Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 11/14/2012 10:19:39)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly report pursuant to Section 13 or 15 (d) of

the Securities Exchange Act of 1934

For the quarterly period ended September 30, 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 October 31, 2012, the registrant had outstanding 9,412,972 shares of voting common stock, $1.00 par value per share and 970,469 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 September 30, 2012 and June 30, 2012     3   
     

Consolidated Statements of Income Three Months Ended September 30, 2012 and 2011

    4   
     

Consolidated Statements of Comprehensive Income Three Months Ended September 30, 2012 and 2011

    5   
     

Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended September  30, 2012 and 2011

    6   
     

Consolidated Statements of Cash Flows Three Months Ended September 30, 2012 and 2011

    7   
     

Notes to Consolidated Financial Statements

    8   
   Item 2.   

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

    27   
   Item 3.   

Quantitative and Qualitative Disclosure about Market Risk

    42   
   Item 4.   

Controls and Procedures

    42   
Part II.    Other Information     42   
   Item 1.    Legal Proceedings     42   
   Item 1A.    Risk Factors     42   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds     42   
   Item 3.    Defaults Upon Senior Securities     42   
   Item 4.    Mine Safety Disclosures     42   
   Item 5.    Other Information     42   
   Item 6.    Exhibits     43   

 

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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)

 

     September 30, 2012     June 30, 2012  
Assets     

Cash and due from banks

   $ 3,341      $ 2,538   

Short-term investments

     99,231        125,736   
  

 

 

   

 

 

 

Total cash and cash equivalents

     102,572        128,274   

Available-for-sale securities, at fair value

     137,069        133,264   

Loans held for sale

     12,986        9,882   

Loans

     375,193        356,254   

Less: Allowance for loan losses

     668        824   
  

 

 

   

 

 

 

Loans, net

     374,525        355,430   

Premises and equipment, net

     9,295        9,205   

Repossessed collateral, net

     2,645        834   

Accrued interest receivable

     1,751        1,840   

Federal Home Loan Bank stock, at cost

     4,602        4,602   

Federal Reserve Bank stock, at cost

     871        871   

Intangible assets, net

     4,222        4,487   

Bank owned life insurance

     14,418        14,295   

Other assets

     5,952        6,212   
  

 

 

   

 

 

 

Total assets

   $ 670,908      $ 669,196   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits

    

Demand

   $ 47,071      $ 45,323   

Savings and interest checking

     87,010        90,204   

Money market

     48,896        45,024   

Time deposits

     272,798        241,637   
  

 

 

   

 

 

 

Total deposits

     455,775        422,188   

Federal Home Loan Bank advances

     43,331        43,450   

Structured repurchase agreements

     35,821        66,183   

Short-term borrowings

     484        1,209   

Junior subordinated debentures issued to affiliated trusts

     8,146        8,106   

Capital lease obligation

     1,869        1,911   

Other liabilities

     6,625        7,010   
  

 

 

   

 

 

 

Total liabilities

     552,051        550,057   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Stockholders’ equity

    

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

     4        4   

Voting common stock, $1.00 par value, 13,500,000 shares authorized; 9,412,972 and 9,307,127 issued and outstanding at September 30, 2012 and June 30, 2012, respectively

     9,413        9,307   

Non-voting common stock, $1.00 par value, 1,500,000 shares authorized; 970,469 and 1,076,314 issued and outstanding at September 30, 2012 and June 30, 2012, respectively

     970        1,076   

Warrants to purchase common stock

     406        406   

Additional paid-in capital

     96,215        96,080   

Unearned restricted stock

     (118     (127

Retained earnings

     12,236        12,235   

Accumulated other comprehensive (loss) income

     (269     158   
  

 

 

   

 

 

 

Total stockholders’ equity

     118,857        119,139   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 670,908      $ 669,196   
  

 

 

   

 

 

 

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

 

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NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

     Three Months Ended September 30,  
     2012      2011  

Interest and dividend income:

     

Interest on loans

   $ 7,341       $ 5,137   

Interest on available-for-sale securities

     347         639   

Dividends on regulatory stock

     6         12   

Other interest and dividend income

     83         47   
  

 

 

    

 

 

 

Total interest and dividend income

     7,777         5,835   
  

 

 

    

 

 

 

Interest expense:

     

Deposits

     978         837   

Federal Home Loan Bank advances

     259         258   

Structured repurchase agreements

     219         248   

Short-term borrowings

     6         5   

Junior subordinated debentures issued to affiliated trusts

     193         183   

Obligation under capital lease agreements

     24         26   
  

 

 

    

 

 

 

Total interest expense

     1,679         1,557   
  

 

 

    

 

 

 

Net interest and dividend income before provision for loan losses

     6,098         4,278   

Provision for loan losses

     228         400   
  

 

 

    

 

 

 

Net interest and dividend income after provision for loan losses

     5,870         3,878   
  

 

 

    

 

 

 

Noninterest income:

     

Fees for other services to customers

     310         340   

Net securities gains (losses)

     792         (53

Gain on sales of loans held for sale

     756         656   

Gain (loss) recognized on repossessed collateral, net

     451         (77

Investment commissions

     675         687   

Bank-owned life insurance income

     123         127   

Other noninterest income

     43         44   
  

 

 

    

 

 

 

Total noninterest income

     3,150         1,724   
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries and employee benefits

