Form 10-Q
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   

 

2


Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

 

     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.

 

3


Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

     Three Months Ended September 30,  
     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.

 

4


Table of Contents

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.

 

5


Table of Contents

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

 

   

 

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.

 

6


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.

 

7


Table of Contents

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.

 

8


Table of Contents
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.

 

9


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   
  

 

 

    

 

 

 

 

10


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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


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.

 

12


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.

 

16


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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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.

 

20


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.

 

21


Table of Contents

Valuation techniques – 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.

 

22


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   

 

23


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

     1         1         0         1         0   

Financial liabilities:

           

Deposits

     422,188         425,782         0         425,782         0   

FHLB advances

     43,450         45,747         0         45,747         0   

Structured repurchase agreements

     66,183         67,314         0         67,314         0   

Short-term borrowings

     1,209         1,209         0         1,209         0   

Capital lease obligation

     1,911         2,202         0         2,202         0   

Subordinated debentures

     8,106         8,597         0         0         8,597   

Interest rate swaps

     580         580         0         580         0   

 

9. Derivatives and Hedging Activities

The Company has stand alone derivative financial instruments in the form of interest rate caps that derive their value from a fee paid and are adjusted to fair value based on index and strike rate, and a swap agreement that derives its value from the underlying interest rate. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such differences, which represent the fair value of the derivative instruments, are recognized as derivative assets and derivative liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Board of Directors. The Company deals only with primary dealers. The Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty.

At September 30, 2012 and June 30, 2012, the Company had cash totaling $800 thousand in a margin account with the dealer bank associated with its interest rate swap.

Risk Management Policies – Hedging Instruments

The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net income volatility within an assumed range of interest rates.

 

24


Table of Contents

Interest Rate Risk Management – Cash Flow Hedging Instruments

The Company uses long-term variable rate debt as a source of funds for use in the Company’s lending and investment activities and other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate interest payments. To meet this objective, management entered into interest rate caps whereby the Company receives variable interest payments above a specified interest rate and swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments during the contract period.

The Company holds two interest rate caps that expire on September 30, 2014. The swap agreement provides for the Company to receive payments at a variable rate determined by a specified index (three month LIBOR) in exchange for making payments at a fixed rate.

Information pertaining to outstanding interest rate caps and swap agreements used to hedge variable rate debt is as follows.

During the three months ended September 30, 2012 and 2011, no interest rate cap or swap agreements were terminated prior to maturity. Changes in the fair value of interest rate caps and swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income. These amounts subsequently are reclassified into interest expense as a yield adjustment in the same period in which the related interest on the long-term debt affects earnings. Risk management results for the three months ended September 30, 2012 and 2011 related to the balance sheet hedging of long-term debt indicates that the hedges were effective.

The Company recorded interest income of $25 thousand related to hedge ineffectiveness in each of the three months ended September 30, 2012 and 2011. This ineffectiveness related to the Company’s interest rate swap. The Company expects to record interest income of $100 thousand related to ineffectiveness in the next twelve months.

The Company reclassified interest expense of $7 thousand and $4 thousand related to the effective portion of purchased interest rate caps during the three months ended September 30, 2012 and 2011, respectively. The Company expects to record interest expense of $28 thousand related to its purchased interest rate caps in the next twelve months.

 

     September 30, 2012     June 30, 2012  
     Interest
Rate Caps
    Interest
Rate Swap
    Interest
Rate Caps
    Interest
Rate Swap
 
     (Dollars in thousands)  

Notional amount

   $ 6,000      $ 10,000      $ 6,000      $ 10,000   

Weighted average pay rate

       4.69       4.69

Weighted average receive rate

       2.35       2.36

Strike rate based on three month LIBOR

     2.51       2.51  

Weighted average maturity in years

     2.00        2.42        2.25        2.67   

Unrealized loss

   $ 63      $ 335      $ 69      $ 315   

The following sets forth the fair values and location of derivatives designated as hedging instruments.

 

September 30, 2012

 
(Dollars in thousands)  

Asset Derivatives

  

Balance Sheet Location

   Fair Value  

Interest rate caps

   Other assets    $ 0   

Liability Derivatives

  

Balance Sheet Location

   Fair Value  

Interest rate swap

   Other liabilities    $ 575   

 

June 30, 2012

 
(Dollars in thousands)  

Asset Derivatives

  

Balance Sheet Location

   Fair Value  

Interest rate caps

   Other assets    $ 1   

Liability Derivatives

  

Balance Sheet Location

   Fair Value  

Interest rate swap

   Other liabilities    $ 580   

 

25


Table of Contents
10. Other Comprehensive (Loss) Income

The components of other comprehensive (loss) income follow.

 

     Three Months Ended September 30,  
     2012     2011  
     Pre-tax
Amount
    Tax
Expense
(Benefit)
    After-tax
Amount
    Pre-tax
Amount
    Tax
Expense
(Benefit)
    After-tax
Amount
 
     (Dollars in thousands)  

Unrealized holding gains on available-for-sale securities

   $ 157      $ 53      $ 104      $ 1,635      $ 556      $ 1,079   

Less: Realized gains (losses)

     792        269        523        (53     (18     (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains on available-for-sale securities, net

     (635     (216     (419     1,688        574        1,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on cash flow hedges

     6        2        4        (199     (68     (131

Less: Realized gains

     18        6        12        22        8        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized losses on cash flow hedges, net

     (12     (4     (8     (221     (76     (145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

   $ (647   $ (220   $ (427   $ 1,467      $ 498      $ 969   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive (loss) income is comprised of the following.

 

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

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

   $ (10   $ 624   

Tax effect

     3        (212
  

 

 

   

 

 

 

Net-of-tax amount

     (7     412   
  

 

 

   

 

 

 

Unrealized loss on cash flow hedges

     (399     (384

Tax effect

     137        130   
  

 

 

   

 

 

 

Net-of-tax amount

     (262     (254
  

 

 

   

 

 

 

Accumulated other comprehensive (loss) income

   $ (269   $ 158   
  

 

 

   

 

 

 

 

11. Troubled Asset Relief Capital Purchase Program

On December 12, 2008, in connection with the Company’s participation in the federal government’s TARP Capital Purchase Program, the Company issued 4,227 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share (the “Series A Preferred Stock”), and a warrant to purchase 67,958 shares of the Company’s common stock (the “TARP Warrant”) to the U.S. Department of the Treasury (the “Treasury”) for aggregate proceeds of $4.2 million.

