 

 

 

June 30, 2013

 

 

 

Originated Portfolio

 

 

 

 

 

 

 

Commercial

 

 

 

Commercial

 

 

 

Purchased

 

 

 

 

 

Real Estate

 

Construction

 

Business

 

Residential(1)

 

Portfolio

 

Total

 

 

 

(Dollars in thousands)

 

 

 

Loans rated 1- 6

 

$

95,834

 

$

42

 

$

29,340

 

$

13,110

 

$

161,965

 

$

300,291

 

Loans rated 7

 

3,537

 

 

82

 

638

 

3,226

 

7,483

 

Loans rated 8

 

1,031

 

 

264

 

527

 

1,595

 

3,417

 

Loans rated 9

 

 

 

 

 

 

 

Loans rated 10

 

 

 

 

 

 

 

 

 

$

100,402

 

$

42

 

$

29,686

 

$

14,275

 

$

166,786

 

$

311,191

 

 


(1)         Certain of the Company’s loans made for commercial purposes, but secured by residential collateral, are rated under the Company’s risk-rating system.

 

18



Table of Contents

 

Past Due and Nonaccrual Loans

 

The following is a summary of past due and non-accrual loans:

 

 

 

March 31, 2014

 

 

 

 

 

 

 

Past Due

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days or

 

90 Days or

 

Total

 

 

 

 

 

Non-

 

 

 

30-59

 

60-89

 

More-Still

 

More-

 

Past

 

Total

 

Total

 

Accrual

 

 

 

Days

 

Days

 

Accruing

 

Nonaccrual

 

Due

 

Current

 

Loans

 

Loans

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

788

 

$

89

 

$

 

$

1,468

 

$

2,345

 

$

118,810

 

$

121,155

 

$

1,678

 

Home equity

 

18

 

 

 

194

 

212

 

28,865

 

29,077

 

214

 

Commercial real estate

 

371

 

 

 

657

 

1,028

 

117,656

 

118,684

 

798

 

Construction

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

 

 

49,549

 

49,549

 

 

Consumer

 

202

 

82

 

 

90

 

374

 

10,454

 

10,828

 

152

 

Total originated portfolio

 

1,379

 

171

 

 

2,409

 

3,959

 

325,334

 

329,293

 

2,842

 

Purchased portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

3,740

 

3,740

 

 

Commercial business

 

 

 

 

 

 

5

 

5

 

 

Commercial real estate

 

383

 

81

 

 

2,987

 

3,451

 

177,763

 

181,214

 

4,582

 

Total purchased portfolio

 

383

 

81

 

 

2,987

 

3,451

 

181,508

 

184,959

 

4,582

 

Total loans

 

$

1,762

 

$

252

 

$

 

$

5,396

 

$

7,410

 

$

506,842

 

$

514,252

 

$

7,424

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

Past Due

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days or

 

90 Days or

 

Total

 

 

 

 

 

Non-

 

 

 

30-59

 

60-89

 

More-Still

 

More-

 

Past

 

Total

 

Total

 

Accrual

 

 

 

Days

 

Days

 

Accruing

 

Nonaccrual

 

Due

 

Current

 

Loans

 

Loans

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

278

 

$

408

 

$

 

$

1,965

 

$

2,651

 

$

87,083

 

$

89,734

 

$

2,346

 

Home equity

 

53

 

47

 

 

253

 

353

 

35,036

 

35,389

 

334

 

Commercial real estate

 

91

 

326

 

 

98

 

515

 

99,887

 

100,402

 

473

 

Construction

 

 

 

 

 

 

42

 

42

 

 

Commercial business

 

 

 

 

44

 

44

 

29,642

 

29,686

 

110

 

Consumer

 

193

 

77

 

 

117

 

387

 

12,950

 

13,337

 

136

 

Total originated portfolio

 

615

 

858

 

 

2,477

 

3,950

 

264,640

 

268,590

 

3,399

 

Purchased portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

2,706

 

2,706

 

 

Commercial business

 

 

 

 

 

 

34

 

34

 

 

Commercial real estate

 

 

2,210

 

 

1,135

 

3,345

 

160,701

 

164,046

 

1,457

 

Total purchased portfolio

 

 

2,210

 

 

1,135

 

3,345

 

163,441

 

166,786

 

1,457

 

Total loans

 

$

615

 

$

3,068

 

$

 

$

3,612

 

$

7,295

 

$

428,081

 

$

435,376

 

$

4,856

 

 

19



Table of Contents

 

Troubled Debt Restructurings

 

The following table shows the Company’s post-modification balance of TDRs by type of modification.

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

Number of

 

Recorded

 

Number of

 

Recorded

 

Number of

 

Recorded

 

Number of

 

Recorded

 

 

 

Contracts

 

Investment

 

Contracts

 

Investment

 

Contracts

 

Investment

 

Contracts

 

Investment

 

 

 

(Dollars in thousands)

 

Extended maturity

 

1

 

$

305

 

2

 

$

84

 

5

 

$

2,082

 

3

 

$

326

 

Adjusted interest rate

 

1

 

36

 

3

 

84

 

2

 

118

 

3

 

84

 

Rate and maturity

 

2

 

65

 

1

 

50

 

2

 

65

 

8

 

733

 

Principal deferment

 

 

 

2

 

73

 

2

 

341

 

2

 

73

 

Court ordered concession

 

1

 

41

 

1

 

80

 

1

 

41

 

2

 

116

 

Other

 

2

 

171

 

 

 

2

 

171

 

 

 

 

 

7

 

$

618

 

9

 

$

371

 

14

 

$

2,818

 

18

 

$

1,332

 

 

The following table shows loans modified in a TDR and the change in the recorded investment subsequent to the modifications occurring.

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

Recorded

 

Recorded

 

 

 

Recorded

 

Recorded

 

 

 

Number of

 

Investment

 

Investment

 

Number of

 

Investment

 

Investment

 

 

 

Contracts

 

Pre-Modification

 

Post-Modification

 

Contracts

 

Pre-Modification

 

Post-Modification

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

4

 

$

164

 

$

164

 

5

 

$

228

 

$

228

 

Home equity

 

1

 

8

 

8

 

2

 

84

 

84

 

Commercial real estate

 

1

 

141

 

141

 

1

 

103

 

50

 

Commercial business

 

 

 

 

 

 

 

Consumer

 

 

 

 

1

 

8

 

8

 

Total originated portfolio

 

6

 

313

 

313

 

9

 

423

 

370

 

Purchased portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

Commercial real estate

 

1

 

305

 

305

 

 

 

 

Total purchased portfolio

 

1

 

305

 

305

 

 

 

 

Total

 

7

 

$

618

 

$

618

 

9

 

$

423

 

$

370

 

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

Recorded

 

Recorded

 

 

 

Recorded

 

Recorded

 

 

 

Number of

 

Investment

 

Investment

 

Number of

 

Investment

 

Investment

 

 

 

Contracts

 

Pre-Modification

 

Post-Modification

 

Contracts

 

Pre-Modification

 

Post-Modification

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

4

 

$

164

 

$

164

 

9

 

$

903

 

$

903

 

Home equity

 

2

 

22

 

22

 

4

 

362

 

362

 

Commercial real estate

 

2

 

464

 

464

 

1

 

103

 

50

 

Commercial business

 

1

 

18

 

18

 

 

 

 

Consumer

 

2

 

121

 

121

 

4

 

16

 

16

 

Total originated portfolio

 

11

 

789

 

789

 

18

 

1,384

 

1,331

 

Purchased portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

Commercial real estate

 

3

 

1,990

 

2,029

 

 

 

 

Total purchased portfolio

 

3

 

1,990

 

2,029

 

 

 

 

Total

 

14

 

$

2,779

 

$

2,818

 

18

 

$

1,384

 

$

1,331

 

 

The following table shows the loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due.

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

Number of

 

Recorded

 

Number of

 

Recorded

 

Number of

 

Recorded

 

Number of

 

Recorded

 

 

 

Contracts

 

Investment

 

Contracts

 

Investment

 

Contracts

 

Investment

 

Contracts

 

Investment

 

 

 

(Dollars in thousands)

 

Residential

 

2

 

$

94

 

 

$

 

3

 

$

163

 

 

$

 

Home equity

 

 

 

1

 

36

 

 

 

1

 

36

 

Consumer

 

 

 

 

 

1

 

10

 

 

 

 

 

2

 

$

94

 

1

 

$

36

 

4

 

$

173

 

1

 

$

36

 

 

As of March 31, 2014, there were no further commitments to lend associated with loans modified in a TDR.

 

20



Table of Contents

 

ASC 310-30 Loans

 

The following table presents a summary of loans accounted for under ASC 310-30 that were acquired by the Company.

 

 

 

Three Months Ended
March 31, 2014

 

Nine Months Ended
March 31, 2014

 

 

 

(Dollars in thousands)

 

Contractually required payments receivable

 

$

27,024

 

$

70,106

 

Nonaccretable difference

 

(376

)

(969

)

Cash flows expected to be collected

 

26,648

 

69,137

 

Accretable yield

 

(10,348

)

(22,870

)

Fair value of loans acquired

 

$

16,300

 

$

46,267

 

 

The following table summarizes the activity in the accretable yield for loans accounted for under ASC 310-30.

 

 

 

Three Months Ended
March 31, 2014

 

Nine Months Ended
March 31, 2014

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

104,117

 

$

108,251

 

Acquisitions

 

10,348

 

22,870

 

Accretion

 

(3,816

)

(11,452

)

Reclassifications to accretable yield

 

83

 

846

 

Disposals and other

 

(4,079

)

(13,862

)

End balance

 

$

106,653

 

$

106,653

 

 

The following table provides information related to the unpaid principal balance and carrying amounts of ASC 310-30 loans.

