Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 04/30/2012 17:19:17)
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, 2012

Commission File Number: 1-14588

 

 

Northeast Bancorp

(Exact name of registrant as specified in its charter)

 

 

 

Maine   01-0425066

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

500 Canal Street, Lewiston, Maine   04240
(Address of Principal executive offices)   (Zip Code)

(207) 786-3245

Registrant’s telephone number, including area code

 

 

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

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   ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    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   ¨     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 27, 2012, the registrant had outstanding 3,312,173 shares of voting common stock, $1.00 par value per share and 195,351 shares of non-voting common stock, $1.00 par value per share.

 

 

 


Table of Contents
Part I.    Financial Information      3   
   Item 1.   

Financial Statements (unaudited)

     3   
      Consolidated Balance Sheets March 31, 2012 and June 30, 2011      3   
     

Consolidated Statements of Income Three and Nine Months Ended March  31, 2012 Three Months Ended March 31, 2011 93 Days Ended March 31, 2011 181 Days Ended December 28, 2010

    
4
  
     

Consolidated Statements of Comprehensive Income Three and Nine Months Ended March  31, 2012 Three Months Ended March 31, 2011 93 Days Ended March 31, 2011 181 Days Ended December 28, 2010

    
6
  
     

Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended March 31, 2012 93 Days Ended March 31, 2011 181 Days Ended December 28, 2010

     7   
     

Consolidated Statements of Cash Flows Nine Months Ended March 31, 2012 93 Days Ended March 31, 2011 181 Days Ended December 28, 2010

    
8
  
          Notes to Consolidated Financial Statements    9  
     Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    31  
     Item 3.    Quantitative and Qualitative Disclosure about Market Risk    51  
     Item 4.    Controls and Procedures    51  

Part II.

   Other Information      51   
     Item 1.    Legal Proceedings    51  
     Item 1A.    Risk Factors    51  
     Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    51  
     Item 3.    Defaults Upon Senior Securities    51  
     Item 4.    Mine Safety Disclosures    51  
     Item 5.    Other Information    51  
     Item 6.    Exhibits    51  

 

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Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

 

     March 31, 2012     June 30, 2011  
Assets     

Cash and due from banks

   $ 2,609      $ 3,227   

Short-term investments

     62,271        80,704   
  

 

 

   

 

 

 

Total cash and cash equivalents

     64,880        83,931   

Available-for-sale securities, at fair value

     136,730        148,962   

Loans held for sale

     6,354        5,176   

Loans

     345,777        309,913   

Less: Allowance for loan losses

     748        437   
  

 

 

   

 

 

 

Loans, net

     345,029        309,476   

Premises and equipment, net

     8,918        8,271   

Repossessed collateral, net

     915        690   

Accrued interest receivable

     1,659        1,244   

Federal Home Loan Bank stock, at cost

     4,602        4,889   

Federal Reserve Bank stock, at cost

     871        871   

Intangible assets, net

     4,749        13,133   

Bank owned life insurance

     14,171        13,794   

Other assets

     6,074        5,956   
  

 

 

   

 

 

 

Total assets

   $ 594,952      $ 596,393   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits

    

Demand

   $ 41,613      $ 48,215  

Savings and interest checking

     88,860        89,804  

Money market

     45,589        48,695  

Time deposits

     227,673        214,404  
  

 

 

   

 

 

 

Total deposits

     403,735        401,118  

Federal Home Loan Bank advances

     43,567        43,922  

Structured repurchase agreements

     66,636        68,008  

Short-term borrowings

     1,836        2,515  

Junior subordinated debentures issued to affiliated trusts

     8,066        7,957  

Capital lease obligation

     1,953        2,075  

Other borrowings

     0        2,229  

Other liabilities

     4,289        3,615  
  

 

 

   

 

 

 

Total liabilities

     530,082        531,439  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock, $1.00 par value, 1,000,000 shares authorized; 4,227 shares issued and outstanding at March 31, 2012 and June 30, 2011; liquidation preference of $1,000 per share

     4        4  

Voting common stock, $1.00 par value, 13,500,000 shares authorized; 3,312,173 issued and outstanding at March 31, 2012 and June 30, 2011

     3,312        3,312  

Non-voting common stock, $1.00 par value, 1,500,000 shares authorized 195,351 issued and outstanding at March 31, 2012 and June 30, 2011

     195        195  

Warrants to purchase common stock

     406        406  

Additional paid-in capital

     50,129        49,700  

Unearned restricted stock

     (136     (163

Retained earnings

     11,601        11,726  

Accumulated other comprehensive loss

     (641     (226
  

 

 

   

 

 

 

Total stockholders’ equity

     64,870        64,954  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 594,952      $ 596,393   
  

 

 

   

 

 

 

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

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

     Successor Company (1)     Predecessor Company
(2)
 
     Three Months Ended
March 31, 2012
     Nine Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
    93 Days Ended
March 31, 2011
    181 Days Ended
December 28, 2010
 

Interest and dividend income:

           

Interest on loans

   $ 5,870       $ 16,881      $ 5,649      $ 5,845      $ 11,210   

Interest and dividends on available-for-sale securities

     422         1,602        910        954        3,111   

Dividends on regulatory stock

     15         48        12        13        18   

Other interest and dividend income

     45         128        33        34        39   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     6,352         18,659        6,604        6,846        14,378   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
 

Interest expense:

           

