Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 11/12/2014 15:04:47)

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 September 30, 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 October 31, 2014, the registrant had outstanding 9,349,587 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
September 30, 2014 and June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income
Three Months Ended September 30, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income
Three Months Ended September 30, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity
Three Months Ended September 30, 2014 and 2013

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows
Three Months Ended September 30, 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 data)

 

 

 

September 30, 2014

 

June 30, 2014

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

2,313

 

$

3,372

 

Short-term investments

 

81,217

 

78,887

 

Total cash and cash equivalents

 

83,530

 

82,259

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

110,347

 

113,881

 

 

 

 

 

 

 

Loans held for sale

 

9,069

 

11,945

 

 

 

 

 

 

 

Loans

 

541,799

 

516,416

 

Less: Allowance for loan losses

 

1,539

 

1,367

 

Loans, net

 

540,260

 

515,049

 

 

 

 

 

 

 

Premises and equipment, net

 

8,780

 

9,135

 

Real estate owned and other repossessed collateral, net

 

2,115

 

1,991

 

Federal Home Loan Bank stock, at cost

 

4,102

 

4,102

 

Intangible assets, net

 

2,632

 

2,798

 

Bank owned life insurance

 

14,945

 

14,836

 

Other assets

 

6,511

 

5,935

 

Total assets

 

$

782,291

 

$

761,931

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Demand

 

$

52,698

 

$

50,140

 

Savings and interest checking

 

96,814

 

98,340

 

Money market

 

103,054

 

83,901

 

Time

 

341,229

 

341,948

 

Total deposits

 

593,795

 

574,329

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

42,773

 

42,824

 

Wholesale repurchase agreements

 

10,158

 

10,199

 

 

 

 

 

 

 

Short-term borrowings

 

3,804

 

2,984

 

Junior subordinated debentures issued to affiliated trusts

 

8,485

 

8,440

 

Capital lease obligation

 

1,511

 

1,558

 

Other liabilities

 

8,523

 

9,531

 

Total liabilities

 

669,049

 

649,865

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

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

 

 

 

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 9,367,071 and 9,260,331 shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively

 

9,367

 

9,260

 

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

 

881

 

881

 

Additional paid-in capital

 

90,809

 

90,914

 

Retained earnings

 

13,836

 

12,294

 

Accumulated other comprehensive loss

 

(1,651

)

(1,283

)

Total shareholders’ equity

 

113,242

 

112,066

 

Total liabilities and shareholders’ equity

 

$

782,291

 

$

761,931

 

 

The accompanying condensed notes are an integral part of these 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 September 30,

 

 

 

2014

 

2013

 

Interest and dividend income:

 

 

 

 

 

Interest on loans

 

$

10,922

 

$

8,457

 

Interest on available-for-sale securities

 

244

 

282

 

Other interest and dividend income

 

66

 

52

 

Total interest and dividend income

 

11,232

 

8,791

 

Interest expense:

 

 

 

 

 

Deposits

 

1,130

 

1,047

 

Federal Home Loan Bank advances

 

323

 

323

 

Wholesale repurchase agreements

 

73

 

95

 

Short-term borrowings

 

9

 

5

 

Junior subordinated debentures issued to affiliated trusts

 

206

 

192

 

Obligation under capital lease agreements

 

20

 

22

 

Total interest expense

 

1,761

 

1,684

 

Net interest and dividend income before provision for loan losses

 

9,471

 

7,107

 

Provision for loan losses

 

320

 

77

 

Net interest income after provision for loan losses

 

9,151

 

7,030

 

Noninterest income:

 

 

 

 

 

Fees for other services to customers

 

394

 

439

 

Gain on sales of loans held for sale

 

584

 

539

 

Gain on sales of portfolio loans

 

80

 

216

 

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

 

(23

)

(38

)

Bank-owned life insurance income

 

109

 

118

 

Other noninterest income

 

10

 

14

 

Total noninterest income

 

1,154

 