 

 

 

March 31, 2014

 

June 30, 2013

 

 

 

(Dollars in thousands)

 

Unpaid principal balance

 

$

218,328

 

$

203,755

 

Carrying amount

 

$

182,654

 

$

166,506

 

 

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Table of Contents

 

5.  Earnings Per Share (EPS)

 

EPS is computed by dividing net income allocated to common shareholders by the weighted average common shares outstanding. The following table shows the weighted average number of shares outstanding for the periods indicated. Shares issuable relative to stock options granted have been reflected as an increase in the shares outstanding used to calculate diluted EPS, after applying the treasury stock method. The number of shares outstanding for basic and diluted EPS is presented as follows:

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Dollars in thousands, except share and per share data)

 

Net income

 

$

437

 

$

1,666

 

$

2,150

 

$

4,215

 

Preferred stock dividends and accretion

 

 

 

 

(355

)

Net income available to common shareholders

 

$

437

 

$

1,666

 

$

2,150

 

$

3,860

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in calculation of basic EPS

 

10,432,494

 

10,425,576

 

10,435,300

 

10,397,280

 

Incremental shares from assumed exercise of dilutive securities

 

 

 

 

 

Weighted average shares used in calculation of diluted EPS

 

10,432,494

 

10,425,576

 

10,435,300

 

10,397,280

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.35

 

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.02

 

Earnings per common share

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.37

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.35

 

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.02

 

Diluted earnings per common share

 

$

0.04

 

$

0.16

 

$

0.21

 

$

0.37

 

 

Average anti-dilutive options and warrants excluded from the calculation of dilutive earnings per share follow.

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

Stock options

 

1,143,329

 

1,074,687

 

1,148,777

 

900,514

 

Warrants

 

 

 

 

40,775

 

 

 

1,143,329

 

1,074,687

 

1,148,777

 

941,289

 

 

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Table of Contents

 

6.  Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another.  When market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same.

 

ASC 820 defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

 

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 — Valuations based on significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

Valuation techniques - There have been no changes in the valuation techniques used during the current period.

 

Transfers - There were no transfers of assets and liabilities measured at fair value on a recurring or nonrecurring basis during the current period.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

 

Available-for-sale securities - Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include publicly-traded common and preferred stocks. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) and market interest rates and credit assumptions or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency and government sponsored agency mortgage-backed securities, as well as certain preferred and trust preferred stocks. Level 3 securities are securities for which significant unobservable inputs are utilized.

 

Derivative financial instruments - The valuation of the Company’s interest rate swaps and caps are determined using widely accepted valuation techniques including discounted cash flow analyses on the expected cash flows of derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. Unobservable inputs, such as credit valuation adjustments are insignificant to the overall valuation of the Company’s derivative financial instruments. Accordingly, the Company has determined that its interest rate derivatives fall within Level 2 of the fair value hierarchy.

 

The fair value of derivative loan commitments and forward loan sale agreements are estimated using the anticipated market price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as Level 2.  The fair value of such instruments was nominal at each date presented.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

 

Impaired Loans - Valuations of impaired loans measured at fair value are determined by a review of collateral values.  Certain inputs used in appraisals are not always observable, and therefore impaired loans are generally categorized as Level 3 within the fair value hierarchy.

 

Real Estate Owned and Other Repossessed collateral - The fair values of real estate owned and other repossessed collateral are estimated based upon appraised values less estimated costs to sell. Certain inputs used in appraisals are not always observable, and therefore may be categorized as Level 3 within the fair value hierarchy. When inputs used in appraisals are primarily observable, they are classified as Level 2.

 

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Table of Contents

 

Fair Value of other Financial Instruments:

 

Cash and cash equivalents - The fair value of cash, due from banks, interest bearing deposits and FHLB overnight deposits approximates their relative book values, as these financial instruments have short maturities.

 

FHLB and Federal Reserve stock - The carrying value of FHLB stock and Federal Reserve stock approximates fair value based on redemption provisions of the FHLB and the Federal Reserve.

 

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic conditions, lending conditions and the effects of estimated prepayments.

 

Loans held for sale - The fair value of loans held-for-sale is estimated based on bid quotations received from loan dealers.

 

Interest receivable - The fair value of this financial instrument approximates the book value as this financial instrument has a short maturity. It is the Company’s policy to stop accruing interest on loans past due by more than 90 days. Therefore, this financial instrument has been adjusted for estimated credit loss.

 

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand. The fair values of time deposits are based on the discounted value of contractual cash flows.  The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company’s net assets could increase.

 

Borrowings - The fair value of the Company’s borrowings with the FHLB is estimated by discounting the cash flows through maturity or the next re-pricing date based on current rates available to the Company for borrowings with similar maturities. The fair value of the Company’s short-term borrowings, capital lease obligations, wholesale repurchase agreements and other borrowings is estimated by discounting the cash flows through maturity based on current rates available to the Company for borrowings with similar maturities.

 

Off-Balance Sheet Credit-Related Instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of such instruments was nominal at each date presented.

 

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Table of Contents

 

Assets and liabilities measured at fair value on a recurring basis are summarized below.

 

 

 

March 31, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$

45,291

 

$

 

$

45,291

 

$

 

Agency mortgage-backed securities

 

67,441

 

 

67,441

 

 

Other assets — interest rate caps

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities — interest rate swaps

 

$

333

 

$

 

$

333

 

$

 

 

 

 

June 30, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$

45,333

 

$

 

$

45,333

 

$

 

Agency mortgage-backed securities

 

76,264

 

 

76,264

 

 

Other assets — interest rate caps

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities — interest rate swaps

 

$

389

 

$

 

$

389

 

$

 

 

Assets measured at fair value on a nonrecurring basis are summarized below.

 

 

 

March 31, 2014

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Collateral dependent impaired loans

 

$

1,361

 

$

 

$

 

$

1,361

 

Real estate owned and other repossessed collateral

 

2,000

 

 

 

2,000

 

 

 

 

June 30, 2013

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Collateral dependent impaired loans

 

$

894

 

$

 

$

 

$

894

 

Real estate owned and other repossessed collateral

 

2,134

 

 

 

2,134

 

 

25



Table of Contents

 

The following table presents the estimated fair value of the Company’s financial instruments.

 

 

 

Carrying

 

Fair Value Measurements at March 31, 2014

 

 

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,363

 

$

74,363

 

$

74,363

 

$

 

$

 

Available-for-sale securities

 

112,732

 

112,732

 

 

112,732

 

 

Regulatory stock

 

5,721

 

5,721

 

 

5,721

 

 

Loans held for sale

 

9,827

 

9,838

 

 

9,838

 

 

Loans, net

 

512,907

 

518,901

 

 

 

518,901

 

Accrued interest receivable

 

1,302

 

1,302

 

 

1,302

 

 

Interest rate caps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

563,310

 

527,447

 

 

527,447

 

 

FHLB advances

 

42,878

 

43,981

 

 

43,981

 

 

Wholesale repurchase agreements

 

10,240

 

10,581

 

 

10,581

 

 

Short-term borrowings

 

2,585

 

2,585

 

 

2,585

 

 

Capital lease obligation

 

1,604

 

1,751

 

 

1,751

 

 

Subordinated debentures

 

8,396

 

7,583

 

 

 

7,583

 

Interest rate swaps

 

333

 

333

 

 

333

 

 

 

 

 

Carrying

 

Fair Value Measurements at June 30, 2013

 

 

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,934

 

$

65,934

 

$

65,934

 

$

 

$

 

Available-for-sale securities

 

121,597

 

121,597

 

 

121,597

 

 

Regulatory stock

 

5,721

 

5,721

 

 

5,721

 

 

Loans held for sale

 

8,594

 

8,602

 

 

8,602

 

 

Loans, net

 

434,233

 

444,988

 

 

 

444,988

 

Accrued interest receivable

 

1,396

 

1,396

 

 

1,396

 

 

Interest rate caps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

484,623

 

449,857

 

 

449,857

 

 

FHLB advances

 

28,040

 

29,404

 

 

29,404

 

 

Wholesale repurchase agreements

 

25,397

 

26,092

 

 

26,092

 

 

Short-term borrowings

 

625

 

625

 

 

625

 

 

Capital lease obligation

 

1,739

 

1,926

 

 

1,926

 

 

Subordinated debentures

 

8,268

 

7,594

 

 

 

7,594

 

Interest rate swaps

 

389

 

389

 

 

389

 

 

 

7.  Derivatives and Hedging Activities

 

The Company has stand-alone derivative financial instruments in the form of interest rate caps that derive their value from a fee paid and are adjusted to fair value based on index and strike rate, and swap agreements that derive their value from the underlying interest rate. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure arises in the event of nonperformance by the counterparties to these agreements, and is limited to the net difference between the calculated amounts to be received and paid, if any. Such differences, which represent the fair value of the derivative instruments, are reflected on the Company’s balance sheet as derivative assets and derivative liabilities. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail to meet their obligations.

 

The Company currently holds derivative instruments that contain credit-risk related features that are in a net liability position, which may require that collateral be assigned to dealer banks. At March 31, 2014, the Company had posted cash collateral totaling $1.0 million with dealer banks related to derivative instruments in a net liability position.

 

The Company does not offset fair value amounts recognized for derivative instruments.  The Company does not net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement.