Deposits

     875         2,548        774        816        2,796   

Federal Home Loan Bank advances

     256         772        284        299        918   

Structured repurchase agreements

     247         744        249        272        1,392   

Short-term borrowings

     7         15        60        67        376   

Junior subordinated debentures issued to affiliated trusts

     188         556        174        180        340   

Obligation under capital lease agreements

     25         76        26        28        55   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,598         4,711        1,567        1,662        5,877   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
 

Net interest and dividend income before provision for loan losses

     4,754         13,948        5,037        5,184        8,501   
 

Provision for loan losses

     100         634        49        49        912   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest and dividend income after provision for loan losses

     4,654         13,314        4,988        5,135        7,589   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
 

Noninterest income:

           

Fees for other services to customers

     326         1,036        310        323        698   

Net securities gains

     731         1,111        47        47        17   

Gain on sales of loans held for sale

     634         2,060        490        539        1,867   

Gain (loss) on sales of portfolio loans

     219         422        (195     (195     0   

Investment commissions

     720         2,111        709        734        1,174   

Bank-owned life insurance income

     124         377        126        131        250   

Bargain purchase gain

     0         0        296        15,216        0   

Other noninterest income

     13         120        144        152        225   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,767         7,237        1,927        16,947        4,231   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
 

Noninterest expense:

           

Salaries and employee benefits

     4,093         11,539        3,958        4,097        4,949   

Occupancy and equipment expense

     970         2,735        773        795        1,352   

Professional fees

     539         1,231        374        383        509   

Data processing fees

     260         823        274        283        521   

Marketing expense

     142         487        216        220        230   

FDIC insurance premiums

     125         364        170        175        346   

Intangible asset amortization

     262         935        306        306        0   

Merger expense

     0         0        132        3,182        94   

Other noninterest expense

     861         2,668        893        997        1,454   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     7,252         20,782        7,096        10,438        9,455   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
 

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

     169         (231     (181     11,644        2,365   

Income tax expense (benefit)

     15         (209     (217     (233     698   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
 

Net income (loss) from continuing operations

   $ 154       $ (22   $ 36      $ 11,877      $ 1,667   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

(Continued)

 

    Successor Company (1)     Predecessor Company
(2)
 
    Three Months Ended
March 31, 2012
    Nine Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
    93 Days Ended
March 31, 2011
    181 Days Ended
December 28, 2010
 
 

Discontinued operations:

           

Income from discontinued operations

  $ 0      $ 186      $ 184      $ 176      $ 94   

Gain on sale of discontinued operations

    22        1,551        0        0        105   

Income tax expense

    8        600        64        62        70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

    14        1,137        120        114        129   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Net income

  $ 168      $ 1,115      $ 156      $ 11,991      $ 1,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Net income available to common stockholders

  $ 70      $ 821      $ 58      $ 11,891      $ 1,677   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Weighted-average shares outstanding:

           

Basic

    3,494,498        3,494,498        3,492,498        3,492,498        2,330,197   

Diluted

    3,512,273        3,494,498        3,559,873        3,560,278        2,354,385   
 

Earnings per common share:

           

Basic:

           

Income (loss) from continuing operations

  $ 0.02      $ (0.09   $ (0.01   $ 3.36      $ 0.66   

Income from discontinued operations

    0.00        0.32        0.03        0.03        0.06   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.02      $ 0.23      $ 0.02      $ 3.39      $ 0.72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Diluted:

           

Income (loss) from continuing operations

  $ 0.02      $ (0.09   $ (0.01   $ 3.30      $ 0.66   

Income from discontinued operations

    0.00        0.32        0.03        0.03        0.05   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 0.02      $ 0.23      $ 0.02      $ 3.33      $ 0.71   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) “Successor Company” means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
(2) “Predecessor Company” means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.

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

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

    Successor Company (1)     Predecessor Company
(2)
 
    Three Months Ended
March 31, 2012
    Nine Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
    93 Days Ended
March 31, 2011
    181 Days Ended
December 28, 2010
 
 

Net income

  $ 168      $ 1,115      $ 156      $ 11,991      $ 1,796   

Other comprehensive income, net of tax:

           

Unrealized (loss) gain on available-for-sale securities, net

    (936     (288     (222     (34     (1,863

Unrealized (loss) gain on purchased interest rate caps and swap, net

    (5     (127     66        66        (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

    (941     (415     (156     32        (1,873
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

  $ (773   $ 700      $ 0      $ 12,023      $ (77
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) “Successor Company” means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
(2) “Predecessor Company” means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.

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

 

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Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Periods Ended March 31, 2012, March 31, 2011 and December 28, 2010

(Unaudited)

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

 

    Preferred Stock     Common Stock     Warrants
to Purchase
    Additional     Unearned
Restricted
    Retained     Accumulated
Other
Comprehensive
    Total
Stockholders’
 
    Shares     Amount     Shares     Amount     Common-Stock     Paid-in Capital     Stock     Earnings     Income (Loss)     Equity  

Predecessor Company (2)

                   

Balance at June 30, 2010

    4,227      $ 4        2,323,832      $ 2,324      $ 133      $ 6,761      $ 0      $ 37,338      $ 4,346      $ 50,906   

Net income for 181 days ended December 28, 2010

    0        0        0        0        0        0        0        1,796        0        1,796   

Other comprehensive loss, net of tax

    0        0        0        0        0        0        0        0        (1,873     (1,873

Dividends on preferred stock

    0        0        0        0        0        0        0        (106     0        (106

Dividends on common stock at $0.18 per share

    0        0        0        0        0        0        0        (419     0        (419