1,288

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

4,533

 

4,612

 

Occupancy and equipment expense

 

1,202

 

1,327

 

Professional fees

 

308

 

376

 

Data processing fees

 

345

 

277

 

Marketing expense

 

69

 

36

 

Loan acquisition and collection expense

 

274

 

473

 

FDIC insurance premiums

 

124

 

110

 

Intangible asset amortization

 

166

 

210

 

Legal settlement recovery

 

 

(250

)

Other noninterest expense

 

716

 

681

 

Total noninterest expense

 

7,737

 

7,852

 

Income from continuing operations before income tax expense

 

2,568

 

466

 

Income tax expense

 

924

 

156

 

Net income from continuing operations

 

1,644

 

310

 

 

 

 

 

 

 

Income from discontinued operations before income tax expense

 

 

15

 

Income tax expense

 

 

5

 

Net income from discontinued operations

 

 

10

 

Net income

 

$

1,644

 

$

320

 

Net income available to common shareholders

 

$

1,644

 

$

320

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

10,180,038

 

10,440,513

 

Diluted

 

10,180,038

 

10,440,513

 

Earnings per common share:

 

 

 

 

 

Basic:

 

 

 

 

 

Income from continuing operations

 

$

0.16

 

$

0.03

 

Income from discontinued operations

 

0.00

 

0.00

 

Net Income

 

$

0.16

 

$

0.03

 

Diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.16

 

$

0.03

 

Income from discontinued operations

 

0.00

 

0.00

 

Net Income

 

$

0.16

 

$

0.03

 

Cash dividends declared per common share

 

$

0.01

 

$

0.09

 

 

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

 

4



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

Net income

 

$

1,644

 

$

320

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

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

 

(275

)

517

 

Reclassification adjustment for net gains included in net income

 

 

 

Total available-for-sale securities

 

(275

)

517

 

Derivatives and hedging activities:

 

 

 

 

 

Change in accumulated loss on effective cash flow hedges

 

(272

)

19

 

Reclassification adjustments for net gains included in net income

 

(9

)

(19

)

 

 

 

 

 

 

Total derivatives and hedging activities

 

(281

)

 

Total other comprehensive income (loss), before tax

 

(556

)

517

 

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

 

(188

)

176

 

Other comprehensive income (loss), net of tax

 

(368

)

341

 

Total comprehensive income

 

$

1,276

 

$

661

 

 

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

 

5



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ 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

 

Shareholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-in Capital

 

Earnings

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

 

$

 

9,565,680

 

$

9,566

 

880,963

 

$

881

 

$

92,745

 

$

12,524

 

$

(1,914

)

$

113,802

 

Net income

 

 

 

 

 

 

 

 

320

 

 

320

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

341

 

341

 

Dividends on common stock at $0.09 per share

 

 

 

 

 

 

 

 

(940

)

 

(940

)

Stock-based compensation

 

 

 

 

 

 

 

323

 

 

 

323

 

Forfeiture of restricted common stock

 

 

 

(13,093

)

(13

)

 

 

13

 

 

 

 

Balance at September 30, 2013

 

 

$

 

9,552,587

 

$

9,553

 

880,963

 

$

881

 

$

93,081

 

$

11,904

 

(1,573

)

$

113,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2014

 

 

$

 

9,260,331

 

$

9,260

 

880,963

 

$

881

 

$

90,914

 

$

12,294

 

$

(1,283

)

$

112,066

 

Net income

 

 

 

 

 

 

 

 

1,644

 

 

1,644

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

(368

)

(368

)

Common stock repurchased

 

 

 

(14,400

)

(14

)

 

 

(120

)

 

 

(134

)

Dividends on common stock at $0.01 per share

 

 

 

 

 

 

 

 

(102

)

 

(102

)

Stock-based compensation

 

 

 

 

 

 

 

136

 

 

 

136

 

Issuance of restricted common stock

 

 

 

128,000

 

128

 

 

 

(128

)

 