 

Risk Management Policies — Derivative Instruments

 

The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net income volatility within an assumed range of interest rates.

 

Interest Rate Risk Management — Cash Flow Hedging Instruments

 

The Company uses variable rate debt as a source of funds for use in the Company’s lending and investment activities and other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes

 

26



Table of Contents

 

it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate interest payments.

 

Information pertaining to outstanding interest rate caps and swap agreements used to hedge variable rate debt is as follows.

 

March 31, 2014

 

Notional
Amount

 

Inception Date

 

Termination Date

 

Index

 

Receive
Rate

 

Pay Rate

 

Strike
Rate

 

Unrealized Loss

 

Fair Value

 

Balance Sheet
Location

 

(Dollars in thousands)

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,000

 

February 2010

 

February 2015

 

3 Mo. LIBOR

 

2.13

%

4.69

%

n/a

 

$

(192

)

$

(226

)

Other Liabilities

 

5,000

 

July 2013

 

July 2033

 

3 Mo. LIBOR

 

0.24

%

3.38

%

n/a

 

(30

)

(30

)

Other Liabilities

 

5,000

 

July 2013

 

July 2028

 

3 Mo. LIBOR

 

0.24

%

3.23

%

n/a

 

(46

)

(46

)

Other Liabilities

 

5,000

 

July 2013

 

July 2023

 

3 Mo. LIBOR

 

0.24

%

2.77

%

n/a

 

(31

)

(31

)

Other Liabilities

 

Interest rate caps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

September 2009

 

September 2014

 

3 Mo. LIBOR

 

n/a

 

n/a

 

2.51

%

(20

)

 

Other Assets

 

$

31,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(319

)

$

(333

)

 

 

 

June 30, 2013

 

Notional
Amount

 

Inception Date

 

Termination Date

 

Index

 

Receive
Rate

 

Pay Rate

 

Strike
Rate

 

Unrealized Loss

 

Fair Value

 

Balance Sheet
Location

 

(Dollars in thousands)

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,000

 

February 2010

 

February 2015

 

3 Mo. LIBOR

 

2.16

%

4.69

%

n/a

 

$

(223

)

$

(389

)

Other Liabilities

 

Interest rate caps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

September 2009

 

September 2014

 

3 Mo. LIBOR

 

n/a

 

n/a

 

2.51

%

(40

)

 

Other Assets

 

$

16,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(263

)

$

(389

)

 

 

 

During the three and nine months ended March 31, 2014 and 2013, no interest rate cap or swap agreements were terminated prior to maturity. Changes in the fair value of interest rate caps and swaps designated as hedging instruments of the variability of cash flows associated with variable rate debt are reported in other comprehensive income. These amounts subsequently are reclassified into interest expense as a yield adjustment in the same period in which the related interest on the debt affects earnings. Risk management results for the three and nine months ended March 31, 2014 and 2013 related to the balance sheet hedging of variable rate debt indicates that the hedges were effective.

 

During the periods presented, amounts recognized in income related to hedge ineffectiveness resulted from amortization of the non-zero fair value associated with the Company’s single interest rate swap held at the time of the merger with FHB Formation LLC in December 2010.  During the periods presented, amounts recognized in income related to amounts excluded from effectiveness testing resulted from amortization of the acquisition price of interest rate caps.  The table below presents amounts recognized in income related to both hedge ineffectiveness and amounts excluded from effectiveness testing.

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Dollars in thousands)

 

Interest income (expense):

 

 

 

 

 

 

 

 

 

Interest rate caps

 

$

(8

)

$

(8

)

$

(22

)

$

(22

)

Interest rate swap

 

80

 

25

 

130

 

76

 

Total

 

$

72

 

$

17

 

$

108

 

$

54

 

 

The Company expects to record interest income of $90 thousand related to interest rate swap ineffectiveness in the next twelve months. The Company expects to record interest expense of $18 thousand related to its purchased interest rate caps in the next twelve months.

 

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Table of Contents

 

8.  Other Comprehensive Income

 

The components of other comprehensive income (loss) follow.

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Pre-tax

 

Tax Expense

 

After-tax

 

Pre-tax

 

Tax Expense

 

After-tax

 

 

 

Amount

 

(Benefit)

 

Amount

 

Amount

 

(Benefit)

 

Amount

 

 

 

(Dollars in thousands)

 

Change in net unrealized gain or loss on available-for-sale securities

 

$

579

 

$

196

 

$

383

 

$

(164

)

$

(55

)

$

(109

)

Reclassification adjustment for net gains included in net income

 

 

 

 

 

 

 

Total available-for-sale securities

 

579

 

196

 

383

 

(164

)

(55

)

(109

)

Change in accumulated loss on effective cash flow hedges

 

(528

)

(178

)

(350

)

62

 

21

 

41

 

Reclassification adjustment for net gains included in net income

 

(72

)

(25

)

(47

)

(17

)

(6

)

(11

)

Total derivatives and hedging activities

 

(600

)

(203

)

(397

)

45

 

15

 

30

 

Total other comprehensive loss

 

$

(21

)

$

(7

)

$

(14

)

$

(119

)

$

(40

)

$

(79

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Pre-tax

 

Tax Expense

 

After-tax

 

Pre-tax

 

Tax Expense

 

After-tax

 

 

 

Amount

 

(Benefit)

 

Amount

 

Amount

 

(Benefit)

 

Amount

 

 

 

(Dollars in thousands)

 

Change in net unrealized gain or loss on available-for-sale securities

 

$

449

 

$

152

 

$

297

 

$

(318

)

$

(108

)

$

(210

)

Reclassification adjustment for net gains included in net income

 

 

 

 

(792

)

(270

)

(522

)

Total available-for-sale securities

 

449

 

152

 

297

 

(1,110

)

(378

)

(732

)

Change in accumulated loss on effective cash flow hedges

 

56

 

20

 

36

 

127

 

43

 

84

 

Reclassification adjustment for net gains included in net income

 

(108

)

(37

)

(71

)

(54

)

(18

)

(36

)

Total derivatives and hedging activities

 

(52

)

(17

)

(35

)

73

 

25

 

48

 

Total other comprehensive income (loss)

 

$

397

 

$

135

 

$

262

 

$

(1,037

)

$

(353

)

$

(684

)

 

Accumulated other comprehensive loss is comprised of the following.

 

 

 

March 31, 2014

 

June 30, 2013

 

 

 

(Dollars in thousands)

 

Unrealized loss on available-for-sale securities

 

$

(2,187

)

$

(2,636

)

Tax effect

 

744

 

896

 

Net-of-tax amount

 

(1,443

)

(1,740

)

Unrealized loss on cash flow hedges

 

(319

)

(263

)

Tax effect

 

110

 

89

 

Net-of-tax amount

 

(209

)

(174

)

Accumulated other comprehensive loss

 

$

(1,652

)

$

(1,914

)

 

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Table of Contents

 

9.  Commitments and Contingencies

 

Commitments

 

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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has 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 and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Financial instruments with contract amounts that represent credit risk are as follows:

 

 

 

March 31, 2014

 

June 30, 2013

 

 

 

(Dollars in thousands)

 

Commitments to originate loans

 

$

23,810

 

$

13,349

 

Unused lines of credit

 

36,340

 

30,809

 

Standby letters of credit

 

166

 

420

 

 

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 commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness 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 of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Contingencies

 

The Company and its subsidiary are parties to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims will not be material to the Company’s consolidated financial position or results of operations.

 

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Table of Contents

 

10.  Discontinued Operations

 

The Company concluded all investment brokerage activities in the second quarter of fiscal 2014.  Accordingly, operations associated with these activities have been classified as discontinued operations in the accompanying consolidated statements of income.  The following summarizes the operations of the Company’s investment brokerage division for the three and nine months ended March 31, 2014 and 2013.

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Dollars in thousands)

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Investment commissions

 

$

 

$

758

 

$

971

 

$

2,232

 

Other noninterest income

 

 

 

 

 

Total noninterest income

 

 

758

 

971

 

2,232

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

575

 

793

 

1,562

 

Occupancy and equipment expense

 

 

40

 

60

 

142

 

Data processing fees

 

 

67

 

82

 

187

 

Marketing expense

 

 

 

8

 

10

 

Other noninterest expense

 

 

21

 

40

 

78

 

Total noninterest expense

 

 

703

 

983

 

1,979

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before tax

 

 

55

 

(12

)

253

 

Income tax expense (benefit)

 

 

19

 

(4

)

87

 

Net income (loss)

 

$

 

$

36

 

$

(8

)

$

166

 

 

11.  Subsequent Events

 

On April 23, 2014, the Company announced that its Board of Directors authorized the Company to purchase up to 870,000 shares of its common stock, representing 8.3% of the Company’s outstanding common shares and approximately $8.4 million based on the Company’s closing stock price on April 22, 2014.  Such purchases will be made in open market or in privately negotiated transactions from time to time and in such amounts as market conditions warrant.  The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.  The stock repurchase program may be suspended or terminated at any time without prior notice, and will expire on April 23, 2016.

 

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Table of Contents

 

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-chartered bank and a member of the Federal Reserve. 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 March 31, 2014 follow.

