Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 02/12/2014 10:54:18)

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, 2013

 

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, 2014 the registrant had outstanding 9,551,531 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
December 31, 2013 and June 30, 2013

 

 

 

 

 

Consolidated Statements of Income
Three Months Ended December 31, 2013 and 2012
Six Months Ended December 31, 2013 and 2012

 

 

 

 

 

Consolidated Statements of Comprehensive Income
Three Months Ended December 31, 2013 and 2012
Six Months Ended December 31, 2013 and 2012

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended December 31, 2013 and 2012

 

 

 

 

 

Consolidated Statements of Cash Flows
Six Months Ended December 31, 2013 and 2012

 

 

 

 

 

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, 2013

 

June 30, 2013

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

2,948

 

$

3,238

 

Short-term investments

 

60,479

 

62,696

 

Total cash and cash equivalents

 

63,427

 

65,934

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

114,717

 

121,597

 

Loans held for sale

 

6,826

 

8,594

 

 

 

 

 

 

 

Loans

 

501,709

 

435,376

 

Less: Allowance for loan losses

 

1,350

 

1,143

 

Loans, net

 

500,359

 

434,233

 

 

 

 

 

 

 

Premises and equipment, net

 

9,624

 

10,075

 

Real estate owned and other possessed collateral, net

 

3,211

 

2,134

 

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

 

5,721

 

5,721

 

Intangible assets, net

 

3,124

 

3,544

 

Bank owned life insurance

 

14,619

 

14,385

 

Other assets

 

10,997

 

4,422

 

Total assets

 

$

732,625

 

$

670,639

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits

 

 

 

 

 

Demand

 

$

47,015

 

$

46,425

 

Savings and interest checking

 

93,394

 

90,970

 

Money market

 

88,156

 

84,416

 

Time

 

307,957

 

262,812

 

Total deposits

 

536,522

 

484,623

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

42,931

 

28,040

 

Wholesale repurchase agreements

 

15,290

 

25,397

 

Short-term borrowings

 

2,468

 

625

 

Junior subordinated debentures issued to affiliated trusts

 

8,352

 

8,268

 

Capital lease obligation

 

1,650

 

1,739

 

Other liabilities

 

11,029

 

8,145

 

Total liabilities

 

618,242

 

556,837

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

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

 

 

 

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

 

9,552

 

9,566

 

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

 

881

 

881

 

Additional paid-in capital

 

93,230

 

92,745

 

Retained earnings

 

12,358

 

12,524

 

Accumulated other comprehensive loss

 

(1,638

)

(1,914

)

Total stockholders’ equity

 

114,383

 

113,802

 

Total liabilities and stockholders’ equity

 

$

732,625

 

$

670,639

 

 

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

 

3



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

 

 

Three Months Ended December 31,

 

Six Months Ended December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

10,282

 

$

8,267

 

$

18,739

 

$

15,608

 

Interest on available-for-sale securities

 

262

 

348

 

544

 

695

 

Other interest and dividend income

 

96

 

109

 

147

 

198

 

Total interest and dividend income

 

10,640

 

8,724

 

19,430

 

16,501

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

979

 

1,028

 

2,026

 

2,006

 

Federal Home Loan Bank advances

 

327

 

259

 

651

 

518

 

Wholesale repurchase agreements

 

98

 

161

 

192

 

380

 

Short-term borrowings

 

6

 

5

 

11

 

11

 

Junior subordinated debentures issued to affiliated trusts

 

192

 

191

 

385

 

384

 

Obligation under capital lease agreements

 

21

 

23

 

43

 

47

 

Total interest expense

 

1,623

 

1,667

 

3,308

 

3,346

 

 

 

 

 

 

 

 

 

 

 

Net interest and dividend income before provision for loan losses

 

9,017

 

7,057

 

16,122

 

13,155

 

Provision for loan losses

 

151

 

247

 

227

 

475

 

Net interest and dividend income after provision for loan losses

 

8,866

 

6,810

 

15,895

 

12,680

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Fees for other services to customers

 

421

 

462

 

861

 

772

 

Net securities gains

 

 

 

 

792

 

Gain on sales of loans held for sale

 

341

 

914

 

880

 

1,670

 

Gain on sales of portfolio loans

 

