Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 02/14/2013 09:03:23)

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 December 31, 2012

 

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 January 31, 2013, the registrant had outstanding 9,467,372 shares of voting common stock, $1.00 par value per share and 916,069 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
December 31, 2012 and June 30, 2012

 

 

 

 

 

Consolidated Statements of Income
Three Months Ended December 31, 2012 and 2011
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Comprehensive Income
Three Months Ended December 31, 2012 and 2011
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Cash Flows
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

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)

 

 

 

December 31, 2012

 

June 30, 2012

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

3,284

 

$

2,538

 

Short-term investments

 

124,328

 

125,736

 

Total cash and cash equivalents

 

127,612

 

128,274

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

133,363

 

133,264

 

Loans held for sale

 

8,262

 

9,882

 

 

 

 

 

 

 

Loans

 

392,583

 

356,254

 

Less: Allowance for loan losses

 

875

 

824

 

Loans, net

 

391,708

 

355,430

 

 

 

 

 

 

 

Premises and equipment, net

 

10,434

 

9,205

 

Repossessed collateral, net

 

2,633

 

834

 

Accrued interest receivable

 

2,068

 

1,840

 

Federal Home Loan Bank stock, at cost

 

4,602

 

4,602

 

Federal Reserve Bank stock, at cost

 

871

 

871

 

Intangible assets, net

 

3,957

 

4,487

 

Bank owned life insurance

 

14,148

 

14,295

 

Other assets

 

5,052

 

6,212

 

Total assets

 

$

704,710

 

$

669,196

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Demand

 

$

48,136

 

$

45,323

 

Savings and interest checking

 

86,231

 

90,204

 

Money market

 

58,351

 

45,024

 

Time deposits

 

308,800

 

241,637

 

Total deposits

 

501,518

 

422,188

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

43,213

 

43,450

 

Structured repurchase agreements

 

25,637

 

66,183

 

Short-term borrowings

 

1,570

 

1,209

 

Junior subordinated debentures issued to affiliated trusts

 

8,186

 

8,106

 

Capital lease obligation

 

1,827

 

1,911

 

Other liabilities

 

7,828

 

7,010

 

Total liabilities

 

589,779

 

550,057

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at December 31, 2012; 4,227 shares issued and outstanding at June 30, 2012; liquidation preference of $1,000 per share

 

0

 

4

 

Voting common stock, $1.00 par value, 25,000,000 and 13,500,000 shares authorized at December 31, 2012 and June 30, 2012, respectively; 9,467,372 and 9,307,127 issued and outstanding at December 31, 2012 and June 30, 2012, respectively

 

9,467

 

9,307

 

Non-voting common stock, $1.00 par value, 3,000,000 and 1,500,000 shares authorized at December 31, 2012 and June 30, 2012, respectively; 916,069 and 1,076,314 issued and outstanding at December 31, 2012 and June 30, 2012, respectively

 

916

 

1,076

 

Warrants to purchase common stock

 

0

 

406

 

Additional paid-in capital

 

92,570

 

96,080

 

Unearned restricted stock

 

(109

)

(127

)

Retained earnings

 

12,534

 

12,235

 

Accumulated other comprehensive (loss) income

 

(447

)

158

 

Total stockholders’ equity

 

114,931

 

119,139

 

Total liabilities and stockholders’ equity

 

$

704,710

 

$

669,196

 

 

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 December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

8,267

 

$

5,874

 

$

15,608

 

$

11,011

 

Interest on available-for-sale securities

 

348

 

541

 

695

 

1,180

 

Other interest and dividend income

 

109

 

57

 

198

 

116

 

Total interest and dividend income

 

8,724

 

6,472

 

16,501

 

12,307

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,028

 

836

 

2,006

 

1,673

 

Federal Home Loan Bank advances

 

259

 

258

 

518

 

516

 

Structured repurchase agreements

 

161

 

249

 

380

 

497

 

Short-term borrowings

 

5

 

3

 

11

 

8

 

Junior subordinated debentures issued to affiliated trusts

 