Stock options exercised

    0        0        7,500        8        0        54        0        0        0        62   

Accretion of preferred stock

    0        0        0        0        0        16        0        (16     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 28, 2010

    4,227      $ 4        2,331,332      $ 2,332      $ 133      $ 6,831      $ 0      $ 38,593      $ 2,473      $ 50,366   
                   

 

 
                   

Successor Company (1)

                   

Balance at December 29, 2010

    4,227      $ 4        2,331,332      $ 2,332      $ 406      $ 33,685      $ 0      $ 0      $ 0      $ 36,427   

Net income for the 93 days ended March 31, 2011

    0        0        0        0        0        0        0        11,991        0        11,991   

Other comprehensive income, net of tax

    0        0        0        0        0        0        0        0        32        32   

Dividends on preferred stock

    0        0        0        0        0        0        0        (53     0        (53

Dividends on common stock at $0.09 per share

    0        0        0        0        0        0        0        (314     0        (314

Restricted stock award

    0        0        13,026        13        0        168        (181     0        0        0   

Voting common stock issued

    0        0        965,815        965        0        12,489        0        0        0        13,454   

Non-voting common stock issued

    0        0        195,351        195        0        2,526        0        0        0        2,721   

Stock-based compensation

    0        0        0        0        0        96        9        0        0        105   

Accretion of preferred stock

    0        0        0        0        0        45        0        (45     0        0   

Modification of stock appreciation rights

    0        0        0        0        0        526        0        0        0        526   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

    4,227      $ 4        3,505,524      $ 3,505      $ 406      $ 49,535      $ (172   $ 11,579      $ 32      $ 64,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Successor Company (1)

                   

Balance at June 30, 2011 4,227

    $ 4        3,507,524      $ 3,507      $ 406      $ 49,700      $ (163   $ 11,726      $ (226   $ 64,954   

Net income

    0        0        0        0        0        0        0        1,115        0        1,115   

Other comprehensive loss, net of tax

    0        0        0        0        0        0        0        0        (415     (415

Dividends on preferred stock

    0        0        0        0        0        0        0        (159     0        (159

Dividends on common stock at $0.27 per share

    0        0        0        0        0        0        0        (946     0        (946

Stock-based compensation

    0        0        0        0        0        294        27        0        0        321   

Accretion of preferred stock

    0        0        0        0        0        135        0        (135     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

    4,227      $ 4        3,507,524      $ 3,507      $ 406      $ 50,129      $ (136   $ 11,601      $ (641   $ 64,870   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) “Successor Company” means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
(2) “Predecessor Company” means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.

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

 

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NORTHEAST BANCORP AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

    Successor Company (1)     Predecessor
Company (2)
 
    Nine Months Ended
March 31, 2012
    93 Days Ended
March 31, 2011
    181 Days Ended
December 28, 2010
 

Cash flows from operating activities:

       

Net income

  $ 1,115      $ 11,991      $ 1,796   

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

       

Provision for loan losses

    634        49        912   

(Gain) loss on sale or impairment of repossessed collateral, net

    (19     55        91   

Accretion of fair value adjustments on loans, net

    (1,559     (396     0   

Accretion of fair value adjustments on deposits, net

    (1,001     (466     0   

Accretion of fair value adjustments on borrowings, net

    (1,621     (553     0   

Originations of loans held for sale

    (93,879     (29,812     (87,971

Net proceeds from sales of loans held for sale

    94,761        29,826        96,239   

Gain on sales of loans held for sale

    (2,060     (539     (1,867

(Gain) loss on sales of portfolio loans

    (422     195        0   

Amortization of intangible assets

    1,004        444        344   

Bank-owned life insurance income, net

    (377     (131     (250

Depreciation of premises and equipment

    907        281        520   

Gain on sale of premises and equipment

    (2     (4     (6

Net gain on sale of available-for-sale securities

    (1,111     (47     (17

Deferred income tax benefit

    0        0        (313

Stock-based compensation

    321        105        0   

Gain on sale of assets of insurance division

    (1,580     0        (104

Amortization of securities, net

    1,239        301        89   

Bargain purchase gain

    0        (15,216     0   

Changes in other assets and liabilities:

       

Interest receivable

    (415     585        121   

Decrease in prepaid FDIC assessment

    438        159        120   

Other assets and liabilities

    (697     (750     33   
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (4,324     (3,923     9,737   
 

 

 

   

 

 

   

 

 

 
 

Cash flows from investing activities:

       

Proceeds from sales of available-for-sale securities

    179,045        64,588        173   

Purchases of available-for-sale securities

    (185,991     (51,029     (19,001

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

    18,615        10,706        26,806   

Loan purchases

    (59,849     0        0   

Loan originations and principal collections, net

    22,363        11,256        14,292   

Proceeds from sales of portfolio loans

    2,405        36,729        0   

Purchases of premises and equipment

    (1,841     (463     (503

Proceeds from sales of premises and equipment

    124        16        36   

Proceeds from sales of repossessed collateral

    669        184        217   

Proceeds from redemption of regulatory stock

    287        0        0   

Proceeds from sale of assets of insurance division

    9,863        0        147   
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (14,310     71,987        22,167   
 

 

 

   

 

 

   

 

 

 
 

Cash flows from financing activities:

       