13

 

998

 

230

 

998

 

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

 

(77

)

 

(115

)

451

 

Bank-owned life insurance income

 

116

 

358

 

234

 

481

 

Other noninterest income

 

21

 

13

 

34

 

56

 

Total noninterest income

 

835

 

2,745

 

2,124

 

5,220

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,253

 

3,843

 

8,885

 

7,483

 

Occupancy and equipment expense

 

1,311

 

1,104

 

2,625

 

2,123

 

Professional fees

 

323

 

399

 

749

 

822

 

Data processing fees

 

256

 

220

 

513

 

432

 

Marketing expense

 

103

 

247

 

139

 

429

 

Loan acquisition and collection expense

 

290

 

479

 

763

 

933

 

FDIC insurance premiums

 

117

 

122

 

227

 

239

 

Intangible asset amortization

 

210

 

265

 

420

 

530

 

Legal settlement recovery

 

 

 

(250

)

 

Other noninterest expense

 

751

 

738

 

1,395

 

1,368

 

Total noninterest expense

 

7,614

 

7,417

 

15,466

 

14,359

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax expense

 

2,087

 

2,138

 

2,553

 

3,541

 

Income tax expense

 

676

 

676

 

832

 

1,121

 

Net income from continuing operations

 

1,411

 

1,462

 

1,721

 

2,420

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations before tax (benefit) expense

 

(27

)

84

 

(12

)

198

 

Income tax (benefit) expense

 

(9

)

29

 

(4

)

68

 

Net (loss) income from discontinued operations

 

(18

)

55

 

(8

)

130

 

Net income

 

$

1,393

 

$

1,517

 

$

1,713

 

$

2,550

 

Net income available to common stockholders

 

$

1,393

 

$

1,259

 

$

1,713

 

$

2,195

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

10,432,833

 

10,383,441

 

10,436,673

 

10,383,441

 

Diluted

 

10,432,833

 

10,383,441

 

10,436,673

 

10,383,441

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.13

 

$

0.11

 

$

0.16

 

$

0.20

 

Income from discontinued operations

 

 

0.01

 

 

0.01

 

Net Income

 

$

0.13

 

$

0.12

 

$

0.16

 

$

0.21

 

Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.13

 

$

0.11

 

$

0.16

 

$

0.20

 

Income from discontinued operations

 

 

0.01

 

 

0.01

 

Net income

 

$

0.13

 

$

0.12

 

$

0.16

 

$

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,393

 

$

1,517

 

$

1,713

 

$

2,550

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

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

 

(647

)

(311

)

(130

)

(154

)

Reclassification adjustment for net gains included in net income

 

 

 

 

(792

)

Total available-for-sale securities

 

(647

)

(311

)

(130

)

(946

)

Derivatives and hedging activities:

 

 

 

 

 

 

 

 

 

Change in accumulated loss on effective cash flow hedges

 

565

 

59

 

584

 

65

 

Reclassification adjustments for net gains included in net income

 

(17

)

(19

)

(36

)

(37

)

Total derivatives and hedging activities

 

548

 

40

 

548

 

28

 

Total other comprehensive (loss) income, before tax

 

(99

)

(271

)

418

 

(918

)

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

 

(34

)

(93

)

142

 

(313

)

Other comprehensive (loss) income, net of tax

 

(65

)

(178

)

276

 

(605

)

Comprehensive income

 

$

1,328

 

$

1,339

 

$

1,989

 

$

1,945

 

 

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

 

5



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Preferred Stock

 

Voting Common Stock

 

Non-voting Common Stock

 

Additional

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Paid-in Capital

 

Earnings

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2012

 

4,227

 

$

4

 

9,307,127

 

$

9,307

 

1,076,314

 

$

1,076

 

$

96,359

 

$

12,235

 

$

158

 

$

119,139

 

Net income

 

 

 

 

 

 

 

 

2,550

 

 

2,550

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

(605

)

(605

)

Conversion of non-voting common stock to voting common stock

 

 

 

160,245

 

160

 

(160,245

)

(160

)

 

 

 

 

Dividends on preferred stock

 

 

 

 

 

 

 

 

(113

)

 

(113

)

Dividends on common stock at $0.18 per share

 

 

 

 

 

 

 