191

 

185

 

384

 

368

 

Obligation under capital lease agreements

 

23

 

25

 

47

 

51

 

Total interest expense

 

1,667

 

1,556

 

3,346

 

3,113

 

 

 

 

 

 

 

 

 

 

 

Net interest and dividend income before provision for loan losses

 

7,057

 

4,916

 

13,155

 

9,194

 

Provision for loan losses

 

247

 

134

 

475

 

534

 

Net interest and dividend income after provision for loan losses

 

6,810

 

4,782

 

12,680

 

8,660

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Fees for other services to customers

 

462

 

370

 

772

 

710

 

Net securities gains

 

0

 

433

 

792

 

380

 

Gain on sales of loans held for sale

 

914

 

770

 

1,670

 

1,426

 

Gain on sales of portfolio loans

 

998

 

203

 

998

 

203

 

Gain recognized on repossessed collateral, net

 

0

 

73

 

451

 

50

 

Investment commissions

 

799

 

704

 

1,474

 

1,391

 

Bank-owned life insurance income

 

358

 

126

 

481

 

253

 

Other noninterest income

 

13

 

13

 

56

 

57

 

Total noninterest income

 

3,544

 

2,692

 

6,694

 

4,470

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,413

 

3,729

 

8,470

 

7,446

 

Occupancy and equipment expense

 

1,147

 

916

 

2,225

 

1,765

 

Professional fees

 

399

 

277

 

822

 

692

 

Data processing fees

 

284

 

289

 

552

 

563

 

Marketing expense

 

252

 

254

 

439

 

345

 

Loan acquisition and collection expense

 

479

 

288

 

933

 

570

 

FDIC insurance premiums

 

122

 

122

 

239

 

239

 

Intangible asset amortization

 

265

 

337

 

530

 

673

 

Other noninterest expense

 

771

 

665

 

1,425

 

1,237

 

Total noninterest expense

 

8,132

 

6,877

 

15,635

 

13,530

 

 

 

 

 

 

 

 

 

 

 

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

 

2,222

 

597

 

3,739

 

(400

)

Income tax expense (benefit)

 

705

 

179

 

1,189

 

(224

)

Net income (loss) from continuing operations

 

$

1,517

 

$

418

 

$

2,550

 

$

(176

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

0

 

$

0

 

$

0

 

$

186

 

Gain on sale of discontinued operations

 

0

 

0

 

0

 

1,529

 

Income tax expense

 

0

 

0

 

0

 

592

 

Net income from discontinued operations

 

$

0

 

$

0

 

$

0

 

$

1,123

 

Net income

 

$

1,517

 

$

418

 

$

2,550

 

$

947

 

Net income available to common stockholders

 

$

1,259

 

$

320

 

$

2,195

 

$

751

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

10,383,441

 

3,494,498

 

10,383,441

 

3,494,498

 

Diluted

 

10,383,441

 

3,511,994

 

10,383,441

 

3,494,498

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.12

 

$

0.09

 

$

0.21

 

$

(0.11

)

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.32

 

Net income

 

$

0.12

 

$

0.09

 

$

0.21

 

$

0.21

 

Diluted:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.12

 

$

0.09

 

$

0.21

 

$

(0.11

)

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.32

 

Net income

 

$

0.12

 

$

0.09

 

$

0.21

 

$

0.21

 

Cash dividends declared per common share

 

$

0.09

 

$

0.09

 

$

0.18

 

$

0.18

 

 

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 December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income

 

$

1,517

 

$

418

 

$

2,550

 

$

947

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

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

 

(311

)

(273

)

(154

)

1,363

 

Reclassification adjustment for net gains included in net income

 

0

 

(433

)

(792

)

(380

)

Total available-for-sale securities

 

(311

)

(706

)

(946

)

983

 

Derivatives and hedging activities:

 

 

 

 

 

 

 

 

 

Change in accumulated loss on effective cash flow hedges

 

59

 

55

 

65

 

(143

)

Reclassification adjustments for net gains included in net income

 

