Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 05/12/2015 11:02:15)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2015

 

Commission File Number: 1-14588

 

Northeast Bancorp

(Exact name of registrant as specified in its charter)

 

Maine

 

01-0425066

(State or other jurisdiction of incorporation or organization)

 

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

 

500 Canal Street, Lewiston, Maine

 

04240

(Address of Principal executive offices)

 

(Zip Code)

 

(207) 786-3245

Registrant’s telephone number, including area code

 

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

 

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

 

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

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller Reporting Company  x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30, 2015 the registrant had outstanding 8,894,721 shares of voting common stock, $1.00 par value per share and 911,488 shares of non-voting common stock, $1.00 par value per share.

 

 

 



Table of Contents

 

Part I.

Financial Information

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Consolidated Balance Sheets
March 31, 2015 and June 30, 2014

3

 

 

 

 

 

 

Consolidated Statements of Income
Three Months Ended March 31, 2015 and 2014
Nine Months Ended March 31, 2015 and 2014

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2015 and 2014
Nine Months Ended March 31, 2015 and 2014

5

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended March 31, 2015 and 2014

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2015 and 2014

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

29

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

46

 

 

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

 

 

Item 1A.

Risk Factors

46

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

47

 

 

 

 

 

Item 4.

Mine Safety Disclosures

47

 

 

 

 

 

Item 5.

Other Information

47

 

 

 

 

 

Item 6.

Exhibits

48

 

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)

 

 

 

March 31, 2015

 

June 30, 2014

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

2,496

 

$

3,372

 

Short-term investments

 

102,577

 

78,887

 

Total cash and cash equivalents

 

105,073

 

82,259

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

105,523

 

113,881

 

Loans held for sale

 

4,439

 

11,945

 

 

 

 

 

 

 

Loans

 

579,193

 

516,416

 

Less: Allowance for loan losses

 

1,741

 

1,367

 

Loans, net

 

577,452

 

515,049

 

 

 

 

 

 

 

Premises and equipment, net

 

8,095

 

9,135

 

Real estate owned and other repossessed collateral, net

 

3,694

 

1,991

 

Federal Home Loan Bank stock, at cost

 

4,102

 

4,102

 

Intangible assets, net

 

2,338

 

2,798

 

Bank owned life insurance

 

15,165

 

14,836

 

Other assets

 

7,047

 

5,935

 

Total assets

 

$

832,928

 

$

761,931

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Demand

 

$

50,870

 

$

50,140

 

Savings and interest checking

 

98,050

 

98,340

 

Money market

 

163,004

 

83,901

 

Time

 

343,253

 

341,948

 

Total deposits

 

655,177

 

574,329

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

30,216

 

42,824

 

Wholesale repurchase agreements

 

10,077

 

10,199

 

Short-term borrowings

 

2,861

 

2,984

 

Junior subordinated debentures issued to affiliated trusts

 

8,578

 

8,440

 

Capital lease obligation

 

1,416

 

1,558

 

Other liabilities

 

12,116

 

9,531

 

Total liabilities

 

720,441

 

649,865

 

Commitments and contingencies

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2015 and June 30, 2014

 

 

 

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 8,908,121 and 9,260,331 shares issued and outstanding at March 31, 2015 and June 30, 2014, respectively

 

8,908

 

9,260

 

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 911,488 and 880,963 shares issued and outstanding at March 31, 2015 and June 30, 2014, respectively

 

911

 

881

 

Additional paid-in capital

 

87,348

 

90,914

 

Retained earnings

 

16,968

 

12,294

 

Accumulated other comprehensive loss

 

(1,648

)

(1,283

)

Total stockholders’ equity

 

112,487

 

112,066

 

Total liabilities and stockholders’ equity

 

$

832,928

 

$

761,931

 

 

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

 

3



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

10,619

 

$

8,403

 

$

32,487

 

$

27,142

 

Interest on available-for-sale securities

 

222

 

253

 

697

 

797

 

Other interest and dividend income

 

72

 

61

 

218

 

208

 

Total interest and dividend income

 

10,913

 

8,717

 

33,402

 

28,147

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,271

 

1,022

 

3,681

 

3,048

 

Federal Home Loan Bank advances

 

257

 

324

 

845

 

975

 

Wholesale repurchase agreements

 