 

 

Forfeiture of restricted common stock

 

 

 

(6,860

)

(7

)

 

 

7

 

 

 

 

Balance at September 30, 2014

 

 

$

 

9,367,071

 

$

9,367

 

880,963

 

$

881

 

$

90,809

 

$

13,836

 

$

(1,651

)

$

113,242

 

 

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

 

6



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

Operating activities:

 

 

 

 

 

Net income

 

$

1,644

 

$

320

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

320

 

77

 

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

 

(5

)

102

 

Accretion of fair value adjustments on loans, net

 

(3,097

)

(1,317

)

Accretion of fair value adjustments on deposits, net

 

(64

)

(201

)

Accretion of fair value adjustments on borrowings, net

 

(47

)

(67

)

Originations of loans held for sale

 

(27,676

)

(27,433

)

Net proceeds from sales of loans held for sale

 

31,136

 

31,148

 

Gain on sales of loans held for sale

 

(584

)

(539

)

Gain on sales of portfolio loans

 

(80

)

(216

)

Amortization of intangible assets

 

166

 

210

 

Bank-owned life insurance income, net

 

(109

)

(118

)

Depreciation of premises and equipment

 

432

 

522

 

Loss (gain) on sale of premises and equipment

 

28

 

(1

)

Stock-based compensation

 

136

 

323

 

Amortization of securities, net

 

262

 

335

 

Changes in other assets and liabilities:

 

 

 

 

 

Other assets

 

(364

)

(497

)

Other liabilities

 

(1,284

)

387

 

Net cash provided by operating activities

 

814

 

3,035

 

Investing activities:

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(3,004

)

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

 

2,994

 

6,576

 

Loan purchases

 

(13,167

)

(16,348

)

Proceeds from sales of portfolio loans

 

793

 

205

 

Loan originations and principal collections, net

 

(10,213

)

(31,961

)

Purchases of premises and equipment

 

(105

)

(284

)

Proceeds from sales of premises and equipment

 

 

11

 

Proceeds from sales of real estate owned and other repossessed collateral

 

88

 

150

 

Net cash used in investing activities

 

(19,610

)

(44,655

)

Financing activities:

 

 

 

 

 

Net increase in deposits

 

19,530

 

47,676

 

Net increase in short-term borrowings

 

820

 

1,345

 

Repurchase of common stock

 

(134

)

 

Dividends paid on common stock

 

(102

)

(940

)

Proceeds from FHLB advances

 

 

15,000

 

Repayment of wholesale repurchase agreements

 

 

(10,000

)

Repayment of capital lease obligation

 

(47

)

(44

)

Net cash provided by financing activities

 

20,067

 

53,037

 

Net increase in cash and cash equivalents

 

1,271

 

11,417

 

Cash and cash equivalents, beginning of period

 

82,259

 

65,934

 

Cash and cash equivalents, end of period

 

$

83,530

 

$

77,351

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Transfers from loans to real estate owned and other repossessed collateral

 

$

209

 

$

1,531

 

Transfers from real estate owned and other repossessed collateral to loans

 

 

 

 

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

 

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Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

September 30, 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, 2014 (“Fiscal 2014”) included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

2.  Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 , Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective January 1, 2017 and is not expected to have a significant impact on the Company’s financial statements.

 

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 is effective January 1, 2015 and is not expected to have a significant impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (“ ASU 2014-14 ”) .  ASU 2014-14 affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD), and the U.S. Department of Veterans Affairs (VA). The update requires that, upon foreclosure, a guaranteed mortgage loan be derecognized and a separate other receivable be recognized when specific criteria are met. ASU 2014-14 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 

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Table of Contents

 

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.