(19

)

(21

)

(37

)

(43

)

Total derivatives and hedging activities

 

40

 

34

 

28

 

(186

)

Total other comprehensive (loss) income , before tax

 

(271

)

(672

)

(918

)

797

 

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

 

(93

)

(229

)

(313

)

271

 

Other comprehensive (loss) income, net of tax

 

(178

)

(443

)

(605

)

526

 

Comprehensive income (loss)

 

$

1,339

 

$

(25

)

$

1,945

 

$

1,473

 

 

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)

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

Unearned

 

 

 

Accumulated
Other

 

Total

 

 

 

Preferred Stock

 

Voting Common Stock

 

Non-voting Common Stock

 

to Purchase

 

Additional

 

Restricted

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Common Stock

 

Paid-in Capital

 

Stock

 

Earnings

 

Income (Loss)

 

Equity

 

Balance at June 30, 2011

 

4,227

 

$

4

 

3,312,173

 

$

3,312

 

195,351

 

$

195

 

$

406

 

$

49,700

 

$

(163

)

$

11,726

 

$

(226

)

$

64,954

 

Net income

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

947

 

0

 

947

 

Other comprehensive income, net of tax

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

526

 

526

 

Dividends on preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(106

)

0

 

(106

)

Dividends on common stock at $0.18 per share

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(631

)

0

 

(631

)

Stock-based compensation

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

192

 

18

 

0

 

0

 

210

 

Accretion of preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

90

 

0

 

(90

)

0

 

0

 

Balance at December 31, 2011

 

4,227

 

$

4

 

3,312,173

 

$

3,312

 

195,351

 

$

195

 

$

406

 

$

49,982

 

$

(145

)

$

11,846

 

$

300

 

$

65,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2012

 

4,227

 

$

4

 

9,307,127

 

$

9,307

 

1,076,314

 

$

1,076

 

$

406

 

$

96,080

 

$

(127

)

$

12,235

 

$

158

 

$

119,139

 

Net income

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

2,550

 

0

 

2,550

 

Other comprehensive loss, net of tax

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(605

)

(605

)

Conversion of non-voting common stock to voting common stock

 

0

 

0

 

160,245

 

160

 

(160,245

)

(160

)

0

 

0

 

0

 

0

 

0

 

0

 

Dividends on preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(113

)

0

 

(113

)

Dividends on common stock at $0.18 per share

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(1,870

)

0

 

(1,870

)

Offering costs

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(60

)

0

 

0

 

0

 

(60

)

Stock-based compensation

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

194

 

18

 

0

 

0

 

212

 

Redemption of preferred stock and warrants

 

(4,227

)

(4

)

0

 

0

 

0

 

0

 

(406

)

(3,912

)

0

 

0

 

0

 

(4,322

)

Accretion of preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

268

 

0

 

(268

)

0

 

0

 

Balance at December 31, 2012

 

0

 

$

0

 

9,467,372

 

$

9,467

 

916,069

 

$

916

 

0

 

$

92,570

 

$

(109

)

$

12,534

 

$

(447

)

$

114,931

 

 

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)

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

Operating activities:

 

 

 

 

 

Net income

 

$

2,550

 

$

947

 

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

 

 

 

 

 

Provision for loan losses

 

475

 

534

 

Gain on sale or impairment of repossessed collateral, net

 

(451

)

(50

)

Accretion of fair value adjustments on loans, net

 

(3,505

)

(1,124

)

Accretion of fair value adjustments on deposits, net

 

(537

)

(716

)

Accretion of fair value adjustments on borrowings, net

 

(703

)

(1,088

)

Originations of loans held for sale

 

(73,982

)

(72,454

)

Net proceeds from sales of loans held for sale

 

77,272

 

70,867

 

Gain on sales of loans held for sale

 

(1,670

)

(1,426

)

Gain on sales of portfolio loans

 

(998

)

(203

)

Amortization of intangible assets

 

530

 

742

 

Bank-owned life insurance income, net

 

(481

)

(253

)