 

(1,870

)

 

(1,870

)

Offering costs

 

 

 

 

 

 

 

(60

)

 

 

(60

)

Stock-based compensation

 

 

 

 

 

 

 

212

 

 

 

212

 

Redemption of preferred stock and warrants

 

(4,227

)

(4

)

 

 

 

 

(4,318

)

 

 

(4,322

)

Accretion of preferred stock

 

 

 

 

 

 

 

268

 

(268

)

 

 

Balance at December 31, 2012

 

 

$

 

9,467,372

 

$

9,467

 

916,069

 

$

916

 

$

92,461

 

$

12,534

 

$

(447

)

$

114,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

 

$

 

9,565,680

 

$

9,566

 

880,963

 

$

881

 

$

92,745

 

$

12,524

 

$

(1,914

)

$

113,802

 

Net income

 

 

 

 

 

 

 

 

1,713

 

 

1,713

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

276

 

276

 

Dividends on common stock at $0.18 per share

 

 

 

 

 

 

 

 

(1,879

)

 

(1,879

)

Stock-based compensation

 

 

 

 

 

 

 

471

 

 

 

471

 

Forfeiture of restricted common stock

 

 

 

(14,149

)

(14

)

 

 

14

 

 

 

 

Balance at December 31, 2013

 

 

$

 

9,551,531

 

$

9,552

 

880,963

 

$

881

 

$

93,230

 

$

12,358

 

$

(1,638

)

$

114,383

 

 

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,

 

 

 

2013

 

2012

 

Operating activities:

 

 

 

 

 

Net income

 

$

1,713

 

$

2,550

 

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

 

 

 

 

 

Provision for loan losses

 

227

 

475

 

Loss (gain) on sale and impairment of real estate owned and other repossessed collateral, net

 

115

 

(451

)

Accretion of fair value adjustments on loans, net

 

(4,099

)

(3,505

)

Accretion of fair value adjustments on deposits, net

 

(415

)

(537

)

Accretion of fair value adjustments on borrowings, net

 

(132

)

(703

)

Originations of loans held for sale

 

(44,651

)

(73,982

)

Net proceeds from sales of loans held for sale

 

47,299

 

77,272

 

Gain on sales of loans held for sale

 

(880

)

(1,670

)

Gain on sales of portfolio loans

 

(230

)

(998

)

Amortization of intangible assets

 

420

 

530

 

Bank-owned life insurance income, net

 

(234

)

(481

)

Depreciation of premises and equipment

 

1,035

 

842

 

Gain on sale of premises and equipment

 

(1

)

 

Net gain on sale of available-for-sale securities

 

 

(792

)

Stock-based compensation

 

471

 

212

 

Amortization of securities, net

 

668

 

794

 

Changes in other assets and liabilities:

 

 

 

 

 

Other assets

 

(6,568

)

932

 

Other liabilities

 

3,290

 

1,159

 

Net cash (used in) provided by operating activities

 

(1,972

)

1,647

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of available-for-sale securities

 

 

159,579

 

Purchases of available-for-sale securities

 

(12,083

)

(167,294

)

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

 

18,165

 

6,668

 

Loan purchases

 

(29,967

)

(63,887

)

Loan originations and principal collections, net

 

(34,000

)

24,193

 

Purchases of premises and equipment

 

(594

)

(2,071

)

Proceeds from sales of premises and equipment

 

11

 

 

Proceeds from sales of real estate owned and other repossessed collateral

 

528

 

907

 

Proceeds from life insurance benefits

 

 

628

 

Proceeds from sales of portfolio loans

 

216

 

5,189

 

Net cash used in investing activities

 

(57,724

)

(36,088

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net increase in deposits

 

52,314

 

79,867

 

Net decrease in short-term borrowings

 

1,843

 

361

 

Dividends paid on preferred stock

 

 

(113

)

Dividends paid on common stock

 

(1,879

)

(1,870

)

Proceeds from FHLB advances

 

15,000

 

 

Stock offering costs

 

 

(60

)

Repayment of wholesale repurchase agreements

 

(10,000

)

(40,000

)

Redemption of preferred stock and warrants

 

 

(4,322

)

Repayment of capital lease obligation

 

(89

)

(84

)

Net cash provided by financing activities

 