The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum until February 14, 2014. Thereafter, the dividend rate will increase to 9% per annum. On and after February 15, 2012, the Company may, at its option, redeem shares of Series A Preferred Stock, in whole or in part, at any time and from time to time, for cash at a per share amount equal to the sum of the liquidation preference per share plus any accrued and unpaid dividends. Any redemption of a share of Series A Preferred Stock would be at one hundred percent (100%) of its issue price, plus any accrued and unpaid dividends and the Series A Preferred Stock may be redeemed without regard to whether the Company has replaced such funds from any other source, or to any waiting period.

The TARP Warrant is exercisable at $9.33 per share at any time on or before December 12, 2018. The number of shares of the Company’s common stock issuable upon exercise of the TARP Warrant and the exercise price per share will be adjusted if specific events occur. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the TARP Warrant. Neither the Series A Preferred Stock nor the TARP Warrant will be subject to any contractual restrictions on transfer, except that the Treasury may not transfer a portion of the Warrant with respect to, or exercise the TARP Warrant for, more than one-half of the shares of common stock underlying the TARP Warrant prior to the date on which the Company has received aggregate gross proceeds of not less than $4.2 million from one or more qualified equity offerings.

 

26


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in Northeast Bancorp’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the Securities and Exchange Commission.

A Note about Forward Looking Statements

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to the Company’s financial condition, prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy, simulation of changes in interest rates, capital spending and finance sources, and revenue sources. These statements relate to expectations concerning matters that are not historical facts. Accordingly, statements that are based on management’s projections, estimates, assumptions, and judgments constitute forward-looking statements. These forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology such as “believe”, “expect”, “estimate”, “anticipate”, “continue”, “plan”, “approximately”, “intend”, “objective”, “goal”, “project”, or other similar terms or variations on those terms, or the future or conditional verbs such as “will”, “may”, “should”, “could”, and “would”. In addition, the Company may from time to time make such oral or written “forward-looking statements” in future filings with the Securities and Exchange Commission (including exhibits thereto), in its reports to shareholders, and in other communications made by or with the Company’s approval.

Such forward-looking statements reflect the Company’s current views and expectations based largely on information currently available to its management, and on the Company’s current expectations, assumptions, plans, estimates, judgments, and projections about its business and industry, and they involve inherent risks and uncertainties. Although the Company believes that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, the Company cannot give you any assurance that its expectations will, in fact, occur or that its estimates or assumptions will be correct. The Company cautions you that actual results could differ materially from those expressed or implied by such forward-looking statements as a result of, among other factors, changes in interest rates and real estate values; competitive pressures from other financial institutions; the effects of a continuing deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay the Company’s loans; changes in loan defaults and charge-off rates; changes in the value of securities and other assets, adequacy of loan loss reserves, or deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; changes in the rules of participation for the TARP Capital Purchase Program promulgated by the U.S. Department of the Treasury under the Emergency Economic Stabilization Act of 2008, which may be changed unilaterally and restrictively by legislative or regulatory actions; establishment of a consumer financial protection bureau with the broad authority to implement new consumer protection regulations; the risk that the Company may not be successful in the implementation of its business strategy; the risk that intangibles recorded in the Company’s financial statements will become impaired; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012 as updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this report and the Company does not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Description of Business and Strategy

Business Overview

Northeast Bancorp (“we,” “our,” “us,” “Northeast” or the “Company”), a Maine corporation chartered in April 1987, is a bank holding company registered with the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended. The Company’s primary subsidiary and principal asset is its wholly-owned banking subsidiary, Northeast Bank (the “Bank” or “Northeast Bank”), which has ten banking branches. The Bank, which was originally organized in 1872 as a Maine-chartered mutual savings bank and was formerly known as Bethel Savings Bank F.S.B., is a Maine state-chartered bank and a member of the Federal Reserve System. As such, the Company and the Bank are currently subject to the regulatory oversight of the Federal Reserve and the State of Maine Bureau of Financial Institutions (the “Bureau”).

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 applied the acquisition method of accounting, as described in Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”) to the merger, which represents an acquisition by FHB of Northeast, with Northeast as the surviving company.

In connection with the transaction, as part of the regulatory approval process, the Company and the Bank made certain commitments to the Federal Reserve and the Bureau, the most significant of which are (i) to maintain a Tier 1 leverage ratio of at least 10%, (ii) to

 

27


Table of Contents

maintain a total risk-based capital ratio of at least 15%, (iii) to limit purchased loans to 40% of total loans, (iv) to fund 100% of the Company’s loans with core deposits (defined as non-maturity deposits and non-brokered insured time deposits), and (v) to hold commercial real estate loans (including owner-occupied commercial real estate) to within 300% of total risk-based capital. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve and the Bureau.

As of September 30, 2012, the Company, on a consolidated basis, had total assets of $670.9 million, total deposits of $455.8 million, and stockholders’ equity of $118.9 million. The Company gathers retail deposits through its Community Banking Division’s banking offices in Maine and through its online affinity deposit program, ableBanking; originates loans through its Community Banking Division; and purchases performing commercial real estate loans at a discount through its Loan Acquisition and Servicing Group (“LASG”). The Company operates the Community Banking Division from Lewiston, Maine, which operates ten full-service branches, some with investment centers, and four loan production offices that serve individuals and businesses located in western and south-central Maine and southern New Hampshire. The Company operates ableBanking and the LASG from its offices in Boston, Massachusetts.

In August of 2011, the Company sold the customer lists and certain other assets of its insurance agency division, Northeast Bank Insurance Group (“NBIG”). The operations of NBIG have been reported as discontinued operations in the consolidated financial statements and in the discussion herein.

In May of 2012, the Company raised net proceeds of $52.7 million through the sale of shares of its common stock.

Unless the context otherwise requires, references herein to the Company include the Company and its subsidiary on a consolidated basis.

Strategy

The Company’s goal is to prudently grow its franchise, while maintaining sound operations and risk management, by implementing the following strategies:

Measured growth of the purchased loan portfolio. The LASG purchases performing commercial real estate loans, on a nationwide basis, at a discount from their outstanding principal balances, producing yields higher than those normally achieved on our originated loan portfolio.

Loans are purchased on a nationwide basis from a variety of sources, including banks, insurance companies, investment funds and government agencies, either directly or indirectly through a broker. We expect that loans purchased by the LASG will, subject to compliance with applicable regulatory commitments, represent an increasing percentage of our total loan portfolio in the future.

Focus on core deposits. The Bank offers a full line of deposit products to customers in the Community Banking Division’s market area through its ten-branch network. In addition, we launched our online affinity deposit program, ableBanking, a division of Northeast Bank in the quarter ended June 30, 2012. One of the Company’s strategic goals is for ableBanking to provide an additional channel through which to raise core deposits to fund the acquisition of loans by the LASG.