Depreciation of premises and equipment

 

842

 

604

 

Loss on sale of premises and equipment

 

0

 

2

 

Net gain on sale of available-for-sale securities

 

(792

)

(380

)

Stock-based compensation

 

212

 

210

 

Gain on sale of assets of insurance division

 

0

 

(1,529

)

Amortization of securities, net

 

794

 

843

 

Changes in other assets and liabilities:

 

 

 

 

 

Interest receivable

 

(228

)

(517

)

Decrease in prepaid FDIC assessment

 

220

 

323

 

Other assets and liabilities

 

2,099

 

372

 

Net cash provided by (used in) operating activities

 

1,647

 

(4,296

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of available-for-sale securities

 

159,579

 

49,053

 

Purchases of available-for-sale securities

 

(167,294

)

(51,274

)

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

 

6,668

 

12,223

 

Loan purchases

 

(63,887

)

(51,662

)

Loan originations and principal collections, net

 

24,193

 

14,141

 

Purchases of premises and equipment

 

(2,071

)

(1,754

)

Proceeds from sales of portfolio loans

 

5,189

 

711

 

Proceeds from sales of repossessed collateral

 

907

 

660

 

Proceeds from life insurance benefits

 

628

 

0

 

Proceeds from sale of assets of insurance division

 

0

 

9,726

 

Net cash used in investing activities

 

(36,088

)

(18,176

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net increase in deposits

 

79,867

 

622

 

Net increase (decrease) in short-term borrowings

 

361

 

(771

)

Dividends paid on preferred stock

 

(113

)

(106

)

Dividends paid on common stock

 

(1,870

)

(631

)

Stock offering costs

 

(60

)

0

 

Repayment of structured repurchase agreements

 

(40,000

)

0

 

Repayment of other borrowings

 

0

 

(2,129

)

Redemption of preferred stock and warrants

 

(4,322

)

0

 

Repayment of capital lease obligation

 

(84

)

(81

)

Net cash provided by (used in) financing activities

 

33,779

 

(3,096

)

Net decrease in cash and cash equivalents

 

(662

)

(25,568

)

Cash and cash equivalents, beginning of period

 

128,274

 

83,931

 

Cash and cash equivalents, end of period

 

$

127,612

 

$

58,363

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Transfers from loans to repossessed collateral

 

$

3,310

 

$

757

 

Transfers from repossessed collateral to loans

 

1,055

 

0

 

 

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

December 31, 2012

 

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 at December 31, 2012, the results of operations for the three and six months ended December 31, 2012 and 2011, comprehensive income for the three and six months ended December 31, 2012 and 2011, the changes in stockholders’ equity for the six months ended December 31, 2012 and 2011, and the cash flows for the six months ended December 31, 2012 and 2011. Operating results for the six months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013 (“Fiscal 2013”). For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2012 (“Fiscal 2012”) 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 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 Company does not anticipate that the adoption of this guidance will have a material impact on the consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”) . The objective of this update is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments in this update require that all non-owner changes in stockholders’ equity be presented either in as single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments are effective for interim and annual periods beginning after December 15, 2011.  The adoption of this guidance did not have a material impact on the consolidated financial statements.

 

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments in this update defer those changes in ASU 2011-05 that relate to the presentation of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by this update. The amendments are effective for interim and annual periods beginning after December 15, 2011.  The adoption of this guidance did not have a material impact on the consolidated financial statements.