57,189

 

33,779

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(2,507

)

(662

)

Cash and cash equivalents, beginning of period

 

65,934

 

128,274

 

Cash and cash equivalents, end of period

 

$

63,427

 

$

127,612

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Transfers from loans to real estate owned and other repossessed collateral

 

$

1,727

 

$

3,310

 

Transfers from real estate owned and other repossessed collateral to loans

 

 

1,055

 

 

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, 2013

 

1.   Basis of Presentation

 

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

 

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

 

2.  Recent Accounting Pronouncements

 

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

 

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

 

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

 

In January 2014, the FASB issued ASU No. 2014-04, Receivables (Topic 310): Troubled Debt Restructurings by Creditors (“ASU 2014-04”).  The amendments clarify that when an in substance repossession or foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments ASU 2013-04 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  An entity can elect to adopt the amendments in ASU 2014-04 using either a modified retrospective transition method or a prospective transition method.  Under the modified retrospective transition method, an entity should apply the amendments by means of a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual period for which the amendments are effective.  The Company does not expect ASU 2014-04 to have material impact on the consolidated financial statements.

 

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3.   Securities Available-for-Sale

 

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

 

 

 

December 31, 2013

 

 

 

Amortized

 

Gross Unrealized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

45,152

 

$

13

 

$

(22

)

$

45,143

 

Agency mortgage-backed securities

 

72,331

 

 

(2,757

)

69,574

 

 

 

$

117,483

 

$

13

 

$

(2,779

)

$

114,717

 

 

 

 

June 30, 2013

 

 

 

Amortized

 

Gross Unrealized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

45,289

 

$

44

 

$

 

$

45,333

 

Agency mortgage-backed securities

 

78,944

 

 

(2,680

)

76,264

 

 

 

$

124,233

 

$

44

 

$

(2,680

)

$

121,597

 

 

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

 

 

 

Three Months Ended December 31,

 

Six Months Ended December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

Gross realized gains

 

$

 

$

 

$

 

$

831

 

Gross realized losses

 

 

 

 

(39

)

Net security gains

 

$

 

$

 

$

 

$

792

 

 

At December 31, 2013, investment securities with a fair value of approximately $42.0 million were pledged as collateral to secure outstanding borrowings.

 

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

 

 

 

December 31,2013

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

9,056

 

$

(22

)

$

 

$

 

$

9,056

 

$

(22

)

Agency mortgage-backed securities

 

33,623

 

(884

)

35,951

 

(1,873

)

69,574

 

(2,757

)

 

 

$

42,679

 

$

(906

)

$

35,951

 

$

(1,873

)

$

78,630

 

$

(2,779

)

 

 

 

June 30, 2013

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

 

$

 

$

 

$

 

$

 

$

 

Agency mortgage-backed securities

 

76,264

 

(2,680

)

 

 

76,264

 

(2,680

)

 

 

$

76,264

 

$

(2,680

)

$

 

$

 

$

76,264

 

$

(2,680

)

 

There were no other-than-temporary impairment losses on securities during the three and six months ended December 31, 2013 or 2012.

 

At December 31, 2013, the Company had eleven securities in a continuous loss position for greater than twelve months.  At December 31, 2013, 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 December 31, 2013 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, 2013.

 

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The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of December 31, 2013. 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

 

$

33,070

 

$

33,082

 

Due after one year through five years

 

12,081

 

12,061

 

Due after five years through ten years

 

37,599

 

36,684

 

Due after ten years

 

34,733

 

32,890

 

 

 

$

117,483

 

$

114,717

 

 

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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 declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses.

 

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

 

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”), and therefore by definition is an impaired loan.  Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. For loans accounted for under ASC 310-30, the Company evaluates whether it has granted a concession by comparing the restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition.  As a result, if an ASC 310-30 loan is modified to be consistent with, or better than, the Company’s expectations at acquisition, the loan would not qualify as a TDR. Nonaccrual loans that are restructured generally remain on nonaccrual status for a minimum period of six months to demonstrate that the borrower can meet the restructured terms.  If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a nonaccrual loan. With limited exceptions, loans classified as TDRs remain classified as such until the loan is paid off.

 

The composition of the Company’s loan portfolio follows.