Net increase (decrease) in deposits

    3,618        24,588        (9,580

Net (decrease) increase in short-term borrowings

    (679     (49,264     16,875   

Dividends paid on preferred stock

    (159     (53     (106

Dividends paid on common stock

    (946     (314     (419

Issuance of common stock

    0        16,175        62   

Repayment of other borrowings

    (2,129     0        (496

Repayment of Federal Home Loan Bank advances

    0        (8,000     0   

Repayment of capital lease obligation

    (122     (39     (77
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (417     (16,907     6,259   
 

 

 

   

 

 

   

 

 

 
 

Net (decrease) increase in cash and cash equivalents

    (19,051     51,157        38,163   
 

Cash and cash equivalents, beginning of period

    83,931        58,598        20,435   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 64,880      $ 109,755      $ 58,598   
 

 

 

   

 

 

   

 

 

 
 

Supplemental schedule of cash flow information:

       

Interest paid

  $ 7,334      $ 2,971      $ 5,800   

Income taxes paid, net

    307        28        846   

Supplemental schedule of noncash investing and financing activities:

       

Transfers from loans to acquired assets

  $ 919      $ 27      $ 124   

Transfers from acquired assets to loans

    44        0        143   

 

(1) “Successor Company” means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
(2) “Predecessor Company” means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.

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

 

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NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2012

 

1. Basis of Presentation

The accompanying unaudited condensed and consolidated interim financial statements include the accounts of Northeast Bancorp (“Northeast” or the “Company”) and its wholly-owned subsidiary, Northeast Bank (the “Bank”). These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position at March 31, 2012; the results of operations for the three- and nine-month periods ended March 31, 2012, the three-month period ended March 31, 2011, the 93 days ended March 31, 2011, and the 181 days ended December 28, 2010; the changes in stockholders’ equity for the nine-month period ended March 31, 2012, the 93 days ended March 31, 2011, and the 181 days ended December 28, 2010; the cash flows for the nine-month period ended March 31, 2012, the 93 days ended March 31, 2011, and the 181 days ended December 28, 2010. Operating results for the three- and nine-month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012 (“Fiscal 2012”). For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2011 (” Fiscal 2011”) included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011, as amended, filed with the Securities and Exchange Commission on March 19, 2012.

 

2. Merger Transaction

On December 29, 2010, the merger of the Company and FHB Formation LLC, a Delaware limited liability company (“FHB”), was consummated. As a result of the merger, the surviving company received a capital contribution of $16.2 million (in addition to the approximately $13.1 million in cash consideration paid to former shareholders), and the former members of FHB collectively acquired approximately 60% of the Company’s outstanding common stock. The Company has applied the acquisition method of accounting, as described in ASC 805, Business Combinations (“ASC 805”) to the merger, which represents an acquisition by FHB of Northeast (the “Predecessor Company”), with Northeast as the surviving company (the “Successor Company”). In the application of ASC 805 to this transaction, the following was considered:

Identify the Accounting Acquirer : FHB was identified as the accounting acquirer. FHB, which was incorporated on March 9, 2009, acquired a controlling financial interest of approximately 60% of the Successor Company’s total outstanding voting and non-voting common stock in exchange for contributed capital and cash consideration.

In the evaluation and identification of FHB as the accounting acquirer, it was concluded that FHB was a substantive entity involved in significant pre-merger activities, including the following: raising capital; incurring debt; incurring operating expenses; leasing office space; hiring staff to develop the surviving company’s business plan; retaining professional services firms; and identifying acquisition targets and negotiating potential transactions, including the merger.

Determine the Acquisition Date : December 29, 2010, the closing date of the merger, was the date that FHB gained control of the combined entity.

Recognize assets acquired and liabilities assumed : Because neither the Predecessor Company (the acquired company) nor FHB (the accounting acquirer) exist as separate entities after the merger, a new basis of accounting at fair value for the Successor Company’s assets and liabilities was established in the consolidated financial statements. At the acquisition date, the Successor Company recognized the identifiable assets acquired and the liabilities assumed based on their then fair values in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”) . The Successor Company recognized a bargain purchase gain as the difference between the total purchase price and the net assets acquired.

As a result of application of the acquisition method of accounting to the Successor Company’s balance sheet, the Successor Company’s financial statements from the periods prior to the transaction date are not directly comparable to the financial statements for periods subsequent to the transaction date. To make this distinction, the Company has labeled balances and results of operations prior to the transaction date as “Predecessor Company” and balances and results of operations for periods subsequent to the transaction date as “Successor Company.” The lack of comparability arises from the assets and liabilities having new accounting bases as a result of recording them at their fair values as of the transaction date rather than at historical cost basis. To denote this lack of comparability, a heavy black line has been placed between the Successor Company and Predecessor Company columns in the Consolidated Financial Statements and in the tables in the Notes to the Unaudited Consolidated Financial Statements.

 

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Table of Contents

In connection with the transaction, as part of the regulatory approval process the Company made certain commitments to the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Maine Bureau of Financial Institutions (the “Bureau”), the most significant of which are, (i) maintain a Tier 1 leverage ratio of at least 10%, (ii) maintain a total risk-based capital ratio of at least 15%, (iii) limit purchased loans to 40% of total loans, (iv) fund 100% of the Company’s loans with core deposits, and (v) hold commercial real estate loans (including owner-occupied commercial real estate) to within 300% of total risk-based capital. The Company is currently in compliance with all commitments to the Federal Reserve and the Bureau.

 

3. Loans, Allowance for Loan Losses and Credit Quality

The composition of the Company’s loan portfolio is as follows on the dates indicated. The Company’s originated loan portfolio consists of loans originated before and after the merger with FHB. The Company’s purchased loan portfolio consists of loans acquired after the merger through the Company’s Loan Acquisition and Servicing Group (“LASG”).