     4,057         3,717   

Occupancy and equipment expense

     1,078         849   

Professional fees

     423         415   

Data processing fees

     268         274   

Marketing expense

     187         73   

FDIC insurance premiums

     117         117   

Intangible asset amortization

     265         336   

Other noninterest expense

     1,107         818   
  

 

 

    

 

 

 

Total noninterest expense

     7,502         6,599   
  

 

 

    

 

 

 

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

     1,518         (997

Income tax expense (benefit)

     484         (403
  

 

 

    

 

 

 

Net income (loss) from continuing operations

   $ 1,034       $ (594
  

 

 

    

 

 

 

Discontinued operations:

     

Income from discontinued operations

   $ 0       $ 186   

Gain on sale of discontinued operations

     0         1,529   

Income tax expense

     0         592   
  

 

 

    

 

 

 

Net income from discontinued operations

     0         1,123   
  

 

 

    

 

 

 

Net income

   $ 1,034       $ 529   
  

 

 

    

 

 

 

Net income available to common stockholders

   $ 936       $ 431   
  

 

 

    

 

 

 

Weighted-average shares outstanding:

     

Basic

     10,383,441         3,494,498   

Diluted

     10,383,441         3,513,545   

Earnings per common share:

     

Basic:

     

Income (loss) from continuing operations

   $ 0.09       $ (0.13

Income from discontinued operations

     0.00         0.25   
  

 

 

    

 

 

 

Net income

   $ 0.09       $ 0.12   
  

 

 

    

 

 

 

Diluted:

     

Income (loss) from continuing operations

   $ 0.09       $ (0.13

Income from discontinued operations

     0.00         0.25   
  

 

 

    

 

 

 

Net income

   $ 0.09       $ 0.12   
  

 

 

    

 

 

 

Cash dividends declared per common share

   $ 0.09       $ 0.09   
  

 

 

    

 

 

 

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

 

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NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

     Three Months Ended September 30,  
     2012     2011  

Net income

   $ 1,034      $ 529   

Other comprehensive (loss) income, before tax:

    

Available-for-sale securities:

    

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

     157        1,635   

Reclassification adjustment for net (gains) losses included in net income

     (792     53   
  

 

 

   

 

 

 

Total available-for-sale securities

     (635     1,688   

Derivatives and hedging activities:

    

Change in accumulated loss on effective cash flow hedges

     6        (199

Reclassification adjustments for net gains included in net income

     (18     (22
  

 

 

   

 

 

 

Total derivatives and hedging activities

     (12     (221
  

 

 

   

 

 

 

Total other comprehensive (loss) income, before tax

     (647     1,467   

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

     (220     498   
  

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax

     (427     969   
  

 

 

   

 

 

 

Comprehensive income

   $ 607      $ 1,498   
  

 

 

   

 

 

 

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

 

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NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

 

   

 

Preferred Stock

   

 

Voting Common Stock

   

 

Non-voting Common Stock

    Warrants
to  Purchase

Common Stock
    Additional
Paid-in  Capital
    Unearned
Restricted

Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive

Income (Loss)
    Total
Stockholders’

Equity
 
    Shares     Amount     Shares     Amount     Shares     Amount              

Balance at June 30, 2011

    4,227      $ 4        3,312,173      $ 3,312        195,351      $ 195      $ 406      $ 49,700      $ (163   $ 11,726      $ (226   $ 64,954   

Net income

    0        0        0        0        0        0        0        0        0        529        0        529   

Other comprehensive loss, net of tax

    0        0        0        0        0        0        0        0        0        0        969        969   

Dividends on preferred stock

    0        0        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        0        0        (316     0        (316

Stock-based compensation

    0        0        0        0        0        0        0        96        9        0        0        105   

Accretion of preferred stock

    0        0        0        0        0        0        0        45        0        (45     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    4,227      $ 4        3,312,173      $ 3,312        195,351      $ 195      $ 406      $ 49,841      $ (154   $ 11,841      $ 743      $ 66,188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

    4,227      $ 4        9,307,127      $ 9,307        1,076,314      $ 1,076      $ 406      $ 96,080      $ (127   $ 12,235      $ 158      $ 119,139   

Net income

    0        0        0        0        0        0        0        0        0        1,034        0        1,034   

Other comprehensive loss, net of tax

    0        0        0        0        0        0        0        0        0        0        (427     (427

Conversion of non-voting common stock to voting common stock

    0        0        105,845        106        (105,845     (106     0        0        0        0        0        0   

Dividends on preferred stock

    0        0        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        0        0        (935     0        (935

Stock-based compensation

    0        0        0        0        0        0        0        90        9        0        0        99   

Accretion of preferred stock

    0        0        0        0        0        0        0        45        0        (45     0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    4,227      $ 4        9,412,972      $ 9,413        970,469      $ 970      $ 406      $ 96,215      $ (118   $ 12,236      $ (269   $ 118,857   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Three Months Ended September 30,  
     2012     2011  

Operating activities:

    

Net income

   $ 1,034      $ 529   

Adjustments to reconcile net income to net cash used in operating activities:

    

Provision for loan losses

     228        400   

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

     (451     77   

Accretion of fair value adjustments on loans, net

     (1,692     (388

Accretion of fair value adjustments on deposits, net

     (275     (373

Accretion of fair value adjustments on borrowings, net

     (441     (544

Originations of loans held for sale

     (38,204     (28,571

Net proceeds from sales of loans held for sale

     35,856        27,998   

Gain on sales of loans held for sale

     (756     (656

Amortization of intangible assets

     265        406   

Bank-owned life insurance income, net

     (123     (127

Depreciation of premises and equipment

     424        304   

Loss on sale of premises and equipment

     0        25   

Net (gain) loss on sale of available-for-sale securities

     (792     53   

Stock-based compensation

     99        105   

Gain on sale of assets of insurance division

     0        (1,529

Amortization of securities, net

     420        373   

Changes in other assets and liabilities:

    

Interest receivable

     89        (322

Decrease in prepaid FDIC assessment

     108        (116

Other assets and liabilities

     (25     (736
  

 

 

   

 

 

 

Net cash used in operating activities

     (4,236     (3,092
  

 

 

   

 

 

 

Investing activities:

    

Proceeds from sales of available-for-sale securities

     159,579        606   

Purchases of available-for-sale securities

     (167,294     0   

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

     3,647        6,390   

Loan purchases

     (31,023     (11,428

Loan originations and principal collections, net

     11,437        5,006   

Purchases of premises and equipment

     (514     (611

Proceeds from sales of repossessed collateral

     595        329   

Proceeds from sale of assets of insurance division

     0        9,726   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (23,573     10,018   
  

 

 

   

 

 

 

Financing activities:

    

Net increase (decrease) in deposits

     33,862        (7,012

Net decrease in short-term borrowings

     (725     (1,506

Dividends paid on preferred stock

     (53     (53

Dividends paid on common stock

     (935     (316

Repayment of structured repurchase agreements

     (30,000     0   

Repayment of other borrowings

     0        (2,132

Repayment of capital lease obligation

     (42     (40
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     2,107        (11,059
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (25,702     (4,133

Cash and cash equivalents, beginning of period

     128,274        89,931   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 102,572      $ 79,798   
  

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities:

    

Transfers from loans to repossessed collateral

   $ 3,010      $ 180   

Transfers from repossessed collateral to loans

     1,055        0   

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

 

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NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

September 30, 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 September 30, 2012, the results of operations for the three months ended September 30, 2012 and 2011, comprehensive income for the three months ended September 30, 2012 and 2011, the changes in stockholders’ equity for the for the three months ended September 30, 2012 and 2011, and the cash flows for the for the three months ended September 30, 2012 and 2011. Operating results for the three months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013 (“Fiscal 2013”). For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2012 (“Fiscal 2012”) included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

2. Recent Accounting Pronouncements

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

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

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

 

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3. Securities Available-for-Sale

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

 

     September 30, 2012      June 30, 2012  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

U.S. Government agency securities

   $ 45,690       $ 45,750       $ 45,824       $ 45,808   

Agency mortgage-backed securities

     91,389         91,319         86,816         87,456   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 137,079       $ 137,069       $ 132,640       $ 133,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     September 30, 2012      June 30, 2012  
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
 
     (Dollars in thousands)  

U.S. Government agency securities

   $ 60       $ 0       $ 5       $ 21   

Agency mortgage-backed securities

     0         70         640         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 60       $ 70       $ 645       $ 21   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended September 30,  
     2012     2011  
     (Dollars in thousands)  

Gross realized gains

   $ 831      $ 14   

Gross realized losses

     (39     (67
  

 

 

   

 

 

 

Net security gains (losses)

   $ 792      $ (53
  

 

 

   

 

 

 

At September 30, 2012, investment securities with a fair value of approximately $54.9 million were pledged as collateral to secure outstanding borrowings.

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

 

     September 30, 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)  

U.S. Government agency securities

   $ 0       $ 0       $ 0       $ 0       $ 0       $ 0   

Agency mortgage-backed securities

     19,776         70         0         0         19,776         70   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,776       $ 70       $ 0       $ 0       $ 19,776       $ 70   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 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)  

U.S. Government agency securities

   $ 36,585       $ 21       $ 0       $ 0       $ 36,585       $ 21   

Agency mortgage-backed securities

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 36,585       $ 21       $ 0       $ 0       $ 36,585       $ 21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no other-than-temporary impairment losses on securities during the three months ended September 30, 2012 or 2011.

At September 30, 2012, the Company did not have any securities in a continuous loss position for greater than twelve months. At September 30, 2012, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or government-sponsored enterprises. The decline in fair value of the Company’s available-for-sale securities at September 30, 2012 is attributable to changes in interest rates.

 

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Table of Contents

Management of the Company, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company’s investment portfolio, also considers the Company’s ability and intent to hold such securities to maturity or recovery of cost. Management does not believe any of the Company’s available-for-sale securities are other-than-temporarily impaired at September 30, 2012.

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of September 30, 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
     Fair
Value
 
     (Dollars in thousands)  

Due within one year

   $ 3,080       $ 3,086   

Due after one year through five years

     42,610         42,664   

Due after five years through ten years

     0         0   

Due after ten years

     0         0   
  

 

 

    

 

 

 
     45,690         45,750   

Mortgage-backed securities

     91,389         91,319   
  

 

 

    

 

 

 
   $ 137,079       $ 137,069   
  

 

 

    

 

 

 

 

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Table of Contents
4. Loans, Allowance for Loan Losses and Credit Quality

Loans are carried at the principal amounts outstanding, or amortized acquired fair value in the case of acquired loans, adjusted by partial charge-offs and net of deferred loan costs or fees. Loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method. When a loan is paid off, the unamortized portion is recognized in interest income. Interest income is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status.