 

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Table of Contents

 

Condition

 

Ratios at March 31, 2014

 

(i)   Tier 1 leverage ratio

 

16.28

%

(ii)  Total risk-based capital ratio

 

24.21

%

(iii) Ratio of purchased loans to total loans

 

35.29

%

(iv) Ratio of loans to core deposits

 

93.18

%

(v)  Ratio of commercial real estate loans to total risk-based capital

 

175.10

%

 

As of March 31, 2014, the Company, on a consolidated basis, had total assets of $750.9 million, total deposits of $563.3 million, and stockholders’ equity of $114.0 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, operates 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 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.  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, as an additional channel through which to raise core deposits to fund the Company’s asset strategy.  We also raise deposits through deposit listing services, which offer the ability to attract longer term funding than can typically be obtained through retail channels.

 

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 allows 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 nine months ended March 31, 2014.

 

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Table of Contents

 

Overview

 

Net income from continuing operations was $437 thousand for the quarter ended March 31, 2014, compared to $1.6 million for the quarter ended March 31, 2013.  Net income from continuing operations for the nine months ended March 31, 2014 was $2.2 million, compared to $4.0 million for the nine months ended March 31, 2013.

 

Net income available to common stockholders was $437 thousand, or $0.04 per diluted common share, for the quarter ended March 31, 2014, compared to $1.7 million, or $0.16 per diluted common share, for the quarter ended March 31, 2013.  For the nine months ended March 31, 2014, net income available to common stockholders was $2.2 million, or $0.21 per diluted common share, compared to $3.9 million, or $0.37 per diluted common share, for the nine months ended March 31, 2013.

 

Net interest income before provision decreased by $1.1 million, or 13.8%, to $7.1 million for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013, primarily due to lower transactional interest income from purchased loan payoffs. This result is evident in the net interest margin, which decreased by 99 basis points to 4.08% for the quarter ended March 31, 2014, compared to 5.07% for the quarter ended March 31, 2013.

 

Noninterest income decreased by $1.3 million for the quarter ended March 31, 2014, compared to the quarter ended March 31, 2013, principally due to the following:

 

·                  A decrease of $855 thousand in gain on sales of portfolio loans, due to a lower volume of purchased loan sales in the quarter ended March 31, 2014.

·                  A decrease of $360 thousand in gain on sales of loans held for sale, principally a volume-related difference due to a significant decline in residential loan refinance activity.  The Company sold $15.3 million of residential loans in the quarter ended March 31, 2014, compared to $33.3 million in the quarter ended March 31, 2013.

·                  A decrease of $65 thousand in net gains on the disposition of other real estate owned.

·                  A decrease of $45 thousand in fee income, primarily due to a decrease in transactional deposit account activity.

 

Noninterest expense decreased by $612 thousand for the quarter ended March 31, 2014, compared to the quarter ended March 31, 2013, principally due to the following:

 

·                  A decrease of $928 thousand in salaries and employee benefits, principally related to incentive compensation.

·                  An increase of $232 thousand in occupancy and equipment expense, primarily due to increased rent and utilities expense, depreciation, and software expenses.

·                  A decrease of $163 thousand in marketing expense, mainly due to a reduction in deposit marketing in fiscal 2014.

·                  An increase of $88 thousand in loan acquisition and collection expenses due, in part, to an increase of $5.0 million in loan purchases in the quarter ended March 31, 2014 when compared to the quarter ended March 31, 2013.

·                  An increase of $204 thousand in other noninterest expense, principally due to non-capital expenditures associated with the Company’s upcoming core banking software system conversion.

 

Financial Condition

 

Overview

 

Total assets increased by $80.3 million, or 12.0%, to $750.9 million at March 31, 2014, compared to June 30, 2013. The principal components of the change in the balance sheet were as follows:

 

·                  The loan portfolio grew by $78.9 million, or 18.1%, compared to June 30, 2013, principally due to net growth of $68.0 million in commercial loans purchased or originated by the LASG and $10.9 million of net growth in loans originated by the Bank’s Community Banking Division.  As has been discussed in the Company’s prior SEC filings, the Company made certain commitments to the Federal Reserve in connection with the merger of FHB with and into the Company in December 2010.  The Company’s loan purchase capacity under these conditions follow.

 

Basis for
Regulatory Condition

 

Condition

 

Purchased Loan Capacity at
March 31, 2014

 

 

 

 

 

(Dollars in millions)

 

Total Loans

 

Purchased loans may not exceed 40% of total loans

 

$

41.1

 

Regulatory Capital

 

Commercial real estate loans may not exceed 300% of total risk-based capital

 

$

153.6

 

 

33



Table of Contents

 

An overview of the LASG portfolio follows.

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Purchased

 

Originated

 

Total LASG

 

Purchased

 

Originated

 

Total LASG

 

 

 

(Dollars in thousands)

 

Loans purchased or originated during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

$

19,050

 

$

11,158

 

$

30,208

 

$

13,971

 

$

2,800

 

$

16,771

 

Net investment basis

 

16,300

 

11,158

 

27,458

 

11,340

 

2,827

 

14,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan returns during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Yield

 

9.51

%

5.13

%

8.11

%

17.76

%

9.43

%

16.84

%

Total Return (1)

 

10.39

%

5.13

%

8.71

%

22.02

%

9.43

%

20.64

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Purchased

 

Originated

 

Total LASG

 

Purchased

 

Originated

 

Total LASG

 

 

 

(Dollars in thousands)

 

Loans purchased or originated during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

$

53,044

 

$

54,722

 

$

107,766

 

$

103,539

 

$

15,625

 

$

119,164

 

Net investment basis

 

46,267

 

54,722

 

100,989

 

75,553

 

15,652

 

91,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan returns during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Yield

 

11.17

%

5.27

%

9.55

%

15.52

%

9.55

%

14.89

%

Total Return (1)

 

11.60

%

5.27

%

9.87

%

18.66

%

9.55

%

17.70

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans as of period end:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

$

221,597

 

$

88,700

 

$

310,297

 

$

166,360

 

$

17,871

 

$

184,231

 

Net investment basis

 

184,959

 

88,724

 

273,683

 

130,502

 

17,904

 

148,406

 

 


(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 $78.7 million and $1.6 million, respectively, from June 30, 2013.  Growth in each was tied to the Company’s strategy for funding its loan growth which, through the third quarter of fiscal 2014, included a component of duration-matched funding for residential mortgages.

 

Assets

 

Cash, Short-term Investments and Securities

 

Cash and short-term investments were $74.4 million as of March 31, 2014, an increase of $8.4 million, or 12.8%, from $65.9 million at June 30, 2013.

 

Available-for-sale securities, consisting of securities issued by government agencies and government-sponsored enterprises, totaled $112.7 million as of March 31, 2014.  At March 31, 2014, securities with a fair value of $30.0 million were pledged for outstanding borrowings.

 

34



Table of Contents

 

Loans

 

Total loans, excluding loans held for sale, amounted to $514.3 million as of March 31, 2014, an increase of $78.9 million, or 18.1%, from $435.4 million as of June 30, 2013. The increase consisted of net growth in loans purchased or originated by the LASG of $68.0 million and net growth in loans originated by the Community Banking Division of $10.9 million.  The composition of the Company’s loan portfolio follows.

 

 

 

March 31, 2014

 

 

 

Community
Banking
Division

 

LASG

 

Total

 

Percent of
Total

 

 

 

(Dollars in thousands)

 

Originated loans:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

121,005

 

$

150

 

$

121,155

 

23.56

%

Home equity

 

29,077

 

 

29,077

 

5.65

%

Commercial real estate: non-owner occupied

 

46,523

 

39,716

 

86,239

 

16.77

%

Commercial real estate: owner occupied

 

22,970

 

9,475

 

32,445

 

6.31

%

Construction

 

 

 

 

0.00

%

Commercial business

 

10,166

 

39,383

 

49,549

 

9.64

%

Consumer

 

10,828

 

 

10,828

 

2.10

%

Subtotal

 

240,569

 

88,724

 

329,293

 

64.03

%

Purchased loans:

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

3,740

 

3,740

 

0.73

%

Commercial business

 

 

5

 

5

 

0.00

%

Commercial real estate: non-owner occupied

 

 

129,038

 

129,038

 

25.09

%

Commercial real estate: owner occupied

 

 

52,176

 

52,176

 

10.15

%

Subtotal

 

 

184,959

 

184,959

 

35.97

%

Total

 

$

240,569

 

$

273,683

 

$

514,252

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

Community
Banking
Division

 

LASG

 

Total

 

Percent of
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

 

15.29

%

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

 

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications, 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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Table of Contents

 

The following table details the Company’s nonperforming assets and other credit quality indicators as of March 31, 2014 and June 30, 2013.  The net increase in nonperforming assets during the nine months ended March 31, 2014 was principally due to four purchased loan relationships.  Management believes that, based on their carrying amounts, these nonperforming assets are well secured based on the estimated fair value of underlying collateral.