 

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3.   Securities Available-for-Sale

 

Securities available-for-sale at amortized cost and approximate fair values are summarized below:

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

45,556

 

$

45,618

 

$

45,824

 

$

45,808

 

Agency mortgage-backed securities

 

88,128

 

87,745

 

86,816

 

87,456

 

 

 

$

133,684

 

$

133,363

 

$

132,640

 

$

133,264

 

 

The gross unrealized gains and unrealized losses on available-for-sale securities are as follows:

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Gross

 

Gross

 

Gross

 

Gross

 

 

 

Unrealized

 

Unrealized

 

Unrealized

 

Unrealized

 

 

 

Gains

 

Losses

 

Gains

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

62

 

$

0

 

$

5

 

$

21

 

Agency mortgage-backed securities

 

95

 

478

 

640

 

0

 

 

 

$

157

 

$

478

 

$

645

 

$

21

 

 

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 December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Gross realized gains

 

$

0

 

$

433

 

$

831

 

$

447

 

Gross realized losses

 

0

 

0

 

(39

)

(67

)

Net security gains

 

$

0

 

$

433

 

$

792

 

$

380

 

 

At December 31, 2012, investment securities with a fair value of approximately $43.1 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.

 

 

 

December 31, 2012

 

 

 

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

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

Agency mortgage-backed securities

 

68,560

 

478

 

0

 

0

 

68,560

 

478

 

 

 

$

68,560

 

$

478

 

$

0

 

$

0

 

$

68,560

 

$

478

 

 

 

 

June 30, 2012

 

 

 

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

 

$

36,585

 

$

21

 

$

0

 

$

0

 

$

36,585

 

$

21

 

Agency mortgage-backed securities

 

0

 

0

 

0

 

0

 

0

 

0

 

 

 

$

36,585

 

$

21

 

$

0

 

$

0

 

$

36,585

 

$

21

 

 

There were no other-than-temporary impairment losses on securities during the three and six months ended December 31, 2012 or 2011.

 

At December 31, 2012, the Company did not have any securities in a continuous loss position for greater than twelve months.  At December 31, 2012, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or

 

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Table of Contents

 

government-sponsored enterprises.  The decline in fair value of the Company’s available-for-sale securities at December 31, 2012 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 December 31, 2012.

 

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of December 31, 2012.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

(Dollars in thousands)

 

Due within one year

 

$

12,080

 

$

12,096

 

Due after one year through five years

 

33,476

 

33,522

 

Due after five years through ten years

 

47,276

 

47,135

 

Due after ten years

 

40,852

 

40,610

 

 

 

$

133,684

 

$

133,363

 

 

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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.

 

All loans purchased by the Company in the secondary market by the Bank’s Loan Acquisition and Servicing Group (“LASG”)  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 “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 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”).  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 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.

 

The composition of the Company’s loan portfolio follows.

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Originated

 

Purchased

 

Total

 

Originated

 

Purchased

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate

 

$

84,678

 

$

4,254

 

$

88,932

 

$

90,944

 

$

3,931

 

$

94,875

 

Home equity

 

39,041

 

0

 

39,041

 

42,696

 

0

 

42,696

 

Commercial real estate

 

103,071

 

129,470

 

232,541

 

100,196

 

80,539

 

180,735

 

Construction

 

42

 

0

 

42

 

1,187

 

0

 

1,187

 

Commercial business

 

17,134

 

0

 

17,134

 

19,612

 

0

 

19,612

 

Consumer

 

14,893

 

0

 

14,893

 

17,149

 

0

 

17,149

 

Total loans

 

$

258,859

 

$

133,724

 

$

392,583

 

$

271,784

 

$

84,470

 

$

356,254

 

 

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Table of Contents

 

Purchased credit impaired (“PCI”) loans include those loans acquired with specific evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable.  The Company does not characterize purchased loans with no or insignificant credit impairment as PCI loans.  The following table presents a summary of PCI loans purchased by the LASG during the six months ended December 31, 2012 and 2011.

 

 

 

PCI Loans Acquired

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Contractually required payments receivable

 

$

44,575

 

$

10,064

 

Nonaccretable difference

 

(10,814

)

(2,958

)

Cash flows expected to be collected

 

33,761

 

7,106

 

Accretable yield

 

(14,214

)

(3,122

)

Fair value of loans acquired

 

$

19,547

 

$

3,984

 

 

 

 

PCI Loans: Activity in Accretable Yield

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

7,169

 

$

0

 

Accretion

 

(2,052

)

(564

)

Acquisitions

 

14,214

 

3,122

 

Reclassifications from nonaccretable difference

 

894

 

210

 

Disposals and transfers

 

(2,951

)

(614

)

Other changes

 

23

 

0

 

End balance

 

$

17,297

 

$

2,154

 

 

The following table provides information related to the unpaid principal balance and carrying amounts of PCI loans.