All loans purchased by the Company in the secondary market by its Loan Acquisition and Servicing Group (“LASG”) are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). At acquisition, the effective interest rate is determined based on the discount rate that equates the present value of the Company’s estimate of cash flows with the purchase price of the loan. Prepayments are not assumed in determining a purchased loan’s effective interest rate and income accretion. The application of ASC 310-30 limits the yield that may be accreted on the purchased loan, or the “the accretable yield,” to the excess of the Company’s estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company’s initial investment in the loan. The excess of contractually required payments receivable over the cash flows expected to be collected on the loan represents the purchased loan’s “nonaccretable difference.” Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase to the loan’s effective yield through a reclassification of some, or all, of the nonaccretable difference to accretable yield. The effect of subsequent declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses.

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

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”). Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. Nonaccrual loans that are restructured generally remain on nonaccrual for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a nonaccrual loan. Loans classified as TDRs remain classified as such until the loan is paid off.

The composition of the Company’s loan portfolio follows.

 

     September 30, 2012      June 30, 2012  
     Originated      Purchased      Total      Originated      Purchased      Total  
     (Dollars in thousands)  

Residential real estate

   $ 89,545       $ 3,655       $ 93,200       $ 90,944       $ 3,931       $ 94,875   

Home equity

     40,576         0         40,576         42,696         0         42,696   

Commercial real estate

     102,088         103,787         205,875         100,196         80,539         180,735   

Construction

     508         0         508         1,187         0         1,187   

Commercial business

     19,201         0         19,201         19,612         0         19,612   

Consumer

     15,833         0         15,833         17,149         0         17,149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 267,751       $ 107,442       $ 375,193       $ 271,784       $ 84,470       $ 356,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Purchased credit impaired (“PCI”) loans include those loans acquired with specific evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable. The Company does not characterize purchased loans with no or insignificant credit impairment as PCI loans. The following table presents a summary of PCI loans purchased by the LASG during the three months ended September 30, 2012 and 2011.

 

     PCI Loans Acquired  
     Three Months Ended September 30,  
     2012     2011  
     (Dollars in thousands)  

Contractually required payments receivable

   $ 12,980      $ 9,461   

Nonaccretable difference

     (4,113     (2,597
  

 

 

   

 

 

 

Cash flows expected to be collected

     8,867        6,864   

Accretable yield

     (5,764     (3,027
  

 

 

   

 

 

 

Fair value of loans acquired

   $ 3,103      $ 3,837   
  

 

 

   

 

 

 

 

    PCI Loans: Activity in Accretable Yield  
    Three Months Ended September 30,  
    2012     2011  
    (Dollars in thousands)  

Beginning balance

  $ 7,169      $ 0   

Accretion

    (601     (76

Acquisitions

    5,764        3,027   

Reclassifications from nonaccretable difference

    132        0   

Disposals and transfers

    (2,951     0   
 

 

 

   

 

 

 

End balance

  $ 9,513      $ 2,951   
 

 

 

   

 

 

 

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

 

     September 30, 2012      June 30, 2012  
     (Dollars in thousands)  

Unpaid principal balance

   $ 24,423       $ 21,359   
  

 

 

    

 

 

 

Carrying amount

   $ 13,974       $ 13,866   
  

 

 

    

 

 

 

Allowance for Loan Losses

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

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

Residential real estate: The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not originate subprime loans. All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, particularly unemployment rates and housing prices, has a significant effect on the credit quality in this segment. For purposes of the Company’s allowance for loan loss calculation, home equity loans and lines of credit are included in residential real estate.

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

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

 

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Table of Contents

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

Purchased: Loans in this segment are secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the LASG. Loans acquired by the LASG are, with limited exceptions, performing loans at the date of purchase. Loans in this segment acquired with specific material credit deterioration since origination are identified as purchased credit-impaired. Repayment of loans in this segment is largely dependent on cash flow from the successful operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied property. Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the real estate market such as geographic location or property type. Loans in this segment are evaluated for impairment under ASC 310-30. The Company reviews expected cash flows from purchased loans on a quarterly basis. The effect of a decline in expected cash flows subsequent to the acquisition of the loan is recognized through a specific allocation in the allowance for loan losses.

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

 

   

Levels and trends in delinquencies

 

   

Trends in the volume and nature of loans

 

   

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

 

   

Trends in portfolio concentration

 

   

National and local economic trends and conditions.

 

   

Effects of changes or trends in internal risk ratings

 

   

Other effects resulting from trends in the valuation of underlying collateral

There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended September 30, 2012.

The allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial business and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower 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 qualitative factors. Accordingly, the Company does not separately identify individual consumer and residential loans for individual impairment and disclosure. However, all loans modified in troubled debt restructurings are individually reviewed for impairment.

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

 

13


Table of Contents

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

 

     Three months ended September 30, 2012  
     Residential
Real Estate
    Commercial
Real Estate
    Commercial
Business
    Consumer     Purchased (1)      Total  
     (Dollars in thousands)  

Beginning balance

   $ 214      $ 93      $ 292      $ 225      $ 0       $ 824   

Provision (benefit)

     213        (22     (36     73        0         228   

Recoveries

     1        0        0        3        0         4   

Charge-offs

     (127     0        (203     (58     0         (388
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 301      $ 71      $ 53      $ 243      $ 0       $ 668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Three months ended September 30, 2011  
     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)

     114        (9     158        137        0         400   

Recoveries

     0        0        22        15        0         37   

Charge-offs

     (24     (24     0        (116     0         (164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 124      $ 114      $ 418      $ 54      $ 0       $ 710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