 

     March 31, 2012      June 30, 2011  
     (Dollars in thousands)  

Loans:

     

Originated portfolio:

     

Residential real estate

   $ 92,557       $ 95,417   

Home equity

     44,082         50,060   

Commercial real estate

     110,731         117,124   

Construction

     1,497         2,015   

Commercial business

     21,635         22,225   

Consumer

     18,359         22,435   
  

 

 

    

 

 

 

Total originated portfolio

     288,861         309,276   

Purchased portfolio:

     

Commercial real estate

     53,329         637   

Residential real estate

     3,587         0   
  

 

 

    

 

 

 

Total purchased portfolio

     56,916         637   

Total loans

     345,777         309,913   

Less: Allowance for loan losses

     748         437   
  

 

 

    

 

 

 

Loans, net

   $ 345,029       $ 309,476   
  

 

 

    

 

 

 

In the fourth quarter of Fiscal 2011, the Company launched its loan acquisition and servicing business, which operates at the Company’s office in Boston, Massachusetts. The LASG purchases performing commercial real estate loans, on a nationwide basis, at a discount from their outstanding principal balance, producing yields higher than those normally achieved on the Company’s originated loan portfolio. The Company intends to continue to grow this segment of its loan portfolio, both in absolute terms and as a percentage of its total loan portfolio.

The Company’s loan origination activities are predominantly conducted in south-central and western Maine and south-eastern New Hampshire through the Bank’s Community Banking Division. In its Maine and New Hampshire market areas, the Company originates single-family and multi-family residential loans, commercial real estate loans, commercial business loans and a variety of consumer loans. In addition, the Company originates loans for the construction of residential homes, multi-family properties, commercial real estate properties, and for land development. The majority of loans originated by the Company are collateralized by real estate. The ability and willingness of residential and commercial real estate, commercial business and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers’ geographic area and/or the general economy.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the loan is well secured by collateral and in process of collection. The determination of past due status is based on the contractual terms of the loan. In all cases, the Company ceases the accrual of interest if the Company considers collection of principal or interest to be doubtful. All interest accrued but not collected for loans that are placed on nonaccrual are reversed against interest income. The interest on these loans is accounted for on a cash or cost recovery basis, until the loan qualifies for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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Table of Contents

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”). The Company has elected to account for all purchased loans under ASC 310-30, including those with insignificant or no credit deterioration. 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 generally assumed in determining a purchased loan’s effective interest rate and income accretion.

The application of ASC 310-30 limits the yield that may be accreted on the purchased loan, or the “the accretable yield,” to the excess of the Company’s estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company’s initial investment in the loan. The excess of contractually required payments receivable over the cash flows expected to be collected on the loan represents the purchased loan’s “nonaccretable difference.” Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase to the loan’s effective yield through a reclassification of some, or all, of the nonaccretable difference to accretable yield. The effect of subsequent declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses.

Purchased credit impaired (“PCI”) include those loans acquired with specific evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable. The Company does not characterize purchased loans with no or insignificant credit impairment as PCI loans.

The following table presents a summary of PCI loans acquired through the merger on December 29, 2010. There were no acquisitions of PCI loans subsequent to the merger through March 31, 2011.

 

    Residential Real Estate
and Consumer
    Commercial Real Estate
and Commercial Business
    Total  
    (Dollars in thousands)  

Contractually required payments receivable

  $ 3,677      $ 6,066      $ 9,743   

Nonaccretable difference

    (938     (2,410     (3,348
 

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected

    2,739        3,656        6,395   

Accretable yield

    (1,204     (486     (1,690
 

 

 

   

 

 

   

 

 

 

Fair value of PCI loans acquired

  $ 1,535      $ 3,170      $ 4,705   
 

 

 

   

 

 

   

 

 

 

The following table presents a summary of PCI loans purchased during the three and nine months ended March 31, 2012. PCI loans purchased during each period consisted of commercial real estate and commercial business loans.

 

     PCI Loans Acquired  
     Three Months Ended
March 31, 2012
    Nine Months Ended
March 31, 2012
 
     (Dollars in thousands)  

Contractually required payments receivable

   $ 3,879      $ 13,943   

Nonaccretable difference

     (1,053     (4,011
  

 

 

   

 

 

 

Cash flows expected to be collected

     2,826        9,932   

Accretable yield

     (305     (3,427
  

 

 

   

 

 

 

Fair value of loans acquired

   $ 2,521      $ 6,505   
  

 

 

   

 

 

 

 

     Activity in Accretable Yield  
     Three Months Ended
March 31, 2012
    Nine Months Ended
March 31, 2012
 
     (Dollars in thousands)  

Beginning balance

   $ 2,154      $ 0   

Accretion

     (214     (778

Acquisitions

     305        3,427   

Reclassifications from nonaccretable difference

     100        310   

Disposals and transfers

     0        (614
  

 

 

   

 

 

 

End balance

   $ 2,345      $ 2,345   
  

 

 

   

 

 

 

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

 

     March 31, 2012      June 30, 2011  
     Acquired through                    Acquired through                
     Merger      Purchased      Total      Merger      Purchased      Total  
     (Dollars in thousands)      (Dollars in thousands)  

Unpaid principal balance

   $ 4,343       $ 9,602       $ 13,945       $ 7,110       $ 159       $ 7,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount

   $ 2,453       $ 5,646       $ 8,099       $ 4,228       $ 0       $ 4,228   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Allowance for Loan Losses