 

 

 

September 30, 2014

 

 

 

Amortized

 

Gross
Unrealized

 

Gross
Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

48,359

 

$

15

 

$

(23

)

$

48,351

 

Agency mortgage-backed securities

 

63,544

 

0

 

(1,548

)

61,996

 

 

 

$

111,903

 

$

15

 

$

(1,571

)

$

110,347

 

 

 

 

June 30, 2014

 

 

 

Amortized

 

Gross
Unrealized

 

Gross
Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

48,415

 

$

31

 

$

(28

)

$

48,418

 

Agency mortgage-backed securities

 

66,744

 

3

 

(1,284

)

65,463

 

 

 

$

115,159

 

$

34

 

$

(1,312

)

$

113,881

 

 

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale.  There were no securities sold during the three months ended September 30, 2014 or 2013. At September 30, 2014, investment securities with a fair value of approximately $32.3 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.

 

 

 

September 30, 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

 

$

27,111

 

$

(23

)

$

 

$

 

$

27,111

 

$

(23

)

Agency mortgage-backed securities

 

2,510

 

(6

)

59,486

 

(1,542

)

61,996

 

(1,548

)

 

 

$

29,621

 

$

(29

)

$

59,486

 

$

(1,542

)

$

89,107

 

$

(1,571

)

 

 

 

June 30, 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

 

$

24,141

 

$

(28

)

$

 

$

 

$

24,141

 

$

(28

)

Agency mortgage-backed securities

 

 

 

62,734

 

(1,284

)

62,734

 

(1,284

)

 

 

$

24,141

 

$

(28

)

$

62,734

 

$

(1,284

)

$

86,875

 

$

(1,312

)

 

There was no other-than-temporary impairment losses on securities during the three months ended September 30, 2014 or 2013.

 

At September 30, 2014, the Company had twenty-one securities in a continuous loss position for greater than twelve months.  At September 30, 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 September 30, 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 September 30, 2014.

 

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Table of Contents

 

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of September 30, 2014.  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

 

$

3,002

 

$

3,009

 

Due after one year through five years

 

45,357

 

45,342

 

Due after five years through ten years

 

31,904

 

31,393

 

Due after ten years

 

31,640

 

30,603

 

 

 

$

111,903

 

$

110,347

 

 

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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 is as follows on the dates indicated.

 

 

 

September 30, 2014

 

June 30, 2014

 

 

 

Originated

 

Purchased

 

Total

 

Originated

 

Purchased

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate

 

$

114,414

 

$

2,729

 

$

117,143

 

$

116,972

 

$

3,687

 

$

120,659

 

Home equity

 

26,818

 

 

26,818

 

27,975

 

 

27,975

 

Commercial real estate

 

108,709

 

202,922

 

311,631

 

116,617

 

199,481

 

316,098

 

Commercial business

 

76,663

 

277

 

76,940

 

41,518

 

282

 

41,800

 

Consumer

 

9,267

 

 

9,267

 

9,884

 

 

9,884

 

Total loans

 

$

335,871

 

$

205,928

 

$

541,799

 

$

312,966

 

$

203,450

 

$

516,416

 

 

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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 appropriateness 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.  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.  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 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 months ended September 30, 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

 

12



Table of Contents

 

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 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 collecting the scheduled principal and interest payments when due.

 

13



Table of Contents

 

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

 

 

 

Three Months Ended September 30, 2014

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

580

 

$

358

 

$

48

 

$

79

 

$

267

 

$

35

 

$

1,367

 

Provision

 

358

 

(18

)

1

 

(35

)

4

 

10

 

320

 

Recoveries

 

5

 

 

 

10

 

 

 

15

 

Charge-offs

 

(160

)

 

 

(3

)

 

 

(163

)

Ending balance

 

$

783

 

$

340

 

$

49

 

$

51

 

$

271

 

$

45

 

$

1,539

 

 

 

 

Three Months Ended September 30, 2013

 

 

 

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

 

115

 

(10

)

(26

)

(53

)

25

 

26

 

77

 

Recoveries

 

6

 

 

6

 

18

 

 

 

30

 

Charge-offs

 

(20

)

 

 

(6

)

 

 

(26

)

Ending balance

 

$

695

 

$

163

 