Continuing our community banking tradition. The Community Banking Division retains a high degree of local autonomy and operational flexibility to better serve its customers. The Community Banking Division’s focus on sales and service is expected to allow us to attract and retain core deposits in support of balance sheet growth, and to continue to generate new loans, particularly through the efforts of the residential mortgage origination team.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. The reader is encouraged to review each of the policies included in Form 10-K for the year ended June 30, 2012 to gain a better understanding of how Northeast’s financial performance is measured and reported. There has been no material change in critical accounting policies during the three months ended September 30, 2012.

 

28


Table of Contents

Overview

Net income for the quarter ended September 30, 2012 was $1.0 million, or $0.09 per diluted common share, compared to net income of $529 thousand, or $0.12 per diluted common share, for the quarter ended September 30, 2011. The 2011 quarter included a $594 thousand net loss, or $0.13 per diluted share, from continuing operations and $1.1 million of net income, or $0.25 per diluted common share, from discontinued operations. Weighted average common shares outstanding increased to 10.4 million in the quarter ended September 30, 2012 from 3.5 million in the quarter ended September 30, 2011 as a result of the Company’s public offering of common stock in May 2012.

The Company’s net interest margin was 3.80% for the quarter ended September 30, 2012, compared to 3.11% in the quarter ended September 30, 2011, an increase principally attributable to net loan growth in the LASG portfolio. The average balance of purchased loans totaled $83.4 million during the quarter ended September 30, 2012, compared to $11.1 million during the quarter ended September 30, 2011.

During the quarter ended September 30, 2012, the LASG purchased loans totaling $31.3 million, and grew the purchased loan portfolio on a net basis to $107.4 million at quarter end. Additionally, the LASG originated $8.8 million in commercial loans, thereby increasing its originated book to $12.6 million at quarter end. An overview of LASG portfolio results for the three months ended September 30, 2012 follows.

 

     Purchased     Originated     Total LASG  
     (Dollars in thousands)  

Purchased or originated during the three months ended September 30, 2012:

      

Unpaid principal balance

   $ 42,273      $ 8,799      $ 51,072   

Net investment basis (1)

     31,349        8,799        40,148   

Totals as of September 30, 2012:

      

Unpaid principal balance

   $ 133,510      $ 12,594      $ 146,104   

Net investment basis

     107,442        12,595        120,037   

Returns during the three months ended September 30, 2012:

      

Yield

     15.13     9.54     14.58

Total Return (2)

     17.41     9.54     16.63

 

(1) Net investment basis of loans purchased in the quarter ended September 30, 2012 includes $326 thousand advanced on a purchased loan.
(2) The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, and other noninterest income recorded in connection with purchased loans during the period divided by the average invested balance, on an annualized basis.

Financial Condition

Overview

Total assets increased by $1.7 million, or 0.3%, to $670.9 million at September 30, 2012, compared to June 30, 2012. The principal components of the change in the balance sheet were as follows:

 

  1. Loan growth of $18.9 million, or 5.3%, principally due to net growth of $23.0 million in the Bank’s purchased loan portfolio and $7.5 million of commercial loans originated by the LASG, offset in part by net amortization and payoffs of $11.6 million in the Community Banking Division loan portfolio. In conjunction with one purchased pool, the Bank acquired the right to service the guaranteed portion of $44 million of SBA loans at an average annual gross servicing fee equal to approximately 1%.

 

  2. Deposit growth of $33.6 million, or 8.0%, consisting of a $10.5 million increase in deposits raised through ableBanking, the Bank’s online affinity deposit platform, $15.5 million raised through the Bank’s community banking branch network, and $7.6 million generated through deposit listing service referrals.

 

  3. A $31.2 million, or 25.8%, decrease in borrowings, the result primarily of the repayment of structured repurchase agreements totaling $30.0 million during the quarter.

 

  4. A $25.7 million decrease in cash and equivalents, principally the result of loan growth during the quarter.

 

29


Table of Contents

Assets

Cash, Short-term Investments and Securities

Cash and short-term investments were $102.6 million as of September 30, 2012, a decrease of $25.7 million, or 20.0%, from $128.3 million at June 30, 2012. This decrease is principally the result of the following balance sheet changes: i) net loan growth of $18.9 million, ii) net increases in investment securities and loans held for sale of $3.8 million and $3.1 million, respectively, iii) the repayment of structured repurchase agreements totaling $30.0 million, and iv) net deposit growth of $33.6 million.

Available-for-sale securities, consisting of securities issued by government agencies and government-sponsored enterprises, totaled $137.1 million as of September 30, 2012. At quarter end, securities with a fair value of $54.9 million were pledged for outstanding borrowings.

Loan Portfolio

Total loans, excluding loans held for sale, amounted to $375.2 million as of September 30, 2012, an increase of $18.9 million, or 5.3%, from $356.3 million as of June 30, 2012. The increase consisted of growth in the purchased loan portfolio of $23.0 million, partially offset by a $4.1 million decrease in originated loans. The net decrease in originated loans consisted of an $11.5 million decrease in loans originated by the Community Banking Division and a net increase of $7.5 million of LASG originated commercial loans. The decrease in Community Banking Division loans was principally due to net runoff in residential and commercial real estate loan portfolios.

The Company continues to sell most of its originated fixed-rate residential real estate loans in the secondary market. The principal balance of residential real estate loans sold during the three months ended September 30, 2012 totaled $35.1 million, resulting in net gains of $756 thousand.

The composition of the Company’s loan portfolio follows.

 

     September 30, 2012  
     Community
Banking Division
     LASG      Total      Percent of
Total
 
     (Dollars in thousands)  

Originated loans:

           

Residential real estate

   $ 89,394       $ 151       $ 89,545         23.87

Home equity

     40,576         0         40,576         10.81

Commercial real estate

     93,692         8,396         102,088         27.21

Construction

     508         0         508         0.14

Commercial business

     15,153         4,048         19,201         5.12

Consumer

     15,833         0         15,833         4.22
  

 

 

    

 

 

    

 

 

    

Subtotal

     255,156         12,595         267,751         71.37

Purchased loans:

           

Residential real estate

     0         3,655         3,655         0.97

Commercial real estate

     0         103,787         103,787         27.66
  

 

 

    

 

 

    

 

 

    

Subtotal

     0         107,442         107,442         28.63
  

 

 

    

 

 

    

 

 

    

Total

   $ 255,156       $ 120,037       $ 375,193         100.00
  

 

 

    

 

 

    

 

 

    

 

     June 30, 2012  
     Community
Banking Division
     LASG      Total      Percent of
Total
 
     (Dollars in thousands)  

Originated loans:

           

Residential real estate

   $ 90,793       $ 151       $ 90,944         25.53

Home equity

     42,696         0         42,696         11.98

Commercial real estate

     97,146         3,050         100,196         28.12

Construction

     1,187         0         1,187         0.33

Commercial business

     17,732         1,880         19,612         5.51

Consumer

     17,149         0         17,149         4.81
  

 

 

    

 

 

    

 

 

    

Subtotal

     266,703         5,081         271,784         76.28

Purchased loans:

           

Residential real estate

     0         3,931         3,931         1.10

Commercial real estate

     0         80,539         80,539         22.62
  

 

 

    

 

 

    

 

 

    

Subtotal

     0         84,470         84,470         23.72
  

 

 

    

 

 

    

 

 

    

Total

   $ 266,703       $ 89,551       $ 356,254         100.00
  

 

 

    

 

 

    

 

 

    

 

30


Table of Contents

Classification of Assets

Loans are classified as non-performing when 90 days past due, unless a loan is well-secured and in process of collection. Loans less than 90 days past due, for which collection of principal or interest is considered doubtful, also may be designated as non-performing. In both situations, accrual of interest ceases. The Company typically maintains such loans as non-performing until the respective borrowers have demonstrated a sustained period of payment performance.