 

 

 

Non-Performing Assets at March 31, 2014

 

 

 

Community Banking
Division

 

LASG

 

Total

 

 

 

(Dollars in thousands)

 

Loans:

 

 

 

 

 

 

 

Residential real estate

 

$

1,528

 

$

150

 

$

1,678

 

Home equity

 

214

 

 

214

 

Commercial real estate

 

798

 

4,582

 

5,380

 

Construction

 

 

 

 

Commercial business

 

 

 

 

Consumer

 

152

 

 

152

 

Subtotal

 

2,692

 

4,732

 

7,424

 

Real estate owned and other repossessed collateral

 

2,000

 

 

2,000

 

Total

 

$

4,692

 

$

4,732

 

$

9,424

 

 

 

 

 

 

 

 

 

Ratio of nonperforming loans to total loans

 

 

 

 

 

1.44

%

Ratio of nonperforming assets to total assets

 

 

 

 

 

1.28

%

Ratio of loans past due to total loans

 

 

 

 

 

1.44

%

Nonperforming loans that are current

 

 

 

 

 

$

1,923

 

Loans risk rated substandard or worse

 

 

 

 

 

$

11,023

 

Troubled debt restructurings:

 

 

 

 

 

 

 

On accrual status

 

 

 

 

 

$

4,160

 

On nonaccrual status

 

 

 

 

 

$

2,189

 

 

 

 

 

 

 

 

 

 

 

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

 

Loans risk rated substandard or worse

 

 

 

 

 

$

3,417

 

Troubled debt restructurings:

 

 

 

 

 

 

 

On accrual status

 

 

 

 

 

$

2,632

 

Nonaccrual status

 

 

 

 

 

$

1,110

 

 

36



Table of Contents

 

Allowance for Loan Losses

 

In connection with the application of the acquisition method of accounting for the merger on December 29, 2010, the allowance for loan losses was reduced to zero when the loan portfolio was marked to its then current fair value.  Since that date, the Company has provided for an allowance for loan losses as new loans are originated or in the event that credit exposure in the pre-merger loan portfolio or other acquired loans exceeds the exposure estimated when initial fair values were determined.

 

The Company’s allowance for loan losses was $1.3 million as of March 31, 2014, which represents an increase of $202 thousand from $1.1 million as of June 30, 2013.  The increase during the period was principally due to increases in reserves necessary for specific reserves on troubled debt restructurings and general allowances on newly originated loans.

 

The following table details ratios related to the allowance for loan losses for the periods indicated.

 

 

 

March 31, 2014

 

June 30, 2013

 

March 31, 2013

 

Allowance for loan losses to nonperforming loans

 

18.12

%

23.54

%

19.15

%

Allowance for loan losses to total loans

 

0.26

%

0.26

%

0.27

%

Last twelve months of net-charge offs to average loans

 

0.09

%

0.21

%

0.23

%

 

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.

 

Other Assets

 

The cash surrender value of the Company’s bank-owned life insurance (“BOLI”) assets increased $341 thousand, or 2.4%, to $14.7 million at March 31, 2014, compared to $14.4 million at June 30, 2013. Increases in cash surrender value are recognized in other income and are not subject to income taxes.  Borrowing on, or surrendering a policy, may subject the Company to income tax expense on the increase in cash surrender value.  For these reasons, management considers BOLI an illiquid asset. BOLI represented 11.9% of the Company’s total risk-based capital at March 31, 2014.

 

Intangible assets totaled $3.0 million and $3.5 million at March 31, 2014 and June 30, 2013, respectively.  The $582 thousand decrease was the result of core deposit intangible asset amortization during the period.

 

Deposits, Borrowed Funds, Capital Resources and Liquidity

 

Deposits

 

The Company’s principal source of funding is its core deposit accounts. At March 31, 2014, non-maturity accounts and certificates of deposit with balances less than $250 thousand represented 99.6% of total deposits.

 

Total deposits increased $78.7 million to $563.3 million as of March 31, 2014 from $484.6 million as of June 30, 2013. The increase, which funded growth in the Company’s loan portfolio, was principally from term deposits raised through deposit listing services, which has provided the Bank with longer term funding than can typically be attracted through retail channels. At March 31, 2014, the Bank had $138.6 million of such deposit funding, with a weighted-average original term of 3.0 years. The composition of total deposits at March 31, 2014 and June 30, 2013 follows.

 

 

 

March 31, 2014

 

June 30, 2013

 

 

 

Amount

 

Percent of
Total

 

Amount

 

Percent of
Total

 

 

 

(Dollars in thousands)

 

Demand deposits

 

$

43,294

 

7.69

%

$

46,425

 

9.58

%

NOW accounts

 

64,966

 

11.53

%

57,334

 

11.83

%

Regular and other savings

 

35,995

 

6.39

%

33,636

 

6.94

%

Money market deposits

 

86,735

 

15.40

%

84,416

 

17.42

%

Total non-certificate accounts

 

230,990

 

41.01

%

221,811

 

45.77

%

Term certificates less than $250 thousand

 

329,988

 

58.58

%

254,384

 

52.49

%

Term certificates of $250 thousand or more

 

2,332

 

0.41

%

8,428

 

1.74

%

Total certificate accounts

 

332,320

 

58.99

%

262,812

 

54.23

%

Total deposits

 

$

563,310

 

100.00

%

$

484,623

 

100.00

%

 

37



Table of Contents

 

Borrowed Funds

 

Advances from the FHLB were $42.9 million and $28.0 million at March 31, 2014 and June 30, 2013, respectively; the increase the result of $15.0 million of new advances during the period used to fund a portion of the Company’s residential loan growth.  In conjunction with the aforementioned FHLB advances, the Company entered into interest rate swaps with a weighted average pay rate and term of 3.13% and 15 years, respectively.  The interest rate swaps have been designated has cash flow hedges of the variability of cash flows associated with the variable rate debt.

 

At March 31, 2014, the Company had pledged investment securities with a fair value of $18.2 million, as well as certain residential real estate loans, commercial real estate loans, and FHLB deposits free of liens or pledges to secure outstanding advances and available additional borrowing capacity.

 

Wholesale repurchase agreements were $10.2 million and $25.4 million at March 31, 2014 and June 30, 2013, respectively. During the nine months ended March 31, 2014, the Company repaid at maturity wholesale repurchase agreements totaling $15.0 million.  At March 31, 2014, the Company had pledged investment securities with a fair value of $11.8 million as collateral for outstanding wholesale repurchase agreements.

 

Short-term borrowings, consisting of sweep accounts and repurchase agreements, were $2.6 million and $625 thousand as of March 31, 2014 and June 30, 2013, respectively.

 

Liquidity

 

The following table is a summary of the liquidity the Company had the ability to access as of March 31, 2014, in addition to traditional retail deposit products (dollars in thousands).

 

Brokered time deposits

 

$

187,723

 

Subject to policy limitation of 25% of total assets

 

Federal Home Loan Bank of Boston

 

94,172

 

Based on eligible and qualified collateral

 

Federal Reserve Discount Window Borrower-in-Custody

 

10

 

Based on the pledge of indirect auto loans

 

Total unused borrowing capacity

 

281,905

 

 

 

Unencumbered investment securities

 

82,769

 

 

 

Total sources of liquidity

 

$

364,674

 

 

 

 

Retail deposits and other core deposit sources including deposit listing services are used by the Company to manage its overall liquidity position. While the Company typically does not seek wholesale funding such as brokered deposits, the ability to raise them remains an important part of its liquidity contingency planning. While management closely monitors and forecasts the Company’s liquidity position, it is affected by asset growth, deposit withdrawals and other contractual obligations and commitments. The accuracy of management’s forecast assumptions may increase or decrease the Company’s overall available liquidity.

 

At March 31, 2014, the Company had $364.7 million of immediately accessible liquidity, defined as additional cash that could be raised within seven days through collateralized borrowings, brokered deposits or security sales. This position represented 48.6% of total assets.  The Company also had $74.4 million of cash and cash equivalents at March 31, 2014.

 

Management believes that there are adequate funding sources to meet its liquidity needs for the foreseeable future. Primary funding sources are the repayment of principal and interest on loans, the renewal of time deposits, the potential for growth in the deposit base, and the credit availability from the FHLB.  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.

 

Capital

 

The carrying amount and unpaid principal balance of junior subordinated debentures totaled $8.4 million and $16.5 million, respectively, as of March 31, 2014. This debt represents qualifying Tier 1 capital for the Company, up to a maximum of 25% of total Tier 1 capital.  At March 31, 2014, the carrying amounts of the junior subordinated notes, net of the Company’s $496 thousand investment in the affiliated trusts, qualified as Tier 1 capital.

 

At March 31, 2014, stockholders’ equity was $114.0 million, an increase of $206 thousand compared to June 30, 2013. Book value per outstanding common share was $10.93 at March 31, 2014 and $10.89 at June 30, 2013.  Tier 1 capital to total average assets of the Company was 16.28% as of March 31, 2014 and 17.78% at June 30, 2013.

 

In addition to the risk-based capital requirements, the Federal Reserve requires top-rated bank holding companies to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to its average total consolidated assets of at least 3.0%. For most other bank holding companies (including the Company), the minimum leverage capital ratio is 4.0%. Bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as bank holding companies that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels.

 

38



Table of Contents

 

The Federal Reserve’s capital adequacy standards also apply to state-chartered banks that are members of the Federal Reserve System, such as the Bank. Moreover, the Federal Reserve has promulgated corresponding regulations to implement the system of prompt corrective action established by Section 38 of the Federal Deposit Insurance Act. Under these regulations, a bank is “well capitalized” if it has: (i) a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; (iii) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A bank is “adequately capitalized” if it has: (1) a total risk-based capital ratio of 8.0% or greater; (2) a Tier 1 risk-based capital ratio of 4.0% or greater; and (3) a leverage capital ratio of 4.0% or greater (3.0% under certain circumstances) and does not meet the definition of a “well capitalized bank.”

 

The Federal Reserve also must take into consideration: (i) concentrations of credit risk; (ii) interest rate risk; and (iii) risks from non-traditional activities, as well as an institution’s ability to manage those risks when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination. The Bank is currently considered well-capitalized under all regulatory definitions.