$

50

 

$

148

 

$

101

 

$

67

 

$

1,224

 

 

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

 

 

 

September 30, 2014

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

389

 

$

86

 

$

 

$

4

 

$

232

 

$

 

$

711

 

Collectively evaluated

 

394

 

254

 

49

 

47

 

 

45

 

789

 

ASC 310-30

 

 

 

 

 

39

 

 

39

 

Total

 

$

783

 

$

340

 

$

49

 

$

51

 

$

271

 

$

45

 

$

1,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

3,501

 

$

2,294

 

$

 

$

221

 

$

6,274

 

$

 

$

12,290

 

Collectively evaluated

 

137,731

 

106,415

 

76,663

 

9,046

 

 

 

329,855

 

ASC 310-30

 

 

 

 

 

199,654

 

 

199,654

 

Total

 

$

141,232

 

$

108,709

 

$

76,663

 

$

9,267

 

$

205,928

 

$

 

$

541,799

 

 

 

 

June 30, 2014

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

190

 

$

84

 

$

 

$

6

 

$

166

 

$

 

$

446

 

Collectively evaluated

 

390

 

274

 

48

 

73

 

 

35

 

820

 

ASC 310-30

 

 

 

 

 

101

 

 

101

 

Total

 

$

580

 

$

358

 

$

48

 

$

79

 

$

267

 

$

35

 

$

1,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

2,314

 

$

2,549

 

$

 

$

240

 

$

4,747

 

$

 

$

9,850

 

Collectively evaluated

 

142,633

 

114,068

 

41,518

 

9,644

 

 

 

307,863

 

ASC 310-30

 

 

 

 

 

198,703

 

 

198,703

 

Total

 

$

144,947

 

$

116,617

 

$

41,518

 

$

9,844

 

$

203,450

 

$

 

$

516,416

 

 

14



Table of Contents

 

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.

 

 

 

At September 30, 2014

 

At June 30, 2014

 

 

 

 

 

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

 

$

1,396

 

$

1,468

 

$

 

$

1,005

 

$

1,081

 

$

 

Consumer

 

191

 

195

 

 

200

 

205

 

 

Commercial real estate

 

808

 

814

 

 

1,368

 

1,371

 

 

Commercial business

 

 

11

 

 

 

 

 

Purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

5,018

 

7,193

 

 

2,857

 

4,148

 

 

Total

 

7,413

 

9,681

 

 

5,430

 

6,805

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

2,105

 

2,036

 

389

 

1,309

 

1,278

 

190

 

Consumer

 

30

 

31

 

4

 

40

 

47

 

6

 

Commercial real estate

 

1,486

 

1,468

 

86

 

1,181

 

1,187

 

84

 

Commercial business

 

 

 

 

 

 

 

Purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,256

 

1,745

 

232

 

1,890

 

2,215

 

166

 

Total

 

4,877

 

5,280

 

711

 

4,420

 

4,727

 

446

 

Total impaired loans

 

$

12,290

 

$

14,961

 

$

711

 

$

9,850

 

$

11,532

 

$

446

 

 

 

 

Three Months Ended September 30,

 

 

 

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

 

$

1,201

 

$

17

 

$

1,061

 

$

6

 

Consumer

 

196

 

3

 

84

 

1

 

Commercial real estate

 

1,088

 

7

 

439

 

7

 

Commercial business

 

 

1

 

63

 

3

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

3,938

 

75

 

1,637

 

7

 

Total

 

6,423

 

103

 

3,284

 

24

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

1,707

 

28

 

1,393

 

18

 

Consumer

 

35

 

1

 

91

 

1

 

Commercial real estate

 

1,334

 

20

 

1,121

 

26

 

Commercial business

 

 

 

54

 

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,573

 

3

 

200

 

2

 

Total

 

4,649

 

52

 

2,859

 

47

 

Total impaired loans

 

$

11,072

 

$

155

 

$

6,143

 

$

71

 

 

15



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