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.

Other nonperforming assets include other real estate owned (“OREO”) and other personal property securing loans repossessed by the Company. The real estate and personal property collateral for commercial and consumer loans is written down to its estimated realizable value upon repossession. Revenues and expenses are recognized in the period when received or incurred on other real estate and in substance foreclosures. Gains and losses on disposition are recognized in noninterest income.

 

31


Table of Contents

The following table shows details the Company’s nonperforming assets and other credit quality indicators as of September 30, 2012 and June 30, 2012. The net increase in nonperforming assets during the quarter was principally due to the acquisition of a loan pool in late September that included $667 thousand of nonperforming loans.

 

     Non-Performing Assets at September 30, 2012  
     Community
Banking Division
     LASG      Total  
     (Dollars in thousands)  

Loans:

        

Residential real estate

   $ 3,184       $ 0       $ 3,184   

Home equity

     289         0         289   

Commercial real estate

     626         667         1,293   

Construction

     0         0         0   

Commercial business

     133         0         133   

Consumer

     181         0         181   
  

 

 

    

 

 

    

 

 

 

Subtotal

     4,413         667         5,080   

Repossessed collateral

     1,129         1,516         2,645   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,542       $ 2,183       $ 7,725   
  

 

 

    

 

 

    

 

 

 

Ratio of nonperforming loans to total loans

           1.35

Ratio of nonperforming assets to total assets

           1.15

Ratio of loans past due to total loans

           1.65

Nonperforming loans that are current

         $ 674   

Commercial loans risk rated substandard or worse

         $ 2,717   

Troubled debt restructurings:

        

On accrual status

         $ 2,010   

On nonaccrual status

         $ 611   

 

     Non-Performing Assets at June 30, 2012  
     Community
Banking Division
     LASG      Total  
     (Dollars in thousands)  

Loans:

        

Residential real estate

   $ 3,090       $ 0       $ 3,090   

Home equity

     220         0         220   

Commercial real estate

     417         1,055         1,472   

Construction

     0         0         0   

Commercial business

     1,008         0         1,008   

Consumer

     324         0         324   
  

 

 

    

 

 

    

 

 

 

Subtotal

     5,059         1,055         6,114   

Repossessed collateral

     834         0         834   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,893       $ 1,055       $ 6,948   
  

 

 

    

 

 

    

 

 

 

Ratio of nonperforming loans to total loans

           1.72

Ratio of nonperforming assets to total assets

           1.04

Ratio of loans past due to total loans

           1.95

Nonperforming loans that are current

         $ 377   

Commercial loans risk rated substandard or worse

         $ 2,486   

Troubled debt restructurings:

        

On accrual status

         $ 1,165   

Nonaccrual status

         $ 139   

 

32


Table of Contents

Allowance for Loan Losses

In connection with the application of the acquisition method of accounting for the merger on December 29, 2010, the allowance for loan losses was reduced to zero when the loan portfolio was marked to its then current fair value. Since that date, the Company has provided for an allowance for loan losses as new loans are originated or in the event that credit exposure in the pre-merger loan portfolio or other acquired loans exceeds the exposure estimated when initial fair values were determined.

The Company’s allowance for loan losses was $668 thousand as of September 30, 2012, which represents a decrease of $156 thousand from $824 thousand as of June 30, 2012. The decrease during the quarter ended September 30, 2012 was principally due to the partial charge-off related to one commercial loan relationship totaling $203 thousand. Loan loss reserves related to this credit were allocated in a prior period.

The following table details ratios related to the allowance for loan losses for the periods indicated.

 

     September 30, 2012     June 30, 2012     September 30, 2011  

Allowance for loan losses to nonperforming loans

     13.15     13.48     9.55

Allowance for loan losses to total loans

     0.18     0.23     0.22

While management believes that it uses the best information available to make its determinations with respect to the allowance, there can be no assurance that the Company will not have to increase its provision for loan losses in the future as a result of changing economic conditions, adverse markets for real estate or other factors.

Other Assets

The cash surrender value of the Company’s bank-owned life insurance (“BOLI”) assets increased $123 thousand, or 0.9% to $14.4 million at September 30, 2012, compared to $14.3 million at June 30, 2012. Increases in cash surrender value are recognized in other income and are not subject to income taxes. Borrowing on or surrendering a policy may subject the Company to income tax expense on the increase in cash surrender value. For these reasons, management considers BOLI an illiquid asset. BOLI represented 11.6% of the Company’s total risk-based capital at September 30, 2012.

Intangible assets totaled $4.2 million and $4.5 million at September 30, 2012 and June 30, 2012, respectively. The $265 thousand decrease was the result of core deposit intangible asset amortization during the period.

Deposits, Borrowed Funds, Capital Resources and Liquidity

Deposits

The Company’s principal source of funding is its core deposit accounts. At September 30, 2012, non-maturity accounts and certificates of deposit with balances less than $250 thousand represented 98.2% of total deposits.

Total deposits increased $33.6 million to $455.8 million as of September 30, 2012 from $422.2 million as of June 30, 2012. The increase was the result of a $10.5 million increase in deposits raised through ableBanking, the Bank’s online affinity deposit platform, $15.5 million raised through the Bank’s community banking branch network, and $7.6 million generated through deposit listing service referrals. The composition of total deposits at September 30, 2012 and June 30, 2012 follows.