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

 

     September 30, 2012  
     Residential
Real Estate
     Commercial
Real Estate
     Commercial
Business
     Consumer      Total  
     (Dollars in thousands)  

Allowance for loan losses:

              

Individually evaluated

   $ 59       $ 43       $ 47       $ 31       $ 180   

Collectively evaluated

     242         28         6         212         488   

Purchased (1)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 301       $ 71       $ 53       $ 243       $ 668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated

   $ 1,546       $ 1,775       $ 210       $ 120       $ 3,651   

Collectively evaluated

     128,575         100,821         18,991         15,713         264,100   

Purchased (1)

     3,655         103,787         0         0         107,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 133,776       $ 206,383       $ 19,201       $ 15,833       $ 375,193   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2012  
     Residential
Real Estate
     Commercial
Real Estate
     Commercial
Business
     Consumer      Total  
     (Dollars in thousands)  

Allowance for loan losses:

              

Individually evaluated

   $ 3       $ 41       $ 284       $ 0       $ 328   

Collectively evaluated

     211         52         8         225         496   

Purchased (1)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 214       $ 93       $ 292       $ 225       $ 824   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated

   $ 399       $ 3,112       $ 1,127       $ 0       $ 4,638   

Collectively evaluated

     133,241         99,326         18,485         17,149         268,201   

Purchased (1) (2)

     3,931         79,484         0         0         83,415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 137,571       $ 181,922       $ 19,612       $ 17,149       $ 356,254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans in this category are evaluated for impaired under ASC 310-30. Post acquisition, the effect of a decline in expected cash flows is recorded through the allowance for loan losses as a specific allocation.
(2) At June 30, 2012, one purchased loan totaling $1.1 million was nonperforming and considered collateral dependent for purposes of evaluation under ASC 310-10.

 

14


Table of Contents

The following table sets forth information regarding impaired loans. Interest income recognized includes interest received or accrued based on loan principal and contractual interest rates. Loans accounted for under ASC 310-30 that have performed based on cash flow and accretable yield expectations determined at date of acquisition are not considered impaired assets and have been excluded from the tables below.

 

     At September 30, 2012      For the Three Months  Ended
September 30, 2012
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)  

Impaired loans without a valuation allowance:

              

Originated:

              

Residential real estate

   $ 811       $ 1,029       $ 0       $ 552       $ 5   

Consumer

     45         48         0         22         1   

Commercial real estate

     1,249         1,443         0         1,366         20   

Commercial business

     163         337         0         270         3   

Purchased:

              

Commercial real estate

     0         0         0         528         0   

Residential real estate

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,268         2,857         0         2,738         29   

Impaired loans with a valuation allowance:

              

Originated:

              

Residential real estate

     735         722         59         420         9   

Consumer

     75         77         31         37         1   

Commercial real estate

     526         517         43         550         6   

Commercial business

     47         82         47         398         0   

Purchased:

              

Commercial real estate

     0         0         0         0         0   

Residential real estate

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,383         1,398         180         1,405         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 3,651       $ 4,255       $ 180       $ 4,143       $ 45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At June 30, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 
     (Dollars in thousands)  

Impaired loans without a valuation allowance:

        

Originated:

        

Residential real estate

   $ 293       $ 483       $ 0   

Consumer

     0         0         0   

Commercial real estate

     1,482         1,738         0   

Commercial business

     377         692         0   

Purchased:

        

Commercial real estate

     1,055         1,462         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     3,207         4,375         0   

Impaired loans with a valuation allowance:

        

Originated:

        

Residential real estate

     106         103         3   

Consumer

     0         0         0   

Commercial real estate

     575         565         41   

Commercial business

     750         817         284   

Purchased:

        

Commercial real estate

     0         0         0   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     1,431         1,485         328   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 4,638       $ 5,860       $ 328   
  

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     For the Three Months Ended
September 30, 2011
 
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)  

Originated:

     

Residential real estate

   $ 49       $ 1   

Consumer

     0         0   

Commercial real estate

     1,846         21   

Commercial business

     1,090         4   

Purchased:

     

Commercial real estate

     0         0   

Residential real estate

     0         0   
  

 

 

    

 

 

 
   $ 2,985       $ 26   
  

 

 

    

 

 

 

Credit Quality

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

Loans rated 1 – 6: Loans in these categories are considered “pass” rated loans. Loans in categories 1-5 are considered to have low to average risk. Loans rated 6 are considered marginally acceptable business credits and have more than average risk.

Loans rated 7: Loans in this category are considered “special mention.” These loans 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.” Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well defined weakness or weaknesses that jeopardize the orderly liquidation of the debt.

Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in one graded 8 with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions and values, 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.