71

 

93

 

216

 

285

 

Short-term borrowings

 

5

 

6

 

21

 

17

 

Junior subordinated debentures issued to affiliated trusts

 

171

 

140

 

566

 

525

 

Obligation under capital lease agreements

 

18

 

20

 

56

 

63

 

Total interest expense

 

1,793

 

1,605

 

5,385

 

4,913

 

 

 

 

 

 

 

 

 

 

 

Net interest and dividend income before provision for loan losses

 

9,120

 

7,112

 

28,017

 

23,234

 

Provision for loan losses

 

44

 

180

 

477

 

407

 

Net interest and dividend income after provision for loan losses

 

9,076

 

6,932

 

27,540

 

22,827

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Fees for other services to customers

 

303

 

385

 

1,089

 

1,246

 

Gain on sales of loans held for sale

 

355

 

265

 

1,384

 

1,145

 

Gain on sales of portfolio loans

 

425

 

373

 

950

 

603

 

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

 

357

 

165

 

303

 

50

 

Bank-owned life insurance income

 

110

 

108

 

329

 

342

 

Other noninterest income

 

4

 

12

 

23

 

46

 

Total noninterest income

 

1,554

 

1,308

 

4,078

 

3,432

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,316

 

3,759

 

13,586

 

12,624

 

Occupancy and equipment expense

 

1,278

 

1,450

 

3,662

 

4,075

 

Professional fees

 

386

 

366

 

1,153

 

1,115

 

Data processing fees

 

361

 

257

 

1,029

 

770

 

Marketing expense

 

54

 

86

 

203

 

225

 

Loan acquisition and collection expense

 

409

 

440

 

1,096

 

1,203

 

FDIC insurance premiums

 

137

 

127

 

371

 

354

 

Intangible asset amortization

 

128

 

162

 

460

 

582

 

Legal settlement recovery

 

 

 

 

(250

)

Other noninterest expense

 

816

 

869

 

2,272

 

2,284

 

Total noninterest expense

 

7,885

 

7,516

 

23,832

 

22,982

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income tax expense

 

2,745

 

724

 

7,786

 

3,277

 

Income tax expense

 

993

 

287

 

2,810

 

1,119

 

Net income from continuing operations

 

1,752

 

437

 

4,976

 

2,158

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

(12

)

Income tax (benefit) expense

 

 

 

 

(4

)

Net (loss) income from discontinued operations

 

 

 

 

(8

)

Net income

 

$

1,752

 

$

437

 

$

4,976

 

$

2,150

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

9,833,033

 

10,432,494

 

10,049,983

 

10,435,300

 

Diluted

 

9,833,033

 

10,432,494

 

10,049,983

 

10,435,300

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.04

 

$

0.50

 

$

0.21

 

Income from discontinued operations

 

 

 

 

 

Net Income

 

$

0.18

 

$

0.04

 

$

0.50

 

$

0.21

 

Diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.04

 

$

0.50

 

$

0.21

 

Income from discontinued operations

 

 

 

 

 

Net income

 

$

0.18

 

$

0.04

 

$

0.50

 

$

0.21

 

Cash dividends declared per common share

 

$

0.01

 

$

0.09

 

$

0.03

 

$

0.27

 

 

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

 

4



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended March 31,

 

Nine Months Ended March 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income

 

$

1,752

 

$

437

 

$

4,976

 

$

2,150

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

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

 

571

 

579

 

834

 

449

 

Reclassification adjustment for net gains included in net income

 

 

 

 

 

Total available-for-sale securities

 

571

 

579

 

834

 

449

 

Derivatives and hedging activities:

 

 

 

 

 

 

 

 

 

Change in accumulated loss on effective cash flow hedges

 

(566

)

(528

)

(1,341

)

56

 

Reclassification adjustments for net gains included in net income

 

(16

)

(72

)

(49

)

(108

)

Total derivatives and hedging activities

 

(582

)

(600

)

(1,390

)

(52

)

Total other comprehensive (loss) income, before tax

 

(11

)

(21

)

(556

)

397

 

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

 

(4

)

(7

)

(191

)

135

 

Other comprehensive (loss) income, net of tax

 

(7

)

(14

)

(365

)

262

 

Comprehensive income

 

$

1,745

 

$

423

 