 

     September 30, 2012     June 30, 2012  
     Amount      % of
Total
    Amount      % of
Total
 
     (Dollars in thousands)  

Demand deposits

   $ 47,071         10.33   $ 45,323         10.74

NOW accounts

     56,448         12.39     57,477         13.61

Regular and other savings

     30,562         6.71     32,727         7.75

Money market deposits

     48,896         10.73     45,024         10.66
  

 

 

      

 

 

    

Total non-certificate accounts

     182,977         40.16     180,551         42.76
  

 

 

      

 

 

    

Term certificates less than $250 thousand

     264,032         57.92     232,948         55.18

Term certificates of $250 thousand or more

     8,766         1.92     8,689         2.06
  

 

 

      

 

 

    

Total certificate accounts

     272,798         59.84     241,637         57.24
  

 

 

      

 

 

    

Total deposits

   $ 455,775         100.00   $ 422,188         100.00
  

 

 

      

 

 

    

 

33


Table of Contents

Borrowed Funds

Advances from the FHLB were $43.3 million and $43.5 million at September 30, 2012 and June 30, 2012, respectively. At September 30, 2012, the Company had pledged investment securities with a fair value of $12.3 million, as well as certain residential real estate loans, commercial real estate loans, and FHLB deposits free of liens or pledges to secure outstanding advances and available additional borrowing capacity.

Structured repurchase agreements were $35.8 million and $66.2 million at September 30, 2012 and June 30, 2012, respectively. During the quarter, the Company repaid structured repurchase agreements totaling $30.0 million. At September 30, 2012, the Company had pledged investment securities with a fair value of $42.7 million as collateral for outstanding structured repurchase agreements.

Short-term borrowings, consisting of sweep accounts, were $484 thousand and $1.2 million as of September 30, 2012 and June 30, 2012, respectively. At September 30, 2012, sweep accounts were secured by a letter of credit issued by the FHLB totaling $2.0 million.

Liquidity

The following table is a summary of the liquidity the Company had the ability to access as of September 30, 2012, in addition to traditional retail deposit products.

 

Brokered time deposits

  $ 166,141     

Subject to policy limitation of 25% of total assets

Federal Home Loan Bank of Boston

    10,116     

Subject to eligible and qualified collateral

Federal Reserve Discount Window Borrower-in-Custody

    277     

Subject to the pledge of indirect auto loans

 

 

 

   

Total unused borrowing capacity

    176,534     

Unencumbered investment securities

    82,128     
 

 

 

   

Total sources of liquidity

  $ 258,662     
 

 

 

   

Retail deposits and other core deposit sources including deposit listing services are used by the Company to manage its overall liquidity position. While the Company currently does not seek wholesale funding such as FHLB advances and brokered deposits, the ability to raise them remains an important part of its liquidity contingency planning. While management closely monitors and forecasts the Company’s liquidity position, it is affected by asset growth, deposit withdrawals and other contractual obligations and commitments. The accuracy of management’s forecast assumptions may increase or decrease the Company’s overall available liquidity.

At September 30, 2012, the Company had $258.7 million of immediately accessible liquidity, defined as cash that could be raised within seven days through collateralized borrowings, brokered deposits or security sales. This position represented 39% of total assets. The Company also had $102.6 million of cash and cash equivalents at September 30, 2012. This relatively high level of short-term liquidity is intended, in part, for future purchases of commercial loans by the LASG.

Management believes that there are adequate funding sources to meet its liquidity needs for the foreseeable future. Primary funding sources are the repayment of principal and interest on loans, the renewal of time deposits, the potential growth in the deposit base, and the credit availability from the FHLB and the Federal Reserve’s Borrower-in-Custody program. Management does not believe that the terms and conditions that will be present at the renewal of these funding sources will significantly impact the Company’s operations, due to its management of the maturities of its assets and liabilities.

Capital

The carrying amount and unpaid principal balance of junior subordinated debentures totaled $8.1 million and $16.5 million, respectively, as of September 30, 2012. This debt represents qualifying Tier 1 capital for the Company, up to a maximum of 25% of total Tier 1 capital. At September 30, 2012, the carrying amounts of the junior subordinated notes, net of the Company’s $496 thousand investment in the affiliated trusts, qualified as Tier 1 capital.

Under the terms of the Treasury’s TARP Capital Purchase Program, in which the Company participates, the Company must have the consent of Treasury to redeem, purchase, or acquire any shares of its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the purchase agreement entered into by Treasury and the Company.

Total stockholders’ equity was $118.9 million and $119.1 million at September 30, 2012 and June 30, 2012, respectively. The change reflects net income for the period, dividends paid on common and preferred stock, and other comprehensive loss during the period. Book value per outstanding common share was $11.04 at September 30, 2012 and $11.07 at June 30, 2012. Tier 1 capital to total average assets of the Company was 18.37% as of September 30, 2012 and 19.91% at June 30, 2012.

 

34


Table of Contents

In addition to the risk-based capital requirements, the Federal Reserve requires top-rated bank holding companies to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to its average total consolidated assets of at least 3.0%. For most other bank holding companies (including the Company), the minimum leverage capital ratio is 4.0%. Bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as bank holding companies that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels.

The Federal Reserve’s capital adequacy standards also apply to state-chartered banks which are members of the Federal Reserve System, such as the Bank. Moreover, the Federal Reserve has promulgated corresponding regulations to implement the system of prompt corrective action established by Section 38 of the Federal Deposit Insurance Act. Under these regulations, a bank is “well capitalized” if it has: (i) a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; (iii) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A bank is “adequately capitalized” if it has: (1) a total risk-based capital ratio of 8.0% or greater; (2) a Tier 1 risk-based capital ratio of 4.0% or greater; and (3) a leverage capital ratio of 4.0% or greater (3.0% under certain circumstances) and does not meet the definition of a “well capitalized bank.”

The Federal Reserve also must take into consideration: (i) concentrations of credit risk; (ii) interest rate risk; and (iii) risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination. The Bank is currently considered well-capitalized under all regulatory definitions.

Further, the Bank and the Company are subject to capital commitments with the Federal Reserve and the Maine Bureau of Financial Institutions that require higher minimum capital ratios. These commitments require that the Company and the Bank (i) maintain a Tier 1 leverage ratio of at least 10%, (ii) maintain a total risk-based capital ratio of at least 15%, The Bank and the Company were in compliance with these commitments at September 31, 2012.

The Company’s and the Bank’s regulatory capital ratios are set forth below.