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

The allowance for loan losses is evaluated periodically based upon management’s review of available information, including, but not limited to, the quality of the loan portfolio, certain economic conditions, the value of the underlying collateral and the level of non-accruing and criticized loans. Management relies on its loan quality reviews, its experience and evaluation of economic conditions, among other factors, in determining the amount of provision required for the allowance for loan losses. Determining the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate (including home equity loans), commercial real estate, commercial business, and consumer. The Company currently considers its loss experience subsequent to the merger in its quantitative historical loss analysis. The Company does not weight periods used in that analysis to determine the average loss rate in each portfolio segment. Further, the Company considers qualitative information, including certain experience of the Predecessor Company, in determining its average loss factor for purposes of Company’s allowance for loan losses. Qualitative factors considered in the Company’s analysis include: levels/trends in delinquencies and substandard loans; trends in volumes and terms of loans; effects of changes in risk rating and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and regional economic trends and conditions. 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 or nine months ended March 31, 2012.

The qualitative factors are determined based on the various risk characteristic of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. All loans in this segment are collateralized by residential real estate and repayment is 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. Weak national or regional economic conditions, and a resultant decrease 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 secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the LASG. Loans acquired by the LASG are, with limited exceptions, performing loans at the date of purchase that may have some credit deterioration since origination. Repayment of these loans 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

 

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Table of Contents

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 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 that 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 changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for individual impairment and disclosure. However, all loans modified in troubled debt restructurings are individually reviewed for impairment.

For all segments except the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to realize cash flows as estimated at acquisition. Loan impairment of purchased loans is measured based on the decrease in expected cash flows from those estimated at acquisition, excluding changes due to decreases in interest rate indices. 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.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). The Company considers all loans identified as being modified in a TDR as impaired loans. By policy, the Company does not remove TDRs from impairment classification.

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

Successor Company

 

     Three months ended March 31, 2012  
     Residential
Real Estate
    Commercial
Real Estate
    Commercial
Business
    Consumer     Purchased (1)      Total  
     (Dollars in thousands)  

Beginning balance

   $ 125      $ 147      $ 231      $ 234      $ 0       $ 737   

Provision (benefit)

     20        (11     17        74        0         100   

Recoveries

     1        0        2        4        0         7   

Charge-offs

     (20     0        0        (76     0         (96
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 126      $ 136      $ 250      $ 236      $ 0       $ 748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Successor Company

             
     Nine months ended March 31, 2012  
     Residential
Real Estate
    Commercial
Real Estate
    Commercial
Business
    Consumer     Purchased (1)      Total  
     (Dollars in thousands)  

Beginning balance

   $ 34      $ 147      $ 238      $ 18      $ 0       $ 437   

Provision (benefit)

     171        13        (17     467        0         634   

Recoveries

     2        0        37        30        0         69   

Charge-offs

     (81     (24     (8     (279     0         (392
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 126      $ 136      $ 250      $ 236      $ 0       $ 748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Purchased loans included above include commercial real estate, commercial business, and commercial loans secured by residential real estate. The Company separately analyzes loans purchased by the LASG from other segments in determining the allowance for loan losses. There have been no charge-offs or reductions in the cash flow estimates made at the time of loan acquisition in the Company’s purchased loan portfolio. As a result, no provision has been made for potential losses related to such loans from inception of the Company’s LASG through March 31, 2012.

 

    Successor Company           Predecessor Company  
    Three months ended
March 31, 2011
    93 days ended
March 31, 2011
          181 days ended
December 28, 2010
 
    (Dollars in thousands)  

Beginning balance

  $ 0      $ 0          $ 5,806   

Provision

    49        49            912   

Recoveries

    20        20            108   

Charge-offs

    (55     (55         (859
 

 

 

   

 

 

       

 

 

 

Ending balance

  $ 14      $ 14          $ 5,967   
 

 

 

   

 

 

       

 

 

 

 

13


Table of Contents

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

 

     March 31, 2012  
     Residential
Real Estate
     Commercial
Real Estate
     Commercial
Business
     Consumer      Total  
     (Dollars in thousands)  

Allowance for loan losses:

              

Individually evaluated

   $ 3       $ 79       $ 236       $ 0       $ 318   

Collectively evaluated

     123         57         14         236         430   

Purchased (1)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 126       $ 136       $ 250       $ 236       $ 748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated

   $ 424       $ 1,920       $ 1,175       $ 21       $ 3,540   

Collectively evaluated

     136,215         110,308         20,460         18,338         285,321   

Purchased (1)

     3,587         53,329         0         0         56,916   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 140,226       $ 165,557       $ 21,635       $ 18,359       $ 345,777   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     Residential
Real Estate
     Commercial
Real Estate
     Commercial
Business
     Consumer      Total  
     (Dollars in thousands)  

Allowance for loan losses:

              

Individually evaluated

   $ 0       $ 119       $ 196       $ 0       $ 315   

Collectively evaluated

     34         28         42         18         122   

Purchased (1)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34       $ 147       $ 238       $ 18       $ 437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated

   $ 0       $ 1,221       $ 1,922       $ 0       $ 3,143   

Collectively evaluated

     146,585         116,810         20,303         22,435         306,133   

Purchased (1)

     0         637         0         0         637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 146,585       $ 118,668       $ 22,225       $ 22,435       $ 309,913   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Expected cash flows from individual purchased loans are reviewed quarterly by the Company. Post acquisition, the effect of a decline in expected cash flows is recorded through the allowance for loan losses as a specific allocation.