$

4,611

 

$

2,412

 

 

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

 

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

 

 

 

 

 

 

 

 

2,150

 

 

2,150

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

262

 

262

 

Dividends on common stock at $0.27 per share

 

 

 

 

 

 

 

 

(2,818

)

 

(2,818

)

Stock-based compensation

 

 

 

 

 

 

 

612

 

 

 

612

 

Forfeiture of restricted common stock

 

 

 

(14,149

)

(14

)

 

 

14

 

 

 

 

Balance at March 31, 2014

 

 

$

 

9,551,531

 

$

9,552

 

880,963

 

$

881

 

$

93,371

 

$

11,856

 

$

(1,652

)

$

114,008

 

Balance at June 30, 2014

 

 

$

 

9,260,331

 

$

9,260

 

880,963

 

$

881

 

$

90,914

 

$

12,294

 

$

(1,283

)

$

112,066

 

Net income

 

 

 

 

 

 

 

 

4,976

 

 

4,976

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

(365

)

(365

)

Common stock repurchased

 

 

 

(479,936

)

(480

)

 

 

(3,912

)

 

 

(4,392

)

Conversion of voting common stock to non- voting common stock

 

 

 

(30,525

)

(30

)

30,525

 

30

 

 

 

 

 

Dividends on common stock at $0.03 per share

 

 

 

 

 

 

 

 

 

(302

)

 

(302

)

Stock-based compensation

 

 

 

 

 

 

 

504

 

 

 

504

 

Issuance of restricted common stock

 

 

 

174,000

 

174

 

 

 

(174

)

 

 

 

Forfeiture of restricted common stock

 

 

 

(15,749

)

(16

)

 

 

16

 

 

 

 

Balance at March 31, 2015

 

 

$

 

8,908,121

 

$

8,908

 

911,488

 

$

911

 

$

87,348

 

$

16,968

 

$

(1,648

)

$

112,487

 

 

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

 

6



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended March 31,

 

 

 

2015

 

2014

 

Operating activities:

 

 

 

 

 

Net income

 

$

4,976

 

$

2,150

 

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

 

 

 

 

 

Provision for loan losses

 

477

 

407

 

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

 

(303

)

(50

)

Accretion of fair value adjustments on loans, net

 

(9,149

)

(5,048

)

Accretion of fair value adjustments on deposits, net

 

(159

)

(489

)

Accretion of fair value adjustments on borrowings, net

 

(92

)

(191

)

Originations of loans held for sale

 

(68,734

)

(62,911

)

Net proceeds from sales of loans held for sale

 

77,624

 

62,823

 

Gain on sales of loans held for sale

 

(1,384

)

(1,145

)

Gain on sales of portfolio loans

 

(950

)

(603

)

Amortization of intangible assets

 

460

 

582

 

Bank-owned life insurance income, net

 

(329

)

(342

)

Depreciation of premises and equipment

 

1,259

 

1,540

 

Loss on sale of premises and equipment

 

23

 

16

 

Stock-based compensation

 

504

 

612

 

Amortization of securities, net

 

765

 

972

 

Changes in other assets and liabilities:

 

 

 

 

 

Other assets

 

(687

)

(1,978

)

Other liabilities

 

1,197

 

(460

)

Net cash provided by (used in) operating activities

 

5,498

 

(4,115

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(42,340

)

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

 

8,427

 

50,682

 

Loan purchases

 

(57,896

)

(46,267

)

Proceeds from sales of portfolio loans

 

7,200

 

5,575

 

Loan originations, principal collections, and purchased loan paydowns, net

 

(4,434

)

(33,757

)

Purchases of premises and equipment

 

(385

)

(703

)

Proceeds from sales of premises and equipment

 

143

 

11

 

Proceeds from sales of real estate owned and other repossessed collateral

 

713

 

1,160

 

Net cash used in investing activities

 

(46,232

)

(65,639

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net increase in deposits

 

81,007

 

79,176

 

Net (decrease) increase in short-term borrowings

 

(123

)

1,960

 

Repurchase of common stock

 

(4,392

)

 

Dividends paid on common stock

 

(302

)

(2,818

)

Proceeds from FHLB advances

 

 

15,000

 

Repayments of FHLB advances

 

(12,500

)

 