 

     Actual     Minimum
Capital
Requirements
    Minimum
To Be Well
Capitalized Under
Prompt Correction
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

September 30, 2012:

               

Total capital to risk weighted assets:

               

Company

   $ 124,657         31.30   $ 31,861         ³8.0   $ N/A         N/A   

Bank

     86,340         21.67     31,874         ³8.0     39,843         ³10.0

Tier 1 capital to risk weighted assets:

               

Company

     123,989         31.13     15,932         ³4.0     N/A         N/A   

Bank

     81,357         20.42     15,937         ³4.0     23,905         ³6.0

Tier 1 capital to average assets:

               

Company

     123,989         18.37     26,998         ³4.0     N/A         N/A   

Bank

     81,357         12.16     26,762         ³4.0     33,453         ³5.0

June 30, 2012:

               

Total capital to risk weighted assets:

               

Company

   $ 124,452         33.34   $ 29,863         ³8.0   $ N/A         N/A   

Bank

     75,081         20.14     29,824         ³8.0     37,280         ³10.0

Tier 1 capital to risk weighted assets:

               

Company

     123,628         33.12     14,931         ³4.0     N/A         N/A   

Bank

     70,414         18.89     14,910         ³4.0     22,365         ³6.0

Tier 1 capital to average assets:

               

Company

     123,628         19.91     24,837         ³4.0     N/A         N/A   

Bank

     70,414         11.43     24,642         ³4.0     30,802         ³5.0

 

35


Table of Contents

Off-balance Sheet Arrangements and Aggregate Contractual Obligations

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the condensed consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, unused lines of credit and standby letters of credit is represented by the contractual amount of those instruments. To control the credit risk associated with entering into commitments and issuing letters of credit, the Company uses the same credit quality, collateral policies and monitoring controls in making commitments and letters of credit as it does with its lending activities. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

Unused lines of credit and commitments to extend credit typically result in loans with a market interest rate.

A summary of the amounts of the Company’s contractual obligations and other commitments with off-balance sheet risk at September 30, follows.

 

Contractual obligations

   Total      Less Than
1 Year
     1-3 Years      4-5 Years      After 5
Years
 
     (Dollars in thousands)  

FHLB advances

   $ 42,500       $ 15,000       $ 12,500       $ 10,000       $ 5,000   

Structured repurchase agreements

     35,000         20,000         15,000         0         0   

Junior subordinated debentures

     16,496         0         0         0         16,496   

Short-term borrowings

     484         484         0         0         0   

Capital lease obligation

     2,278         264         535         612         867   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

     96,758         35,748         28,035         10,612         22,363   

Operating lease obligations (1)

     9,820         796         2,134         1,931         4,959   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 106,578       $ 36,544       $ 30,169       $ 12,543       $ 27,322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Commitments with off-balance sheet risk

   Total      Less Than
1 Year
     1-3 Years      4-5 Years      After 5
Years
 
     (Dollars in thousands)  

Commitments to extend credit (2)(4)

   $ 8,214       $ 8,214       $ 0       $ 0       $ 0   

Commitments related to loans held for sale (3)

     9,912         9,912         0         0         0   

Unused lines of credit (4)(5)

     36,025         17,434         3,435         3,041         12,115   

Standby letters of credit (6)

     417         416         1         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commitments with off-balance sheet risk

   $ 54,568       $ 35,976       $ 3,436       $ 3,041       $ 12,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents an off-balance sheet obligation.
(2) Represents commitments outstanding for residential real estate, commercial real estate, and commercial business loans.
(3) Commitments for residential real estate loans that will be held for sale upon origination.
(4) Loan commitments and unused lines of credit for commercial and construction loans expire or are subject to renewal in twelve months or less.
(5) Represents unused lines of credit from commercial, construction, and home equity loans.
(6) Standby letters of credit generally expire in twelve months.

Management believes that the Company has adequate resources to fund all of its commitments.

The Company has written options limited to those residential real estate loans designated for sale in the secondary market and subject to a rate lock. These rate-locked loan commitments are used for trading activities, not as a hedge. The fair value of the outstanding written options at September 30, 2012 was nominal.

 

36


Table of Contents

Results of Operations – Continuing Operations

General

Net income from continuing operations for the three months ended September 30, 2012 was $1.0 million, compared to a loss of $594 thousand for the three months ended September 30, 2011. The increase in net income from continuing operations in the quarter ended September 30, 2012 was principally due to increased net interest income of $1.8 million, increased security gains of $845 thousand, increased gains recognized on repossessed collateral of $528 thousand, and increased gains on the sales of residential mortgages of $100 thousand, partially offset by increased noninterest expense of $903 thousand, consisting of higher employee compensation, occupancy and equipment expense, and loan acquisition and collection costs.

In the quarter ended September 30, 2012, higher average balances in the Company’s purchased loan portfolio, compared to the comparable 2011 quarter, contributed significantly to increased net interest income and earnings for the quarter. The Company’s “total return” on its purchased loan portfolio, a measure that includes gains on asset sales, as well as interest, scheduled accretion and accelerated accretion, totaled 17.41% for the quarter ended September 30, 2012. The following table details the components of the return on purchased loans during the three months ended September 30, 2012 and 2011.

 

     Three Months Ended September 30,  
     2012     2011  
     Income      Return (1)     Income      Return (1)  
     (Dollars in thousands)  

Regularly scheduled interest and accretion

   $ 1,911         9.01   $ 200         7.19

Transactional income:

          

Gain on sale of real estate owned

     473         2.23     0         0.00

Other noninterest income

     36         0.17     0         0.00

Accelerated accretion and loan fees

     1,273         6.00     0         0.00
  

 

 

      

 

 

    

Total

   $ 3,693         17.41   $ 200         7.19
  

 

 

      

 

 

    

 

(1) The total return on purchased loans represents interest and noninterest income recorded during the period divided by the average invested balance, on an annualized basis.

Net Interest Income

Net interest income for the three months ended September 30, 2012 and 2011 was $6.1 million and $4.3 million, respectively. The increase of $1.8 million was largely attributable to growth in the LASG loan portfolio, which earned an average yield of 14.6% for the quarter ended September 30, 2012 on an average outstanding balance of $92.7 million. The following table summarizes interest income and related yields recognized on the Company’s loans.

 

     Three Months Ended September 30,  
     2012     2011  
     Average
Balance
     Interest
Income
     Yield     Average
Balance
     Interest
Income
     Yield  
     (Dollars in thousands)  

Community Banking Division

   $ 270,758       $ 3,936         5.77   $ 304,041       $ 4,937         6.46

LASG:

                

Originated

     9,193         221         9.54     1,141         29         10.11

Purchased

     83,475         3,184         15.13     11,066         200         7.19
  

 

 

    

 

 

      

 

 

    

 

 

    

Total LASG

     92,668         3,405         14.58     12,207         229         7.44
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 363,426       $ 7,341         8.01   $ 316,248       $ 5,137         6.46
  

 

 

    

 

 

      

 

 

    

 

 

    

 

37


Table of Contents

In the quarter ended September 30, 2012, net interest income was negatively affected by a lower level of noncash accretion of fair value adjustments resulting from the merger than in the comparable 2011 quarter. The effect of such accretion will continue to diminish as financial instruments held at the merger mature or prepay. The following table summarizes the effects of such accretion.