 

14


Table of Contents

The following table sets forth information regarding impaired loans. The recorded investment in impaired loans includes discounts or premiums from acquisition through purchase or merger. Interest income recognized includes interest received or accrued based on loan principal and contractual interest rates; amounts do not include accretion or amortization of acquisition discounts or premiums as such amounts related to impaired loans are insignificant. Loans acquired with deteriorated credit quality that have performed based on cash flow and accretable yield expectations determined at date of acquisition are not considered impaired assets and have been excluded from the tables below.

 

     March 31, 2012      For the three months ended
March 31, 2012
     For the nine months ended
March 31, 2012
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)      (Dollars in thousands)      (Dollars in thousands)  

Impaired loans without a valuation allowance:

                    

Residential real estate

   $ 318       $ 497       $ 0       $ 430       $ 9       $ 215       $ 17   

Consumer

     21         21         0         11         0         5         0   

Commercial real estate

     666         817         0         1,540         12         1,028         70   

Commercial business

     487         799         0         483         2         555         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,492         2,134         0         2,464         23         1,803         94   

Impaired loans with a valuation allowance:

                    

Residential real estate

     106         103         3         53         0         63         0   

Consumer

     0         0         0         0         0         0         0   

Commercial real estate

     1,254         1,270         79         721         16         666         19   

Commercial business

     688         720         236         664         0         728         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,048         2,093         318         1,438         16         1,457         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 3,540       $ 4,227       $ 318       $ 3,902       $ 39       $ 3,260       $ 113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (Dollars in thousands)  

Impaired loans without a valuation allowance:

        

Commercial real estate

   $ 348       $ 348       $ 0   

Commercial business

     1,054         1,054         0   
  

 

 

    

 

 

    

 

 

 

Total

     1,402         1,402         0   

Impaired loans with a valuation allowance:

        

Commercial real estate

     873         873         119   

Commercial business

     868         868         196   
  

 

 

    

 

 

    

 

 

 

Total

     1,741         1,741         315   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 3,143       $ 3,143       $ 315   
  

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

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

 

     March 31, 2012  
     30-59
Days
     60-89
Days
     Past Due
90 Days or
More-Still
Accruing
     Past Due
90 Days or
More-
Nonaccrual
     Total
Past
Due
     Total
Current
     Total
Loans
     Non-
Accrual
Loans
 
     (Dollars in thousands)  

Originated portfolio:

                       

Residential real estate

   $ 412       $ 0       $ 0       $ 2,764       $ 3,176       $ 89,381       $ 92,557       $ 3,067   

Home equity

     209         74         0         150         433         43,649         44,082         255   

Commercial real estate

     96         0         0         442         538         110,193         110,731         442   

Construction

     0         0         0         0         0         1,497         1,497         0   

Commercial business

     207         0         0         994         1,201         20,434         21,635         1,108   

Consumer

     259         163         0         300         722         17,637         18,359         309   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated portfolio

     1,183         237         0         4,650         6,070         282,791         288,861         5,181   

Purchased portfolio:

                       

Residential real estate

     30         0         0         0         30         3,557         3,587         0   

Commercial real estate

     1,014         0         0         0         1,014         52,315         53,329         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased portfolio

     1,044         0         0         0         1,044         55,872         56,916         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 2,227       $ 237       $ 0       $ 4,650       $ 7,114       $ 338,663       $ 345,777       $ 5,181   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     30-59
Days
     60-89
Days
     Past Due
90 Days or
More-Still
Accruing
     Past Due
90 Days or
More-
Nonaccrual
     Total
Past
Due
     Total
Current
     Total
Loans
     Non-
Accrual
Loans
 

Originated portfolio:

                       

Residential real estate

   $ 257       $ 1,021       $ 0       $ 1,779       $ 3,057       $ 92,360       $ 95,417       $ 2,195   

Home equity

     117         0         0         89         206         49,854         50,060         205   

Commercial real estate

     0         492         0         934         1,426         115,698         117,124         3,601   

Construction

     0         0         0         121         121         1,894         2,015         121   

Commercial business

     4         75         751         416         1,246         20,979         22,225         559   

Consumer

     566         338         0         508         1,412         21,023         22,435         527   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated portfolio

     944         1,926         751         3,847         7,468         301,808         309,276         7,208   

Purchased portfolio:

                       

Commercial real estate

     0         0         0         0         0         637         637         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased portfolio

     0         0         0         0         0         637         637         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 944       $ 1,926       $ 751       $ 3,847       $ 7,468       $ 302,445       $ 309,913       $ 7,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the troubled debt restructurings which occurred during the nine months ended March 31, 2012 and the change in the recorded investment subsequent to the modifications occurring. All concessions given during the period consisted of either rate reductions or maturity extensions, or combinations thereof. There was no forgiveness of principal related to loans modified in a TDR during the period.

 

     Number of
Contracts
     Recorded
Investment
Pre-Modification
     Recorded
Investment
Post-Modification
 
     (Dollars in thousands)  

Originated portfolio:

        

Residential real estate

     2       $ 161       $ 161   

Home equity

     0         0         0   

Commercial real estate

     0         0         0   

Construction

     0         0         0   

Commercial business

     0         0         0   

Consumer

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total originated portfolio

     2         161         161   

Purchased portfolio:

        

Residential real estate

     0         0         0   

Commercial real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total purchased portfolio

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 161       $ 161   
  

 

 

    

 

 

    

 

 

 

There were no defaults of loans previously modified in a TDR during the three or nine months ended March 31, 2012.