 

The Basel Committee on Banking Supervision has also released new capital requirements, known as Basel III, setting forth higher capital requirements, enhanced risk coverage, a global leverage ratio, provisions for counter-cyclical capital, and liquidity standards. On July 2, 2013, the Federal Reserve, along with the other federal banking agencies, issued a final rule (the “Final Capital Rule”) implementing the Basel III capital standards and establishing the minimum capital requirements for banks and bank holding companies required under the Dodd-Frank Act. The majority of the provisions of the Final Capital Rule apply to bank holding companies and banks with consolidated assets of $500 million or more, such as the Company and the Bank. The Final Capital Rule establishes a new capital risk-based capital ratio, a minimum common equity Tier 1 capital ratio of 6.5% of risk-weighted assets to be a “well capitalized” institution, and increase the minimum total Tier 1 capital ratio to be a “well capitalized” institution from 6.0% to 8.0%. Additionally, the Final Capital Rule requires that an institution establish a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk weight assets, or face restrictions on capital distributions and executive bonuses. The Final Capital Rule increases the required capital for certain categories of assets, including higher-risk construction real estate loans and certain exposures related to securitizations. Under the Final Capital Rule, the Company may make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. If the Company does not make this election, unrealized gains and losses would be included in the calculation of its regulatory capital.

 

The Company must comply with the Final Capital Rule beginning on January 1, 2015.

 

The Bank and the Company are subject to capital commitments with the Federal Reserve and the Bureau that require higher minimum capital ratios. These commitments require that the Company and the Bank (i) maintain a Tier 1 leverage ratio of at least 10%; and (ii) maintain a total risk-based capital ratio of at least 15%.  The Bank and the Company were in compliance with these commitments at March 31, 2014.

 

39



Table of Contents

 

The Company’s and the Bank’s regulatory capital ratios are set forth below.

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

Minimum

 

Capitalized Under

 

 

 

 

 

 

 

Capital

 

Prompt Correction

 

 

 

Actual

 

Requirements

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollars in thousands)

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

122,945

 

24.21

%

$

40,631

 

>8.0

%

$

N/A

 

N/A

 

Bank

 

102,257

 

20.13

%

40,648

 

>8.0

%

50,811

 

>10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

121,590

 

23.94

%

20,316

 

>4.0

%

N/A

 

N/A

 

Bank

 

98,238

 

19.33

%

20,324

 

>4.0

%

30,486

 

>6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to average assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

121,590

 

16.28

%

29,878

 

>4.0

%

N/A

 

N/A

 

Bank

 

98,238

 

13.22

%

29,733

 

>4.0

%

37,166

 

>5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

122,291

 

27.54

%

$

35,520

 

>8.0

%

$

N/A

 

N/A

 

Bank

 

99,527

 

22.30

%

35,709

 

>8.0

%

44,637

 

>10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

121,148

 

27.29

%

17,760

 

>4.0

%

N/A

 

N/A

 

Bank

 

95,485

 

21.39

%

17,855

 

>4.0

%

26,782

 

>6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to average assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

121,148

 

17.78

%

27,255

 

>4.0

%

N/A

 

N/A

 

Bank

 

95,485

 

14.08

%

27,121

 

>4.0

%

33,902

 

>5.0

%

 

Off-balance Sheet Financial Instruments

 

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.

 

See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements — Note 9:  Commitments and Contingencies” for further discussion.

 

40



Table of Contents

 

Results of Operations — Continuing Operations

 

General

 

Net income decreased by $1.2 million to $437 thousand for the quarter ended March 31, 2014, compared to $1.6 million for the quarter ended March 31, 2013.  Net income decreased by $1.9 million to $2.2 million for the nine months ended March 31, 2014, compared to $4.0 million for the nine months ended March 31, 2013.  When compared to the prior year, decreases in net income for both the three and nine months ended March 31, 2014 resulted principally from lower transactional income on purchased loans and lower gains on sales of residential mortgages.  Further, in the nine months ended March 31, 2013, the Company recognized $792 thousand on the sale of investment securities; there were no such sales in the nine months ended March 31, 2014.

 

The following table details the “total return” on purchased loans, which includes transactional income of $689 thousand for the quarter ended March 31, 2014, a decrease of $3.4 million from the quarter ended March 31, 2013.  Transactional income for the nine months ended March 31, 2014 was $3.7 million, a decrease of $4.1 million from the nine months ended March 31, 2013, principally due to lower than average purchased loan payoffs and sales in first and third quarters of fiscal 2014.

 

 

 

Total Return on Purchased Loans

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Income

 

Return (1)

 

Income

 

Return (1)

 

 

 

(Dollars in thousands)

 

Regularly scheduled interest and accretion

 

$

3,880

 

8.83

%

$

3,043

 

9.40

%

Transactional income:

 

 

 

 

 

 

 

 

 

Gains on loan sales

 

349

 

0.79

%

1,218

 

3.76

%

Gain on sale of real estate owned

 

56

 

0.13

%

211

 

0.65

%

Other noninterest income

 

 

0.00

%

 

0.00

%

Accelerated accretion and loan fees

 

284

 

0.65

%

2,653

 

8.20

%

Total transactional income

 

689

 

1.57

%

4,082

 

12.61

%

Total

 

$

4,569

 

10.39

%

$

7,125

 

22.02

%

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Income

 

Return (1)

 

Income

 

Return (1)

 

 

 

(Dollars in thousands)

 

Regularly scheduled interest and accretion

 

$

11,632

 

8.80

%

$

7,813

 

9.35

%

Transactional income:

 

 

 

 

 

 

 

 

 

Gains on loan sales

 

576

 

0.44

%

2,035

 

2.44

%

Gain on sale of real estate owned

 

56

 

0.04

%

684

 

0.82

%

Other noninterest income

 

 

0.00

%

36

 

0.04

%

Accelerated accretion and loan fees

 

3,079

 

2.33

%

5,017

 

6.01

%

Total transactional income

 

3,711

 

2.81

%

7,772

 

9.30

%

Total

 

$

15,343

 

11.60

%

$

15,585

 

18.66

%

 

Net Interest Income

 

Three Months Ended March 31, 2014 and 2013

 

Net interest income before provision for loan losses decreased by $1.1 million, or 13.8%, to $7.1 million for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013, primarily due to lower transactional interest income from purchased loan payoffs. When compared to the quarter ended March 31, 2013, transactional interest income decreased nearly $2.4 million, having a 136 basis point effect on the net interest margin, which declined to 4.08% from 5.07%.  The following table summarizes interest income and related yields recognized on the loan portfolios.

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

 

 

Balance

 

Income

 

Yield

 

Balance

 

Income

 

Yield

 

 

 

(Dollars in thousands)

 

Community Banking Division

 

$

249,962

 

$

3,183

 

5.16

%

$

244,397

 

$

3,529

 

5.86

%

LASG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated — traditional

 

57,534

 

1,008

 

7.11

%

16,167

 

376

 

9.43

%

Originated — securities loans

 

25,992

 

48

 

0.75

%

 

 

0.00

%

Purchased

 

177,559

 

4,164

 

9.51

%

130,045

 

5,696

 

17.76

%

Total LASG

 

261,085

 

5,220

 

8.11

%

146,212

 

6,072

 

16.84

%

Total

 

$

511,047

 

$

8,403

 

6.67

%

$

390,609

 

$

9,601

 

9.97

%

 

41



Table of Contents

 

In the quarter ended March 31, 2014, net interest income was negatively affected by a lower level of noncash accretion of fair value adjustments resulting from the 2010 merger than in the quarter ended March 31, 2013.  The effect of such accretion will continue to diminish as financial instruments held at the merger mature or prepay.  The following table summarizes the effects of such accretion.

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Average

 

Income

 

Effect on

 

Average

 

Income

 

Effect on

 

 

 

Balance

 

(Expense)

 

Yield / Rate

 

Balance

 

(Expense)

 

Yield / Rate

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

114,925

 

$

 

0.00

%

$

131,006

 

$

 

0.00

%

Loans

 

511,047

 

53

 

0.04

%

390,609

 

66

 

0.07

%

Other interest-earning assets

 

81,227

 

 

0.00

%

138,416

 

 

0.00

%

Total interest-earning assets

 

$

707,199

 

$

53

 

0.03

%

$

660,031

 

$

66

 

0.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

508,917

 

74

 

0.06

%

455,700

 

221

 

0.20

%

Short-term borrowings

 

2,192

 

 

0.00

%

1,889

 

 

0.00

%

Borrowed funds

 

59,399

 

104

 

0.71

%

64,212

 

216

 

1.36

%

Junior subordinated debentures

 

8,374

 

 

0.00

%

8,205

 

 

0.00

%

Total interest-bearing liabilities

 

$

578,882

 

$

178

 

0.12

%

$

530,006

 

$

437

 

0.33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total effect of noncash accretion on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

231

 

 

 

 

 

$

503

 

 

 

Net interest margin

 

 

 

0.13

%

 

 

 

 

0.31

%

 

 

 

42



Table of Contents

 

The Company’s interest rate spread and net interest margin decreased by 95 basis points and 99 basis points, respectively, for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013.  These decreases were principally the result of the aforementioned decreases in transactional income in the purchased loan portfolio.  The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the three months ended March 31, 2014 and 2013.