 

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Table of Contents

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

 

     September 30, 2012  
     Originated Portfolio         
     Commercial
Real Estate
     Construction      Commercial
Business
     Purchased
Portfolio
 
     (Dollars in thousands)  

Loans rated 1- 6

   $ 98,878       $ 508       $ 18,686       $ 106,124   

Loans rated 7

     1,872         0         247         207   

Loans rated 8

     1,338         0         268         1,111   

Loans rated 9

     0         0         0         0   

Loans rated 10

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 102,088       $ 508       $ 19,201       $ 107,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2012  
     Originated Portfolio         
     Commercial
Real Estate
     Construction      Commercial
Business
     Purchased
Portfolio
 
     (Dollars in thousands)  

Loans rated 1- 6

   $ 96,963       $ 1,187       $ 18,223       $ 83,415   

Loans rated 7

     1,886         0         250         1,055   

Loans rated 8

     1,347         0         1,139         0   

Loans rated 9

     0         0         0         0   

Loans rated 10

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 100,196       $ 1,187       $ 19,612       $ 84,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     September 30, 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

   $ 151       $ 343       $ 0       $ 2,869       $ 3,363       $ 86,182       $ 89,545       $ 3,184   

Home equity

     55         86         0         212         353         40,223         40,576         289   

Commercial real estate

     420         70         0         310         800         101,293         102,088         626   

Construction

     0         0         0         0         0         508         508         0   

Commercial business

     7         6         0         47         60         19,071         19,201         133   

Consumer

     257         117         0         246         620         15,278         15,833         181   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated portfolio

     890         622         0         3,684         5,196         262,555         267,751         4,413   

Purchased portfolio:

                       

Residential real estate

     0         0         0         0         0         3,655         3,655         0   

Commercial real estate

     0         310         0         666         976         102,811         103,787         666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased portfolio

     0         310         0         666         976         106,466         107,442         666   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 890       $ 932       $ 0       $ 4,350       $ 6,172       $ 369,021       $ 375,193       $ 5,079   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 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

   $ 261       $ 183       $ 0       $ 2,907       $ 3,351       $ 87,593       $ 90,944       $ 3,090   

Home equity

     16         160         0         136         312         42,384         42,696         220   

Commercial real estate

     0         208         0         417         625         99,571         100,196         417   

Construction

     0         0         0         0         0         1,187         1,187         0   

Commercial business

     0         107         0         901         1,008         18,604         19,612         1,008   

Consumer

     259         137         0         206         602         16,547         17,149         324   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated portfolio

     536         795         0         4,567         5,898         265,886         271,784         5,059   

Purchased portfolio:

                       

Residential real estate

     0         0         0         0         0         3,931         3,931         0   

Commercial real estate

     0         0         0         1,055         1,055         79,484         80,539         1,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total purchased portfolio

     0         0         0         1,055         1,055         83,415         84,470         1,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 536       $ 795       $ 0       $ 5,622       $ 6,953       $ 349,301       $ 356,254       $ 6,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table shows loans modified in a TDR during the three months ended September 30, 2012 and the change in the recorded investment subsequent to the modifications occurring. Concessions occurring during the period included a combination of interest rate reductions and maturity extensions. 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

     1       $ 222       $ 222   

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

     1         222         222   

Purchased portfolio:

        

Residential real estate

     0         0         0   

Commercial real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total purchased portfolio

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 222       $ 222   
  

 

 

    

 

 

    

 

 

 

Further, during the quarter ended September 30, 2012, the Company identified approximately $1.1 million of residential and consumer loans for which the borrower’s obligation had been discharged in bankruptcy in a prior period. Under recent regulatory guidance, these loans are required to be classified as TDRs and are considered collateral dependent impaired loans.

The Company considers TDRs past due 90 days or more to be in payment default. There were no payment defaults of loans previously modified in a TDR during the three months ended September 30, 2012. As of September 30, 2012, there were no further commitments to lend associated with loans modified in a TDR.

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

 

     September 30, 2012      June 30, 2012  
     On Accrual
Status
     On Nonaccrual
Status
     Total      On Accrual
Status
     On Nonaccrual
Status
     Total  
     (Dollars in thousands)  

Originated portfolio:

                 

Residential real estate

   $ 312       $ 214       $ 526       $ 92       $ 139       $ 231   

Home equity

     34         49         83         20         0         20   

Commercial real estate

     1,059         0         1,059         1,053         0         1,053   

Construction

     0         0         0         0         0         0   

Commercial business

     0         0         0         0         0         0   

Consumer

     605         348         953         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total originated portfolio

     2,010         611         2,621         1,165         139         1,304   

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

   $ 2,010       $ 611       $ 2,621       $ 1,165       $ 139       $ 1,304   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
5. Stock-Based Compensation

In December 2010, the Company adopted the Northeast Bancorp 2010 Stock Option and Incentive Plan (the “Plan”), which provides for awards of stock-based compensation (stock options, stock appreciation rights, restricted stock awards, cash-based awards and other equity-based incentive awards). The maximum number of authorized shares of stock that may be issued under the plan is 810,054.

A summary of the stock option activity for the three months ended September 30, 2012 follows.

 

     Shares     Weighted
Average
Exercise Price
 

Outstanding at beginning of period

     796,049      $ 13.98   

Granted

     0        0.00   

Exercised

     0        0.00   

Forfeited

     (7,500     12.63   
  

 

 

   

Outstanding at end of period

     788,549        14.00   
  

 

 

   

Exercisable

     54,175      $ 14.11   
  

 

 

   

The following table summarizes information about stock options outstanding at September 30, 2012.

 

Options Outstanding     Options Exercisable  
Weighted
Average
Exercise
Price
    Number     Weighted
Average
Remaining
Life
  Aggregate
Intrinsic
Value
    Weighted
Average
Exercise
Price
    Number     Weighted
Average
Remaining
Life
  Aggregate
Intrinsic
Value
 
$ 12.63        32,500      9.3 years   $ 0      $ 12.63        0      9.3 years   $ 0   
  13.93        594,039      8.3 years     0        13.93        37,975      8.3 years     0   
  14.52        162,010      8.3 years     0        14.52        16,200      8.3 years     0   
 

 

 

         

 

 

     
  14.00        788,549      8.3 years     0        14.11        54,175      8.3 years     0   
 

 

 

         

 

 

     

At September 30, 2012, all unvested stock options outstanding are expected to vest.