 

16


Table of Contents

The following table shows the Company’s total TDRs as of the dates indicated.

 

     March 31, 2012      June 30, 2011  
     On Accrual
Status
     On Nonaccrual
Status
     Total      On Accrual
Status
     On Nonaccrual
Status
     Total  
     (Dollars in thousands)      (Dollars in thousands)  

Originated portfolio:

                 

Residential real estate

   $ 92       $ 161       $ 253       $ 93       $ 0       $ 93   

Home equity

     0         0         0         0         0         0   

Commercial real estate

     0         861         861         0         859         859   

Construction

     0         0         0         0         0         0   

Commercial business

     0         0         0         0         0         0   

Consumer

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated portfolio

     92         1,022         1,114         93         859         952   

Purchased portfolio:

                 

Residential real estate

     0         0         0         0         0         0   

Commercial real estate

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased portfolio

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 92       $ 1,022       $ 1,114       $ 93       $ 859       $ 952   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

As of January 1, 2011, the Company updated its internal loan rating system from an eight to ten point scale. Risk ratings for periods prior to January 1, 2011 have been retroactively adjusted for comparative purposes.

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

Loans rated 1 – 6: Loans in these categories are considered “pass” rated loans with low to average risk.

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

Loans rated 8: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if the current net worth inadequately protects it and the paying capacity of the obligors or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those loans classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, highly questionable and improbable.

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

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

 

17


Table of Contents

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

 

     March 31, 2012  
     Originated Portfolio      Purchased Portfolio  
     Commercial
Real Estate
     Construction      Commercial
Business
     Commercial
Real Estate
 
     (Dollars in thousands)  

Loans rated 1- 6

   $ 105,006       $ 1,497       $ 20,118       $ 53,329   

Loans rated 7

     1,668         0         265         0   

Loans rated 8

     4,057         0         1,252         0   

Loans rated 9

     0         0         0         0   

Loans rated 10

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 110,731       $ 1,497       $ 21,635       $ 53,329   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     Originated Portfolio      Purchased Portfolio  
     Commercial
Real Estate
     Construction      Commercial
Business
     Commercial Real
Estate
 
     (Dollars in thousands)  

Loans rated 1- 6

   $ 106,717       $ 2,015       $ 18,201       $ 637   

Loans rated 7

     3,133         0         1,169         0   

Loans rated 8

     7,274         0         2,855         0   

Loans rated 9

     0         0         0         0   

Loans rated 10

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 117,124       $ 2,015       $ 22,225       $ 637   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

4. Securities Available-for-Sale

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

 

     March 31, 2012      June 30, 2011  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 45,958       $ 45,871       $ 48,827       $ 48,737   

Mortgage-backed securities issued by government agencies

     91,368         90,859         99,637         99,558   

Equity securities

     0         0         193         216   

Trust preferred securities

     0         0         466         451   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 137,326       $ 136,730       $ 149,123       $ 148,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     March 31, 2012      June 30, 2011  
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
 
     (Dollars in thousands)  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 6       $ 93       $ 7       $ 97   

Mortgage-backed securities issued by government agencies

     0         509         212         291   

Equity securities

     0         0         23         0   

Trust preferred securities

     0         0         8         23   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6       $ 602       $ 250       $ 411   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

Successor Company    Three Months Ended
March 31, 2012
     Nine Months Ended
March 31, 2012
     Three Months Ended
March 31, 2011
     93 Days Ended
March 31, 2011
 
     (Dollars in thousands)  

Gross realized gains

   $ 731       $ 1,180       $ 47       $ 47   

Gross realized losses

     0         69         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net security gains

   $ 731       $ 1,111       $ 47       $ 47   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Predecessor Company    181 Days Ended
December 28, 2010
 
     (Dollars in thousands)  

Gross realized gains

   $ 17   

Gross realized losses

     0   
  

 

 

 

Net security gains

   $ 17   
  

 

 

 

 

18


Table of Contents

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, 2012  
     Less than 12 Months      More than 12 Months      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in thousands)  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 42,734       $ 93       $ 0       $ 0       $ 42,734       $ 93   

Mortgage-backed securities issued by government agencies

     90,769         509         0         0         90,769         509   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 133,503       $ 602       $ 0       $ 0       $ 133,503       $ 602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011  
     Less than 12 Months      More than 12 Months      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in thousands)  

Debt securities issued by U.S. Government-sponsored enterprises

   $ 46,130       $ 97       $ 0       $ 0       $ 46,130       $ 97   

Mortgage-backed securities issued by government agencies

     51,367         291         0         0         51,367         291   

Trust preferred securities

     174         23         0         0         174         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 97,671       $ 411       $ 0       $ 0       $ 97,671       $ 411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no other-than-temporary impairment losses on securities during the three or nine months ended March 31, 2012. There were no other-than-temporary impairment losses on securities for the three months or 93 days ended March 31, 2011, nor the 181 days ended December 28, 2010.

At March 31, 2012, the Company had 38 available-for-sale securities with continuous unrealized losses for less than twelve months, representing aggregate depreciation from amortized cost of less than 1%. No securities in an unrealized loss position had continuous losses greater than twelve months. At March 31, 2012, all of the Company’s available-for-sale securities were issued by either government agencies or government-sponsored enterprises. The decline in fair value of the Company’s available-for-sale securities at March 31, 2012 is attributable to changes in interest rates.

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

 

     Amortized
Cost