 

 

 

December 31, 2013

 

June 30, 2013

 

 

 

Originated

 

Purchased

 

Total

 

Originated

 

Purchased

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate

 

$

120,814

 

$

2,606

 

$

123,420

 

$

89,734

 

$

2,706

 

$

92,440

 

Home equity

 

30,065

 

 

30,065

 

35,389

 

 

35,389

 

Commercial real estate

 

117,986

 

174,816

 

292,802

 

100,402

 

164,046

 

264,448

 

Construction

 

 

 

 

42

 

 

42

 

Commercial business

 

43,687

 

13

 

43,700

 

29,686

 

34

 

29,720

 

Consumer

 

11,722

 

 

11,722

 

13,337

 

 

13,337

 

Total loans

 

$

324,274

 

$

177,435

 

$

501,709

 

$

268,590

 

$

166,786

 

$

435,376

 

 

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Table of Contents

 

Allowance for Loan Losses and Impaired Loans

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                   Levels and trends in delinquencies and nonperforming loans

 

·                   Trends in the volume and nature of loans

 

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

 

·                   Trends in portfolio concentration

 

·                   National and local economic trends and conditions

 

·                   Effects of changes or trends in internal risk ratings

 

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

 

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

 

12



Table of Contents

 

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

 

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

 

13



Table of Contents

 

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

 

 

 

Three Months Ended December 31, 2013

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

695

 

$

163

 

$

50

 

$

148

 

$

101

 

$

67

 

$

1,224

 

Provision

 

(33

)

158

 

2

 

(24

)

106

 

(58

)

151

 

Recoveries

 

 

 

 

12

 

 

 

12

 

Charge-offs

 

(13

)

 

 

(24

)

 

 

(37

)

Ending balance

 

$

649

 

$

321

 

$

52

 

$

112

 

$

207

 

$

9

 

$

1,350

 

 

 

 

Three Months Ended December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

301

 

$

71

 

$

53

 

$

243

 

$

 

$

 

$

668

 

Provision

 

199

 

32

 

(6

)

22

 

 

 

247

 

Recoveries

 

 

 

 

5

 

 

 

5

 

Charge-offs

 

(8

)

(1

)

 

(36

)

 

 

(45

)

Ending balance

 

$

492

 

$

102

 

$

47

 

$

234

 

$

 

$

 

875

 

 

 

 

Six Months Ended December 31, 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

 

82

 

148

 

(24

)

(78

)

131

 

(32

)

227

 

Recoveries

 

6

 

 

6

 

31

 

 

 

43

 

Charge-offs

 

(33

)

 

 

(30

)

 

 

(63

)

Ending balance

 

$

649

 

$

321

 

$

52

 

$

112

 

$

207

 

$

9

 

$

1,350

 

 

 

 

Six Months Ended December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

214

 

$

93

 

$

292

 

$

225

 

$

 

$

 

$

824

 

Provision

 

412

 

9

 

(42

)

96

 

 

 

475

 

Recoveries

 

1

 

 

 

7

 

 

 

8

 

Charge-offs

 

(135

)

 

(203

)

(94

)

 

 

(432

)

Ending balance

 

$

492

 

$

102

 

$

47

 

$

234

 

$

 

$

 

875

 

 

14



Table of Contents

 

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

 

 

 

December 31, 2013

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

189

 

$

108

 

$

44

 

$

4

 

$

86

 

$

 

$

431

 

Collectively evaluated

 

460

 

213

 

8

 

108

 

 

9

 

798

 

ASC 310-30

 

 

 

 

 

121

 

 

121

 

Total

 

$

649

 

$

321

 

$

52

 

$

112

 

$

207

 

$

9

 

$

1,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

2,208

 

$

1,637

 

$

108

 

$

224

 

$

5,255

 

$

 

$

9,432

 

Collectively evaluated

 

148,671

 

116,349

 

43,579

 

11,498

 

 

 

320,097

 

ASC 310-30

 

 

 

 

 

172,180

 

 

172,180

 

Total

 

$

150,879

 

$

117,986

 

$

43,687

 

$

11,722

 

$

177,435

 

$

 

$

501,709

 

 

 

 

June 30, 2013

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

235

 

$

85

 

$

63

 

$

23

 

$

65