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

(Dollars in thousands)

 

Unpaid principal balance

 

$

49,768

 

$

21,359

 

Carrying amount

 

$

30,104

 

$

13,866

 

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  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.

 

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Table of Contents

 

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 secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the 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. Loans in this segment are evaluated for impairment under ASC 310-30. The Company reviews expected cash flows from purchased loans on a quarterly basis. The effect of a decline in expected cash flows subsequent to the acquisition of the loan is recognized through a specific allocation in the allowance for loan losses.

 

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

 

·                   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 changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three and six months ended December 31, 2012.

 

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 separately identify individual consumer and residential loans for individual impairment and disclosure.  However, all loans modified in troubled debt restructurings are individually reviewed for impairment.

 

For all portfolio segments, except 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 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.  Loan impairment of purchased loans is measured based on the decrease in expected cash flows from those estimated at acquisition, excluding changes due to decreases in interest rate indices, 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 December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

301

 

$

71

 

$

53

 

$

243

 

$

0

 

$

668

 

Provision (benefit)

 

199

 

32

 

(6

)

22

 

0

 

247

 

Recoveries

 

0

 

0

 

0

 

5

 

0

 

5

 

Charge-offs

 

(8

)

(1

)

0

 

(36

)

0

 

(45

)

Ending balance

 

$

492

 

$

102

 

$

47

 

$

234

 

$

0

 

$

875

 

 

 

 

Three months ended December 31, 2011

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

124

 

$

114

 

$

418

 

$

54

 

$

0

 

$

710

 

Provision (benefit)

 

33

 

33

 

(191

)

259

 

0

 

134

 

Recoveries

 

1

 

0

 

12

 

13

 

0

 

26

 

Charge-offs

 

(33

)

0

 

(8

)

(92

)

0

 

(133

)

Ending balance

 

$

125

 

$

147

 

$

231

 

$

234

 

$

0

 

$

737

 

 


(1)          Purchased loans include commercial real estate, commercial business, and commercial loans secured by residential real estate loans.  The Company separately analyzes all loans purchased by the LASG from other segments in determining the allowance for loan losses under ASC 310-30.

 

 

 

Six months ended December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

214

 

$

93

 

$

292

 

$

225

 

$

0

 

$

824

 

Provision (benefit)

 

412

 

9

 

(42

)

96

 

0

 

475

 

Recoveries

 

1

 

0

 

0

 

7

 

0

 

8

 

Charge-offs

 

(135

)

0

 

(203

)

(94

)

0

 

(432

)

Ending balance

 

$

492

 

$

102

 

$

47

 

$

234

 

$

0

 

$

875

 

 

 

 

Six months ended December 31, 2011

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

34

 

$

147

 

$

238

 

$

18

 

$

0

 

$

437

 

Provision (benefit)

 

147

 

24

 

(33

)

396

 

0

 

534

 

Recoveries

 

1

 

0

 

34

 

28

 

0

 

63

 

Charge-offs

 

(57

)

(24

)

(8

)

(208

)

0

 

(297

)

Ending balance

 

$

125

 

$

147

 

$

231

 

$

234

 

$

0

 

$

737

 

 


(1)          Purchased loans include commercial real estate, commercial business, and commercial loans secured by residential real estate loans.  The Company separately analyzes all loans purchased by the LASG from other segments in determining the allowance for loan losses under ASC 310-30.

 

14



Table of Contents

 

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

 

 

 

December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

248

 

$

74

 

$

44

 

$

28

 

$

394

 

Collectively evaluated

 

244

 

28

 

3

 

206

 

481

 

Purchased (1)

 

0

 

0

 

0

 

0

 

0

 

Total

 

$

492

 

$

102

 

$

47

 

$

234

 

$

875