Repayment of wholesale repurchase agreements

 

 

(15,000

)

Repayment of capital lease obligation

 

(142

)

(135

)

Net cash provided by financing activities

 

63,548

 

78,183

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

22,814

 

8,429

 

Cash and cash equivalents, beginning of period

 

82,259

 

65,934

 

Cash and cash equivalents, end of period

 

$

105,073

 

$

74,363

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Transfers from loans to real estate owned and other repossessed collateral

 

$

2,104

 

$

2,174

 

Transfers from real estate owned and other repossessed collateral to loans

 

 

1,155

 

 

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

 

7



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2015

 

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 January 2014, the FASB issued ASU No. 2014-01,  Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (“ASU 2014-01”). The amendments in ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for fiscal years, and interim periods within those years, beginning after December 31, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company does not expect ASU 2014-01 to have material impact on the consolidated financial statements.

 

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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3.   Securities Available-for-Sale

 

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

 

 

 

March 31, 2015

 

 

 

Amortized

 

Gross Unrealized

 

Gross Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

48,246

 

$

38

 

$

(1

)

$

48,283

 

Agency mortgage-backed securities

 

57,721

 

26

 

(507

)

57,240

 

 

 

$

105,967

 

$

64

 

$

(508

)

$

105,523

 

 

 

 

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 and nine months ended March 31, 2015 or 2014.  At March 31, 2015, investment securities with a fair value of approximately $34.2 million were pledged as collateral to secure outstanding borrowings.

 

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

 

 

 

March 31, 2015

 

 

 

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

 

$

6,058

 

$

(1

)

$

 

$

 

$

6,058

 

$

(1

)

Agency mortgage-backed securities

 

2,085

 

(21

)

52,938

 

(486

)

55,023

 

(507

)

 

 

$

8,143

 

$

(22

)

$

52,938

 

$

(486

)

$

61,081

 

$

(508

)

 

 

 

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 were no other-than-temporary impairment losses on securities during the three and nine months ended March 31, 2015 or 2014.

 

At March 31, 2015, the Company had twenty-two securities in a continuous loss position for greater than twelve months.  At March 31, 2015, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or government-sponsored enterprises.  The decline in fair value of the Company’s available-for-sale securities at March 31, 2015 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. At March 31, 2015, it is more likely than not that the Company will not sell or be required to sell the investment securities before recovery of its amortized cost. As such, management does not believe any of the Company’s available-for-sale securities are other-than-temporarily impaired at March 31, 2015.

 

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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 March 31, 2015. 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

 

$

24,028

 

$

24,045

 

Due after one year through five years

 

24,218

 

24,237

 

Due after five years through ten years

 

28,263

 

28,188

 

Due after ten years

 

29,458

 

29,053

 

 

 

$

105,967

 

$

105,523

 

 

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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.

 

 

 

March 31, 2015

 

June 30, 2014

 

 

 

Originated

 

Purchased

 

Total

 

Originated

 

Purchased

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate

 

$

110,314

 

$

2,143

 

$

112,457

 

$

116,972

 

$

3,687

 

$

120,659

 

Home equity

 

24,321

 

 

24,321

 

27,975

 

 

27,975

 

Commercial real estate

 

134,483

 

193,284

 

327,767

 

116,617

 

199,481

 

316,098

 

Commercial business

 

106,015

 

256

 

106,271

 

41,518

 

282

 

41,800

 

Consumer

 

8,377

 

 

8,377

 

9,884

 

 

9,884

 

Total loans

 

$

383,510

 

$

195,683

 

$

579,193

 

$

312,966

 

$

203,450

 

$

516,416

 

 

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Table of Contents

 

Past Due and Nonaccrual Loans

 

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

 

 

 

March 31, 2015

 

 

 

 

 

 

 

Past Due

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days or

 

90 Days or

 

Total

 

 

 

 

 

Non-

 

 

 

30-59

 

60-89

 

More-Still

 

More-

 

Past

 

Total

 

Total

 

Accrual

 

 

 

Days

 

Days

 

Accruing

 

Nonaccrual

 

Due

 

Current

 

Loans

 

Loans

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

370

 

$

394

 

$

 

$

1,140

 

$

1,904

 

$

108,410

 

$

110,314

 

$

3,163

 

Home equity

 

 

 

 

11

 