 

     Three Months Ended September 30,  
     2012     2011  
     Average
Balance
     Income
(Expense)
    Effect on
Yield /
Rate
    Average
Balance
     Income
(Expense)
    Effect on
Yield /
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

              

Investment securities

   $ 131,796       $ (3     -0.01   $ 147,692       $ (61     -0.16

Loans

     363,426         104        0.11     316,248         355        0.45

Other interest-earning assets

     141,616         0        0.00     84,112         0        0.00
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-earning assets

   $ 636,838       $ 101        0.06   $ 548,052       $ 294        0.21
  

 

 

    

 

 

     

 

 

    

 

 

   

Interest-bearing liabilities:

              

Interest-bearing deposits

     393,267         276        0.28     351,197         372        0.42

Short-term borrowings

     1,251         0        0.00     1,141         0        0.00

Borrowed funds

     100,186         481        1.90     113,746         579        2.03

Junior subordinated debentures

     8,124         (40     -1.95     7,971         (35     -1.75
  

 

 

    

 

 

     

 

 

    

 

 

   

Total interest-bearing liabilities

   $ 502,828       $ 717        0.57   $ 474,055       $ 916        0.77
  

 

 

    

 

 

     

 

 

    

 

 

   

Total effect of noncash accretion on:

              

Net interest income

      $ 818           $ 1,210     

Net interest margin

        0.51          0.88  

 

38


Table of Contents

The Company’s interest rate spread and net interest margin increased by 59 basis points and 69 basis points, respectively, for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011. These increases were principally the result of the aforementioned increase in purchased loans. The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the three months ended September 30, 2012 and 2011.

 

     Three Months Ended September 30,  
     2012     2011  
     Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate
    Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate
 
     (Dollars in thousands)  

Assets:

                

Interest-earning assets:

                

Investment securities (1)

   $ 131,796       $ 347         1.04   $ 147,692       $ 639         1.72

Loans (2) (3)

     363,426         7,341         8.01     316,248         5,137         6.46

Regulatory stock

     5,473         6         0.43     5,761         12         0.83

Short-term investments (4)

     136,143         83         0.24     78,351         47         0.24
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     636,838         7,777         4.84     548,052         5,835         4.24
  

 

 

    

 

 

      

 

 

    

 

 

    

Cash and due from banks

     3,177              2,920         

Other non-interest earning assets

     37,695              38,809         
  

 

 

         

 

 

       

Total assets

   $ 677,710            $ 589,781         
  

 

 

         

 

 

       

Liabilities & Stockholders’ Equity:

                

Interest-bearing liabilities:

                

NOW accounts

   $ 56,595       $ 42         0.29   $ 56,182       $ 69         0.49

Money market accounts

     47,349         53         0.44     45,981         51         0.44

Savings accounts

     31,347         11         0.14     33,439         26         0.31

Time deposits

     257,976         872         1.34     215,595         691         1.28
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     393,267         978         0.99     351,197         837         0.95

Short-term borrowings

     1,251         6         1.90     1,141         5         1.74

Borrowed funds

     100,186         502         1.99     113,746         532         1.86

Junior subordinated debentures

     8,124         193         9.43     7,971         183         9.13
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     502,828         1,679         1.32     474,055         1,557         1.31
  

 

 

    

 

 

      

 

 

    

 

 

    

Interest-bearing liabilities of discontinued operations (5)

     0              1,140         

Non-interest bearing liabilities:

                

Demand deposits and escrow accounts

     49,815              44,553         

Other liabilities

     6,223              4,478         
  

 

 

         

 

 

       

Total liabilities

     558,866              524,226         

Stockholders’ equity

     118,844              65,555         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 677,710            $ 589,781         
  

 

 

         

 

 

       

Net interest income

      $ 6,098            $ 4,278      
     

 

 

         

 

 

    

Interest rate spread

           3.52           2.93

Net interest margin (6)

           3.80           3.11

 

(1) Interest income and yield are stated on an annualized fully tax-equivalent basis using a 34% tax rate.
(2) Includes loans held for sale.
(3) Nonaccrual loans are included in the computation of average, but unpaid interest has not been included for purposes of determining interest income.
(4) Short term investments include FHLB overnight deposits and other interest-bearing deposits.
(5) The average balance of borrowings associated with discontinued operations has been excluded from interest expense, interest rate spread, and net interest margin.
(6) Net interest margin is calculated as net interest income divided by total interest-earning assets, on an annualized basis.

 

39


Table of Contents

The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

     Three Months Ended September 30, 2012
Compared to the Three Months Ended September 30, 2011
 
     Change Due to
Volume
    Change Due to
Rate
    Total Change  
     (Dollars in thousands)  

Interest earning assets:

      

Investments securities

   $ (63   $ (229   $ (292

Loans

     844        1,360        2,204   

Regulatory stock

     (1     (5     (6

Short-term investments

     35        1        36   
  

 

 

   

 

 

   

 

 

 

Total increase in interest income

     815        1,127        1,942   
  

 

 

   

 

 

   

 

 

 

Interest bearing liabilities:

      

Interest bearing deposits

     146        (5     141   

Short-term borrowings

     1        0        1   

Borrowed funds

     (65     35        (30

Junior subordinated debentures

     4        6        10   
  

 

 

   

 

 

   

 

 

 

Total increase in interest expense

     86        36        122   
  

 

 

   

 

 

   

 

 

 

Total increase in net interest income

   $ 729      $ 1,091      $ 1,820   
  

 

 

   

 

 

   

 

 

 

Provision for Loan Losses

Quarterly, the Company determines the amount of the allowance for loan losses that is adequate to provide for losses inherent in the Company’s loan portfolios, with the provision for loan losses determined by the net change in the allowance for loan losses. For loans acquired with deteriorated credit quality, a provision for loan losses is recorded when estimates of future cash flows are lower than had been previously expected (i.e., there are reduced expected cash flows or higher net charge-offs than had been previously expected, requiring additional provision for loan losses). See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 4: Loans, Allowance for Loan losses and Credit Quality” for further discussion.

The provision for loan losses for periods subsequent to the merger reflects the impact of adjusting loans to their then fair values, as well as the elimination of the allowance for loan losses in accordance with the acquisition method of accounting. Subsequent to the merger, the provision for loan losses has been recorded based on estimates of inherent losses in newly originated loans and for incremental reserves required for pre-merger loans based on estimates of deteriorated credit quality post-merger.

The provision for loan losses for the three months ended September 30, 2012 and 2011 was $228 thousand and $400 thousand, respectively. The decrease in the Company’s loan loss provision resulted principally from lower levels of nonperforming and impaired loans requiring specific allocations within the Company’s allowance for loan losses.