 

 

 

Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

114,925

 

$

253

 

0.89

%

$

131,006

 

$

234

 

0.72

%

Loans (1) (2)

 

511,047

 

8,403

 

6.67

%

390,609

 

9,601

 

9.97

%

Regulatory stock

 

5,721

 

16

 

1.13

%

5,391

 

4

 

0.30

%

Short-term investments (3)

 

75,506

 

45

 

0.24

%

133,025

 

81

 

0.25

%

Total interest-earning assets

 

707,199

 

8,717

 

5.00

%

660,031

 

9,920

 

6.10

%

Cash and due from banks

 

2,833

 

 

 

 

 

3,184

 

 

 

 

 

Other non-interest earning assets

 

37,366

 

 

 

 

 

36,694

 

 

 

 

 

Total assets

 

$

747,398

 

 

 

 

 

$

699,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities & Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

61,028

 

$

40

 

0.27

%

$

55,068

 

$

36

 

0.27

%

Money market accounts

 

87,352

 

112

 

0.52

%

70,613

 

102

 

0.59

%

Savings accounts

 

35,032

 

12

 

0.14

%

32,464

 

11

 

0.14

%

Time deposits

 

325,505

 

858

 

1.07

%

297,555

 

935

 

1.27

%

Total interest-bearing deposits

 

508,917

 

1,022

 

0.81

%

455,700

 

1,084

 

0.96

%

Short-term borrowings

 

2,192

 

6

 

1.11

%

1,889

 

4

 

0.86

%

Borrowed funds

 

59,399

 

437

 

2.98

%

64,212

 

389

 

2.46

%

Junior subordinated debentures

 

8,374

 

140

 

6.78

%

8,205

 

190

 

9.39

%

Total interest-bearing liabilities

 

578,882

 

1,605

 

1.12

%

530,006

 

1,667

 

1.28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and escrow accounts

 

48,361

 

 

 

 

 

48,426

 

 

 

 

 

Other liabilities

 

5,920

 

 

 

 

 

5,921

 

 

 

 

 

Total liabilities

 

633,163

 

 

 

 

 

584,353

 

 

 

 

 

Stockholders’ equity

 

114,235

 

 

 

 

 

115,556

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

747,398

 

 

 

 

 

$

699,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

7,112

 

 

 

 

 

$

8,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.87

%

 

 

 

 

4.82

%

Net interest margin (4)

 

 

 

 

 

4.08

%

 

 

 

 

5.07

%

 


(1)              Includes loans held for sale.

(2)              Nonaccrual loans are included in the computation of average, but unpaid interest has not been included for purposes of determining interest income.

(3)              Short term investments include FHLB overnight deposits and other interest-bearing deposits.

(4)              Net interest margin is calculated as net interest income divided by total interest-earning assets.

 

The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume).  Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

 

 

Three Months Ended March 31, 2014 compared to 2013

 

 

 

Change Due to Volume

 

Change Due to Rate

 

Total Change

 

 

 

(Dollars in thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

Investment securities

 

$

(31

)

$

50

 

$

19

 

Loans

 

2,487

 

(3,685

)

(1,198

)

Regulatory stock

 

 

12

 

12

 

Short-term investments

 

(34

)

(2

)

(36

)

Total interest-earning assets

 

2,422

 

(3,625

)

(1,203

)

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

Interest-bearing deposits

 

110

 

(172

)

(62

)

Short-term borrowings

 

1

 

1

 

2

 

Borrowed funds

 

(31

)

79

 

48

 

Junior subordinated debentures

 

4

 

(54

)

(50

)

Total interest-bearing liabilities

 

84

 

(146

)

(62

)

Total change in net interest income

 

$

2,338

 

$

(3,479

)

$

(1,141

)

 

43



Table of Contents

 

Nine Months Ended March 31, 2014 and 2013

 

Net interest income before provision for the nine months ended March 31, 2014 and 2013 was $23.2 million and $21.4 million, respectively.  The increase of $1.8 million was largely attributable to growth in the LASG loan portfolio, which earned a yield of 9.55% for the nine months ended March 31, 2014 on an average outstanding balance of $241.7 million.  The following table summarizes interest income and related yields recognized on the Company’s loans for the nine months ended March 31, 2014 and 2013.

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

 

 

Balance

 

Income

 

Yield

 

Balance

 

Income

 

Yield

 

 

 

(Dollars in thousands)

 

Community Banking Division

 

$

246,539

 

$

9,809

 

5.30

%

$

257,760

 

$

11,449

 

5.92

%

LASG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated — traditional

 

44,631

 

2,513

 

7.50

%

12,974

 

930

 

9.55

%

Originated — securities loans

 

21,638

 

109

 

0.67

%

 

 

0.00

%

Purchased

 

175,383

 

14,711

 

11.17

%

110,151

 

12,830

 

15.52

%

Total LASG

 

241,652

 

17,333

 

9.55

%

123,125

 

13,760

 

14.89

%

Total

 

$

488,191

 

$

27,142

 

7.41

%

$

380,885

 

$

25,209

 

8.82

%

 

In the nine months ended March 31, 2014, net interest income was negatively affected by a lower level of noncash accretion of fair value adjustments resulting from the 2010 merger than in the nine months ended March 31, 2013.  The effect of such accretion will continue to diminish as financial instruments held at the merger mature or prepay.  The following table summarizes the effects of such accretion.

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

Average

 

Income

 

Effect on

 

Average

 

Income

 

Effect on

 

 

 

Balance

 

(Expense)

 

Yield / Rate

 

Balance

 

(Expense)

 

Yield / Rate

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

117,053

 

$

 

0.00

%

$

132,835

 

$

(3

)

0.00

%

Loans

 

488,191

 

136

 

0.04

%

380,885

 

443

 

0.15

%

Other interest-earning assets

 

83,055

 

 

0.00

%

136,437

 

 

0.00

%

Total interest-earning assets

 

$

688,299

 

$

136

 

0.03

%

$

650,157

 

$

440

 

0.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

486,707

 

489

 

0.13

%

427,125

 

758

 

0.24

%

Short-term borrowings

 

2,290

 

 

0.00

%

1,397

 

 

0.00

%

Borrowed funds

 

59,778

 

319

 

0.71

%

81,183

 

999

 

1.64

%

Junior subordinated debentures

 

8,331

 

 

0.00

%

8,164

 

 

0.00

%

Total interest-bearing liabilities

 

$

557,106

 

$

808

 

0.19

%

$

517,869

 

$

1,757

 

0.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total effect of noncash accretion on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

944

 

 

 

 

 

$

2,197

 

 

 

Net interest margin

 

 

 

0.18

%

 

 

 

 

0.45

%

 

 

 

44



Table of Contents

 

The Company’s interest rate spread and net interest margin increased by 15 basis points and 11 basis points, respectively, for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013.  These increases were principally the result of the aforementioned increase in loan volume.  The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the nine months ended March 31, 2014 and 2013.

 

 

 

Nine Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

117,053

 

$

797

 

0.91

%

$

132,835

 

$

929

 

0.93

%

Loans (1) (2)

 

488,191

 

27,142

 

7.41

%

380,885

 

25,209

 

8.82

%

Regulatory stock

 

5,721

 

68

 

1.58

%

5,446

 

42

 

1.03

%

Short-term investments (3)

 

77,334

 

140

 

0.24

%

130,991

 

241

 

0.25

%

Total interest-earning assets

 

688,299

 

28,147

 

5.45

%

650,157

 

26,421

 

5.41

%

Cash and due from banks

 

2,975

 

 

 

 

 

3,094

 

 

 

 

 

Other non-interest earning assets

 

35,855

 

 

 

 

 

37,571

 

 

 

 

 

Total assets

 

$

727,129

 

 

 

 

 

$

690,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities & Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

59,703

 

$

120

 

0.27

%

$

55,468

 

$

116

 

0.28

%

Money market accounts

 

86,421

 

338

 

0.52

%

56,739

 

221

 

0.52

%

Savings accounts

 

34,160

 

35

 

0.14

%

31,631

 

32

 

0.13

%

Time deposits

 

306,423

 

2,555

 

1.11

%

283,287

 

2,721

 

1.28

%

Total interest-bearing deposits

 

486,707

 

3,048

 

0.83

%

427,125

 

3,090

 

0.96

%

Short-term borrowings

 

2,290

 

17

 

0.99

%

1,397

 

15

 

1.43

%

Borrowed funds

 

59,778

 

1,323

 

2.95

%

81,183

 

1,334

 

2.19

%

Junior subordinated debentures

 

8,331

 

525

 

8.39

%

8,164

 

574

 

9.37

%

Total interest-bearing liabilities

 

557,106

 

4,913

 

1.17

%

517,869

 

5,013

 

1.29

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and escrow accounts

 

50,662

 

 

 

 

 

50,192

 

 

 

 

 

Other liabilities

 

5,718

 

 

 

 

 

5,636

 

 

 

 

 

Total liabilities

 

613,486

 

 

 

 

 

573,697

 

 

 

 

 

Stockholders’ equity

 

113,643

 

 

 

 

 

117,125

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

727,129

 

 

 

 

 

$

690,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net interest income

 

 

 

$

23,234

 

 

 

 

 

$

21,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

4.27

%

 

 

 

 

4.12

%

Net interest margin (4)

 

 

 

 

 

4.50

%

 

 

 

 

4.39

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)     Includes loans held for sale.

(2)              Nonaccrual loans are included in the computation of average, but unpaid interest has not been included for purposes of determining interest income.

(3)              Short term investments include FHLB overnight deposits and other interest-bearing deposits.

(4)              Net interest margin is calculated as net interest income divided by total interest-earning assets.