On December 29, 2010, the Company granted a restricted stock award of 13,026 shares of the Company’s common stock to a senior executive of the Company. The holder of this award participates fully in the rewards of stock ownership of the Company, including voting rights and dividend rights. This award was determined to have a fair value of $13.93 per share based on the average price at which the Company’s common stock traded on the date of grant. Forty percent of the award will vest on December 29, 2012, and the remainder will vest in three equal annual installments commencing on December 29, 2013. At September 30, 2012, no restricted common shares were vested. All restricted common shares are expected to vest.

At September 30, 2012, the Company has accrued a liability of $48 thousand representing the maximum cash payment for performance-based stock appreciation rights (“SARs”) granted in the fiscal year ended June 30, 2011. The SARs expire in December of 2020.

The estimated amount and timing of future pre-tax stock-based compensation expense to be recognized are as follows.

 

     Fiscal Years Ending June 30,  
     2013      2014      2015      2016      2017      Total  
     (Dollars in thousands)  

Stock options

   $ 309       $ 399       $ 380       $ 250       $ 64       $ 1,402   

Restricted stock

     27         36         36         18         0         117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 336       $ 435       $ 416       $ 268       $ 64       $ 1,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
6. Discontinued Operations

On August 31, 2011, the Company sold customer lists and certain fixed assets of its wholly-owned subsidiary, Northeast Bank Insurance Group, Inc. (“NBIG”), to local insurance agencies in two separate transactions. The Varney Agency, Inc. of Bangor, Maine, purchased the assets of nine NBIG offices in Anson, Auburn, Augusta, Bethel, Livermore Falls, Scarborough, South Paris, Thomaston and Turner, Maine. The NBIG office in Berwick, Maine, which operates under the name of Spence & Matthews, was acquired by Bradley Scott, previously a member of NBIG’s senior management team. The following is a summary of the sale transactions recorded during the quarter ended September 30, 2011 (dollars in thousands).

 

Sale proceeds

   $ 9,726   

Less:

  

Customer lists and other intangible assets, net

     7,379   

Fixed assets, net of accumulated depreciation

     157   

Severance and other direct expenses

     661   
  

 

 

 

Pre-tax gain recognized

   $ 1,529   
  

 

 

 

Subsequent to the quarter ended September 30, 2011, the Company recognized additional gain on sale of discontinued operations of $37 thousand representing contingent proceeds received, net of expenses. The total gain on sale of discontinued operations was $1.6 million for Fiscal 2012.

Operations associated with NBIG for the periods presented have been classified as discontinued operations in the accompanying consolidated statements of income. The Company has eliminated all intercompany transactions in presenting discontinued operations for each period. In connection with the transaction, the Company repaid borrowings associated with NBIG totaling $2.1 million.

 

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Table of Contents
7. Earnings Per Share (EPS)

EPS is computed by dividing net income allocated to common shareholders by the weighted average common shares outstanding. The following table shows the weighted average number of shares outstanding for the periods indicated. Shares issuable relative to stock options granted have been reflected as an increase in the shares outstanding used to calculate diluted EPS, after applying the treasury stock method. The number of shares outstanding for basic and diluted EPS is presented as follows:

 

     Three months Ended September 30,  
     2012     2011  
     (Dollars in thousands, except share and per
share data)
 

Net income

   $ 1,034      $ 529   

Preferred stock dividends

     (53     (53

Accretion of preferred stock

     (45     (45
  

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 936      $ 431   
  

 

 

   

 

 

 

Weighted average shares used in calculation of basic earnings per share

     10,383,441        3,494,498   

Incremental shares from assumed exercise of dilutive securities

     0        19,047   
  

 

 

   

 

 

 

Weighted average shares used in calculation of diluted earnings per share

     10,383,441        3,513,545   
  

 

 

   

 

 

 

Earnings per common share:

    

Income (loss) from continuing operations

   $ 0.09      $ (0.13

Income from discontinued operations

     0.00        0.25   
  

 

 

   

 

 

 

Earnings per common share

   $ 0.09      $ 0.12   
  

 

 

   

 

 

 

Diluted earnings per common share:

    

Income (loss) from continuing operations

   $ 0.09      $ (0.13

Income from discontinued operations

     0.00        0.25   
  

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.09      $ 0.12   
  

 

 

   

 

 

 

Anti-dilutive options and warrants excluded from the calculation of dilutive earnings per share follow.

 

     Three Months Ended September 30,  
     2012      2011  

Stock options

     788,549         756,049   

Warrants

     67,958         0   
  

 

 

    

 

 

 
     856,507         756,049   
  

 

 

    

 

 

 

 

8. Fair Value Measurements

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date, including in periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another.

ASC 820 defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Valuations based on significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

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Table of Contents

Valuation technique s – There have been no changes in the valuation techniques used during the current period.

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

Available-for-sale securities – Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include publicly-traded common and preferred stocks. If quoted prices are not available, then fair values are estimated by using pricing models ( i.e. , matrix pricing) and market interest rates and credit assumptions or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency and government sponsored agency mortgage-backed securities, as well as certain preferred and trust preferred stocks. Level 3 securities are securities for which significant unobservable inputs are utilized.