Noninterest Income

Noninterest income totaled $3.2 million for the three months ended September 30, 2012 compared to $1.7 million the three months ended September 30, 2011, an increase of $1.5 million. This increase was principally due to net gains recognized on repossessed collateral of $451 thousand for the three months ended September 30, 2012, compared to a net loss of $77 thousand for the quarter ended September 30, 2012, an increase of $100 thousand, or 15.2%, on sales of residential mortgage loans, compared to the quarter ended September 30, 2011 and net securities gains of $792 thousand for the quarter ended September 30, 2012, compared to a net loss of $53 thousand in the quarter ended September 30, 2011.

The net gain recognized on repossessed collateral during the quarter ended September 30, 2012 principally resulted from $473 thousand realized on the sale of real estate previously securing a purchased loan. Increases in security gains resulted from the sale of a substantial portion of the Company’s available-for-sale investment portfolio during the period. The Company reinvested the sales proceeds in government guaranteed mortgage-backed securities similar in composition to the securities sold, albeit at lower market yields. Increased gains on residential mortgage loan sales resulted principally from the volume of fixed-rate loan originations during the period, an increase driven by an increased level of mortgage loan refinance and purchase activity. The Company sold $35.1 million in residential mortgages during the three months ended September 30, 2012, compared to $27.3 million in quarter ended September 30, 2011.

 

40


Table of Contents

Noninterest Expense

Noninterest expense totaled $7.5 million for the three months ended September 30, 2012 compared to $6.6 million the three months ended September 30, 2011, an increase of $903 thousand. The primary components of this increase were an increase of $172 thousand in loan acquisition and collection costs, a $340 thousand increase in employee compensation, and a $229 thousand increase in occupancy and equipment expense.

The aforementioned increases were associated with the implementation of the Company’s business strategy over the past twelve months. Loan costs, such as acquisition diligence, collections, and servicing have increased principally due to growth in the Company’s purchased loan portfolio. Employee compensation has increased principally due to staff increases in LASG, ableBanking, and risk management, finance, and back-office operations. Full-time equivalent employees totaled 205 at September 30, 2012, compared to 192 at September 30, 2011. Increased occupancy and equipment expenses are principally due to depreciation and maintenance associated with investments in new business initiatives, such as ableBanking.

Income Taxes

The Company’s income tax expense was $484 thousand, or an effective rate of 31.9%, for the quarter ended September 30, 2012, as compared to a tax benefit of $403 thousand for the quarter ended September 30, 2011. The effective rate for quarter ended September 30, 2012 differs from the Company’s statutory rate because of the level of projected annual pre-tax income and favorable book to tax differences, such as tax credits and tax exempt life insurance income. The tax benefit realized in the quarter ended September 30, 2011 was the result of a net loss from continuing operations, in addition favorable book to tax differences.

Results of Operations – Discontinued Operations

In the quarter ended September 30, 2011, the Company sold intangible assets (principally customer lists) and certain fixed assets of 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 now operates under the name of Spence & Matthews, was acquired by a member of NBIG’s senior management team. In connection with the transaction, the Company also repaid borrowings associated with NBIG totaling $2.1 million.

The Company no longer conducts any significant operations in the insurance agency business, and therefore has classified the operating results of NBIG, and the associated gain on sale of the division, as discontinued operations in the consolidated financial statements. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 6: “Discontinued Operations” for further details.

Net income from discontinued operations for the quarter ended September 30, 2011 was $1.1 million. Income for the quarter included a $1.5 million pre-tax gain on sale of the assets of NBIG, and pre-tax income associated with operations of $186 thousand. Income taxes associated with discontinued operations totaled $592 thousand, or an effective rate of 34.6%, for the quarter ended September 30, 2011.

 

41


Table of Contents
Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer (the Company’s principal executive officer and principal financial officer, respectively), as appropriate to allow for timely decisions regarding timely disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost/benefit relationship of possible controls and procedures.

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d – 15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on this evaluation of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2012.

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a – 15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2012 that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

None.

 

Item 1A. Risk Factors

Not required for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

42


Table of Contents
Item 6. Exhibits

 

Exhibits
No.

  

Description

  31.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *
  31.2    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *
  32.1    Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **
  32.2    Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **
101    The following materials from Northeast Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2012 and June 30, 2012; (ii) Consolidated Statements of Income for the three months ended September 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the three months ended September 30, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30 2012 and 2011; (v) Consolidated Statements of Cash Flows for the three months ended September 30, 2012 and 2011; and (v) Notes to Unaudited Consolidated Financial Statements. ***

 

* Filed herewith
** Furnished herewith
*** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

 

43


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 14, 2012       NORTHEAST BANCORP
    By:  

/s/ Richard Wayne

      Richard Wayne
      President and CEO
    By:  

/s/ Claire S. Bean

      Claire S. Bean
      Chief Financial Officer

 

44


Table of Contents

NORTHEAST BANCORP

Index to Exhibits

 

Exhibits
No.

  

Description

  31.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *
  31.2    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *
  32.1    Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **
  32.2    Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **
101    The following materials from Northeast Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2012 and June 30, 2012; (ii) Consolidated Statements of Income for the three months ended September 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the three months ended September 30, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30 2012 and 2011; (v) Consolidated Statements of Cash Flows for the three months ended September 30, 2012 and 2011; and (v) Notes to Unaudited Consolidated Financial Statements. ***

 

* Filed herewith
** Furnished herewith
*** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

 

45

Section 302 CEO Certification
Exhibit 31.1 Certification of the Chief Executive Officer

Chief Executive Officer Certification

Pursuant To Section 302 Of

The Sarbanes-Oxley Act Of 2002

I, Richard Wayne, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Northeast Bancorp;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 14, 2012  

/s/ Richard Wayne

  Richard Wayne
  Chief Executive Officer
Section 302 CFO Certification
Exhibit 31.2 Certification of the Chief Financial Officer

Chief Financial Officer Certification

Pursuant To Section 302 Of

The Sarbanes-Oxley Act Of 2002

I, Claire Bean, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Northeast Bancorp;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 14, 2012  

/s/ Claire S. Bean

  Claire S. Bean
  Chief Financial Officer
Section 906 CEO Certification
Exhibit 32.1. Certificate of the Chief Executive Officer

Certification of the Chief Executive Officer Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Northeast Bancorp. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Wayne, as Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and the periods covered by the Report.

This certification shall not be deemed “filed” for any purpose, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 regardless of any general incorporation language in such filing.

 

November 14, 2012  

/s/ Richard Wayne

  Richard Wayne
  Chief Executive Officer
Section 906 CFO Certification
Exhibit 32.2. Certificate of the Chief Financial Officer

Certification of the Chief Financial Officer Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Northeast Bancorp. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Claire Bean, as Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and the periods covered by the Report.

This certification shall not be deemed “filed” for any purpose, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 regardless of any general incorporation language in such filing.

 

November 14, 2012  

/s/ Claire S. Bean

  Claire S. Bean
  Chief Financial Officer