 

The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume).  Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

 

 

Nine Months Ended March 31, 2014 compared to 2013

 

 

 

Change Due to Volume

 

Change Due to Rate

 

Total Change

 

 

 

(Dollars in thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

Investment securities

 

$

(108

)

$

(24

)

$

(132

)

Loans

 

6,377

 

(4,444

)

1,933

 

Regulatory stock

 

2

 

24

 

26

 

Short-term investments

 

(97

)

(4

)

(101

)

Total interest-earning assets

 

6,174

 

(4,448

)

1,726

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

Interest-bearing deposits

 

336

 

(378

)

(42

)

Short-term borrowings

 

8

 

(6

)

2

 

Borrowed funds

 

(405

)

394

 

(11

)

Junior subordinated debentures

 

12

 

(61

)

(49

)

Total interest-bearing liabilities

 

(49

)

(51

)

(100

)

Total change in net interest income

 

$

6,223

 

$

(4,397

)

$

1,826

 

 

45



Table of Contents

 

Provision for Loan Losses

 

Quarterly, the Company determines the amount of the allowance for loan losses that is adequate to provide for losses inherent in the Company’s loan portfolios, with the provision for loan losses determined by the net change in the allowance for loan losses.  For loans acquired with deteriorated credit quality, a provision for loan losses is recorded when estimates of future cash flows are lower than had been previously expected. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements — Note 4:  Loans, Allowance for Loan losses and Credit Quality” for further discussion.

 

The provision for loan losses for periods subsequent to the merger with FHB reflects the impact of adjusting loans to their then fair values, as well as the elimination of the allowance for loan losses in accordance with the acquisition method of accounting. Subsequent to the merger, the provision for loan losses has been recorded based on estimates of inherent losses in newly originated loans and for incremental reserves required for pre-merger loans based on estimates of deteriorated credit quality post-merger.

 

Three Months Ended March 31, 2014 and 2013

 

The provision for loan losses for the quarter ended March 31, 2014 and 2013 was $180 thousand and $346 thousand, respectively.  The decrease in the Company’s loan loss provision resulted principally from favorable charge-off trends in the originated loan portfolio.

 

Nine Months Ended March 31, 2014 and 2013

 

The provision for loan losses for the nine months ended March 31, 2014 and 2013 was $407 thousand and $821 thousand, respectively.  The decrease in the Company’s loan loss provision resulted from favorable charge-off trends in the originated loan portfolio.  Net charge-offs for the nine months ended March 31, 2014 decreased by $405 thousand from the nine months ended March 31, 2013, principally due to the partial charge-off of one commercial business loan relationship in the first quarter of fiscal 2013.

 

Noninterest Income

 

Three Months Ended March 31, 2014 and 2013

 

Noninterest income decreased by $1.3 million for the quarter ended March 31, 2014, compared to the quarter ended March 31, 2013, principally due to the following:

 

·                  A decrease of $855 thousand in gain on sales of portfolio loans, due to a lower volume of purchased loan sales during the quarter ended March 31, 2014.

·                  A decrease of $360 thousand in gain on sales of loans held for sale, principally a volume-related difference related to a significant decline in residential loan refinance activity.  The Company sold $15.3 million of residential loans in the quarter ended March 31, 2014, compared to $33.3 million in the quarter ended March 31, 2013.

·                  A decrease of $65 thousand in net gains on the disposition of other real estate owned.

·                  A decrease of $45 thousand in fee income, primarily due to a decrease in transactional deposit account activity.

 

Nine Months Ended March 31, 2014 and 2013

 

Noninterest income decreased by $4.4 million for the nine months ended March 31, 2014, compared to the nine months ended March 31, 2013, principally due to the following:

 

·                  A decrease of $792 thousand in security gains.  In the first quarter of fiscal 2013, the Company sold a substantial portion of its available-for-sale investment portfolio and reinvested the sales proceeds in similar securities at lower market yields.  There were no security sales in the nine months ended March 31, 2014.

·                  A decrease of $1.2 million on sales of held for sale loans, a volume related difference resulting from an increased proportion of residential mortgages held in portfolio and a significant decline in residential loan refinance activity.

·                  A decrease of $1.6 million in gains on sales of portfolio loans, principally due to lower volume of purchased loan sales during the nine months ended March 31, 2014.

·                  A decrease of $631 thousand in gains on real estate owned, principally due to the favorable resolution of real estate previously securing purchased loans during the nine months ended March 31, 2013.

·                  A decrease of $257 thousand in bank-owned life insurance income.  In the second quarter of fiscal 2013, the Company received $235 thousand in life insurance death benefits.

 

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Noninterest Expense

 

Three Months Ended March 31, 2014 and 2013

 

Noninterest expense decreased by $612 thousand for the current quarter, compared to the quarter ended March 31, 2013.  Changes of significance when comparing the current quarter to the quarter ended March 31, 2013 are:

 

·                  A decrease of $928 thousand in salaries and employee benefits, principally related to a decline in incentive compensation.

·                  An increase of $232 thousand in occupancy and equipment expense, due to increased rent and utilities expense, depreciation, and software expenses.

·                  A decrease of $163 thousand in marketing expense, primarily due to a reduction in deposit marketing in fiscal 2014.

·                  An increase of $88 thousand in loan acquisition and collection expenses due, in part, to an increase of $5.0 million in loan purchases in the quarter ended March 31, 2014 when compared to the quarter ended March 31, 2013.

·                  An increase of $204 thousand in other noninterest expense, principally due to non-capital expenditures associated with the Company’s upcoming core banking software system conversion.

 

Nine Months Ended March 31, 2014 and 2013

 

Noninterest expense increased by $494 thousand for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013.  Changes of significance when comparing the nine months ended March 31, 2014 to the nine months ended March 31, 2013 are:

 

·                  An increase of $454 thousand in salaries and employee benefits, principally due to increased costs associated with severance, employee benefits, and stock-based compensation.

·                  An increase of $734 thousand in occupancy and equipment expense, primarily due to the relocation of the Company’s Boston office in the second quarter of fiscal 2013 as well as increased utilities, depreciation, and software expenses.

·                  A decrease of $453 thousand in marketing expense, primarily due to a reduction in deposit marketing in fiscal 2014.

·                  A decrease of $153 thousand in intangible asset amortization.  The Company’s core deposit intangible amortizes on an accelerated basis.

·                  A legal settlement recovery of $250 thousand recognized in the nine months ended March 31, 2014.

·                  An increase of $250 thousand in other noninterest expense, principally due to non-capital expenditures associated with the Company’s core banking software system conversion.

 

Income Taxes

 

Three Months Ended March 31, 2014 and 2013

 

The Company’s income tax expense was $287 thousand, or an effective rate of 39.6%, for the quarter ended March 31, 2014.  The Company’s income tax expense was $792 thousand, or an effective rate of 32.7%, for the quarter ended March 31, 2013.  The Company’s effective income tax rate may vary in any one quarter due to fluctuations in its projected pre-tax income and permanent book to tax differences for the fiscal year.

 

Nine Months Ended March 31, 2014 and 2013

 

The Company’s income tax expense was $1.1 million, or an effective rate of 34.1%, for the nine months ended March 31, 2014, as compared to $1.9 million, or an effective rate of 32.1%, for the nine months ended March 31, 2013.  The increased effective income tax rate in the nine months ended March 31, 2014 principally resulted from higher statutory rates resulting from expected state tax apportionment.

 

Results of Operations — Discontinued Operations

 

The Company concluded all investment brokerage activities in the second quarter of fiscal 2014.  Accordingly, operations associated with these activities have been classified as discontinued operations.

 

The Company earned net income from discontinued operations of $36 thousand in the quarter ended March 31, 2013, compared to none in the quarter ended March 31, 2014.  The Company reported a net loss from discontinued operations of $8 thousand for the nine months ended March 31, 2014, compared to net income of $166 thousand in the nine months ended March 31, 2013.

 

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Item 3.  Quantitative and Qualitative Disclosure about Market Risk

 

Not required for smaller reporting companies.

 

Item 4.  Controls and Procedures

 

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 the 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.

 

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its 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 Quarterly Report on Form 10-Q.

 

Based on this evaluation of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of March 31, 2014.

 

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2014 that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1.                                 Legal Proceedings

 

None.

 

Item 1A.                        Risk Factors

 

Not required for smaller reporting companies.

 

Item 2.                                 Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.                                 Defaults Upon Senior Securities

 

None.

 

Item 4.                                 Mine Safety Disclosures

 

Not applicable.

 

Item 5.                                 Other Information

 

None.

 

Item 6.                                 Exhibits

 

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Exhibits
No.

 

Description

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)). **

101

 

The following materials from Northeast Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2014 and June 30, 2013; (ii) Consolidated Statements of Income for the three and nine months ended March 31, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2014 and 2013; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended March 31, 2014 and 2013; (v) Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 and 2013; and (v) Notes to Unaudited Consolidated Financial Statements. ***

 


* Filed herewith

** Furnished herewith

*** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

 

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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: May 8, 2014

 

NORTHEAST BANCORP

 

By:

/s/ Richard Wayne

 

 

Richard Wayne

 

 

President and CEO

 

 

 

By:

/s/ Claire S. Bean

 

 

Claire S. Bean

 

 

Chief Financial Officer

 

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NORTHEAST BANCORP

Index to Exhibits

 

Exhibits
No.

 

Description

 

 

 

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)). **

101

 

The following materials from Northeast Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2014 and June 30, 2013; (ii) Consolidated Statements of Income for the three and nine months ended March 31, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2014 and 2013; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended March 31, 2014 and 2013; (v) Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 and 2013; and (v) Notes to Unaudited Consolidated Financial Statements. ***

 


*   Filed herewith

** Furnished herewith

*** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

 

51