11

 

24,310

 

24,321

 

11

 

Commercial real estate

 

435

 

197

 

 

904

 

1,536

 

132,947

 

134,483

 

1,201

 

Commercial business

 

2

 

 

 

 

2

 

106,013

 

106,015

 

 

Consumer

 

194

 

86

 

 

63

 

343

 

8,034

 

8,377

 

225

 

Total originated portfolio

 

1,001

 

677

 

 

2,118

 

3,796

 

379,714

 

383,510

 

4,600

 

Purchased portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

2,143

 

2,143

 

 

Commercial business

 

 

 

 

 

 

256

 

256

 

 

Commercial real estate

 

5,868

 

 

 

5,204

 

11,072

 

182,212

 

193,284

 

5,850

 

Total purchased portfolio

 

5,868

 

 

 

5,204

 

11,072

 

184,611

 

195,683

 

5,850

 

Total loans

 

$

6,869

 

$

677

 

$

 

$

7,322

 

$

14,868

 

$

564,325

 

$

579,193

 

$

10,450

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

Past Due

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days or

 

90 Days or

 

Total

 

 

 

 

 

Non-

 

 

 

30-59

 

60-89

 

More-Still

 

More-

 

Past

 

Total

 

Total

 

Accrual

 

 

 

Days

 

Days

 

Accruing

 

Nonaccrual

 

Due

 

Current

 

Loans

 

Loans

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

222

 

$

728

 

$

 

$

1,573

 

$

2,523

 

$

114,449

 

$

116,972

 

$

1,743

 

Home equity

 

109

 

7

 

 

120

 

236

 

27,739

 

27,975

 

160

 

Commercial real estate

 

126

 

136

 

 

629

 

891

 

115,726

 

116,617

 

1,162

 

Commercial business

 

 

 

 

 

 

41,518

 

41,518

 

5

 

Consumer

 

188

 

24

 

 

49

 

261

 

9,623

 

9,884

 

139

 

Total originated portfolio

 

645

 

895

 

 

2,371

 

3,911

 

309,055

 

312,966

 

3,209

 

Purchased portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

3,687

 

3,687

 

 

Commercial business

 

 

 

 

 

 

282

 

282

 

 

Commercial real estate

 

 

 

 

1,995

 

1,995

 

197,486

 

199,481

 

4,116

 

Total purchased portfolio

 

 

 

 

1,995

 

1,995

 

201,455

 

203,450

 

4,116

 

Total loans

 

$

645

 

$

895

 

$

 

$

4,366

 

$

5,906

 

$

510,510

 

$

516,416

 

$

7,325

 

 

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

 

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Table of Contents

 

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 and nine months ended March 31, 2015 or 2014.

 

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

 

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Table of Contents

 

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

 

 

 

Three Months Ended March 31, 2015

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

796

 

$

288

 

$

54

 

$

59

 

$

413

 

$

54

 

$

1,664

 

Provision

 

(38

)

187

 

(45

)

(13

)

(87

)

40

 

44

 

Recoveries

 

1

 

 

35

 

4

 

 

 

40

 

Charge-offs

 

 

 

(1

)

(6

)

 

 

(7

)

Ending balance

 

$

759

 

$

475

 

$

43

 

$

44

 

$

326

 

$

94

 

$

1,741

 

 

 

 

Three Months Ended March 31, 2014

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased

 

Unallocated

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

649

 

$

321

 

$

52

 

$

112

 

$

207

 

$

9

 

$

1,350

 

Provision

 

151

 

 

41

 

25

 

(28

)

(9

)

180

 

Recoveries

 

1

 

1

 

1

 

5

 

 

 

8

 

Charge-offs

 

(123

)

 

(43

)

(27

)

 

 

(193

)

Ending balance

 

$

678

 

$

322

 

$

51

 

$

115

 

$

179

 

$

 

$

1,345

 

 

 

 

Nine Months Ended March 31, 2015

 

 

 

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

 

322

 

116

 

(39

)

(40

)

59

 

59

 

477

 

Recoveries

 

17

 

1

 

35

 

17

 

 

 

70

 

Charge-offs

 

(160

)

 

(1

)

(12

)

 

 

(173

)

Ending balance

 

$

759

 

$

475

 

$

43

 

$

44

 

$

326