Derivative financial instruments – The valuation of the Company’s interest rate swaps and caps are determined using widely accepted valuation techniques including discounted cash flow analyses on the expected cash flows of derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. Unobservable inputs, such as credit valuation adjustments are insignificant to the overall valuation of the Company’s derivative financial instruments. Accordingly, the Company has determined that its interest rate derivatives fall within Level 2 of the fair value hierarchy.

The fair value of derivative loan commitments and forward loan sale agreements are estimated using the anticipated market price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as Level 2. The fair value of such instruments was nominal at each date presented.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

Impaired Loans – Valuations of impaired loans measured at fair value are determined by a review of collateral values. Certain inputs used in appraisals are not always observable, and therefore impaired loans are generally categorized as Level 3 within the fair value hierarchy.

Repossessed collateral – The fair values of other real estate owned and other repossessed collateral are estimated based upon appraised values less estimated costs to sell. Certain inputs used in appraisals are not always observable, and therefore repossessed collateral may be categorized as Level 3 within the fair value hierarchy. When inputs used in appraisals are primarily observable, they are classified as Level 2.

Fair Value of other Financial Instruments:

Cash and cash equivalents – The fair value of cash, due from banks, interest bearing deposits and FHLB overnight deposits approximates their relative book values, as these financial instruments have short maturities.

FHLB and Federal Reserve stock – The carrying value of FHLB stock and Federal Reserve stock approximates fair value based on redemption provisions of the FHLB and the Federal Reserve.

Loans – Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic conditions, lending conditions and the effects of estimated prepayments.

Loans held for sale – The fair value of loans held-for-sale is estimated based on bid quotations received from loan dealers.

Interest receivable – The fair value of this financial instrument approximates the book value as this financial instrument has a short maturity. It is the Company’s policy to stop accruing interest on loans past due by more than ninety days. Therefore, this financial instrument has been adjusted for estimated credit loss.

Deposits – The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand. The fair values of time deposits are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company’s net assets could increase.

Borrowings – The fair value of the Company’s borrowings with the FHLB is estimated by discounting the cash flows through maturity or the next repricing date based on current rates available to the Company for borrowings with similar maturities. The fair value of the Company’s short-term borrowings, capital lease obligations, structured repurchase agreements and other borrowings is estimated by discounting the cash flows through maturity based on current rates available to the Company for borrowings with similar maturities.

 

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Table of Contents

Off-Balance Sheet Credit-Related Instruments – Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of such instruments was nominal at each date presented.

Assets and liabilities measured at fair value on a recurring basis are summarized below.

 

     September 30, 2012  
     Total      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Assets

           

Securities available-for-sale

           

U.S. Government agency securities

   $ 45,750       $ 0       $ 45,750       $ 0   

Agency mortgage-backed securities

     91,319         0         91,319         0   

Other assets – interest rate caps

     0         0         0         0   

Liabilities

           

Other liabilities – interest rate swap

   $ 575       $ 0       $ 575       $ 0   

 

     June 30, 2012  
     Total      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Assets

           

Securities available-for-sale

           

U.S. Government agency securities

   $ 45,808       $ 0       $ 45,808       $ 0   

Agency mortgage-backed securities

     87,456         0         87,456         0   

Other assets – interest rate caps

     1         0         1         0   

Liabilities

           

Other liabilities – interest rate swap

   $ 580       $ 0       $ 580       $ 0   

There were no significant transfers between the three levels of the fair value hierarchy for the quarters ended September 30, 2012 and 2011.

Assets measured at fair value on a nonrecurring basis are summarized below.

 

     September 30, 2012  
     Total      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Impaired loans

   $ 841       $ 0       $ 0       $ 841   

Repossessed collateral

     1,129         0         0         1,129   

 

     June 30, 2012  
     Total      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Impaired loans

   $ 1,103       $ 0       $ 0       $ 1,103   

Repossessed collateral

     834         0         0         834   

 

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Table of Contents

The following table presents the estimated fair value of the Company’s financial instruments.

 

     Carrying
Amount
     Fair Value Measurements at September 30, 2012  
        Total      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 102,572       $ 102,572       $ 102,572       $ 0       $ 0   

Available-for-sale securities

     137,069         137,069         0         137,069         0   

Regulatory stock

     5,473         5,473         0         5,473         0   

Loans held for sale

     12,986         13,005         0         13,005         0   

Loans, net

     374,525         396,947         0         0         396,947   

Accrued interest receivable

     1,751         1,751         0         1,751         0   

Interest rate caps

     0         0         0         0         0   

Financial liabilities:

           

Deposits

     455,775         460,273         0         460,273         0   

FHLB advances

     43,331         45,662         0         45,662         0   

Structured repurchase agreements

     35,821         36,868         0         36,868         0   

Short-term borrowings

     484         484         0         484         0   

Capital lease obligation

     1,869         2,167         0         2,167         0   

Subordinated debentures

     8,146         8,324         0         0         8,324   

Interest rate swaps

     575         575         0         575         0   

 

     Carrying
Amount
     Fair Value Measurements at June 30, 2012  
        Total      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Financial assets:

           

Cash and cash equivalents

   $ 128,274       $ 128,274       $ 128,274       $ 0       $ 0   

Available-for-sale securities

     133,264         133,264         0         133,264         0   

Regulatory stock

     5,473         5,473         0         5,473         0   

Loans held for sale

     9,882         9,896         0         9,896         0   

Loans, net

     355,430         374,062         0         0         374,062   

Accrued interest receivable

     1,840         1,840         0         1,840         0   

Interest rate caps