Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 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 o

 

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

 

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

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer o

Smaller Reporting Company x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of January 31, 2013, the registrant had outstanding 9,467,372 shares of voting common stock, $1.00 par value per share and 916,069 shares of non-voting common stock, $1.00 par value per share.

 

 

 



Table of Contents

 

Part I.

Financial Information

 

Item 1.

Financial Statements (unaudited)

 

 

Consolidated Balance Sheets
December 31, 2012 and June 30, 2012

 

 

 

 

 

Consolidated Statements of Income
Three Months Ended December 31, 2012 and 2011
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Comprehensive Income
Three Months Ended December 31, 2012 and 2011
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

Consolidated Statements of Cash Flows
Six Months Ended December 31, 2012 and 2011

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

Item 4.

Mine Safety Disclosures

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

2



Table of Contents

 

PART 1- FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

 

 

 

December 31, 2012

 

June 30, 2012

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

3,284

 

$

2,538

 

Short-term investments

 

124,328

 

125,736

 

Total cash and cash equivalents

 

127,612

 

128,274

 

 

 

 

 

 

 

Available-for-sale securities, at fair value

 

133,363

 

133,264

 

Loans held for sale

 

8,262

 

9,882

 

 

 

 

 

 

 

Loans

 

392,583

 

356,254

 

Less: Allowance for loan losses

 

875

 

824

 

Loans, net

 

391,708

 

355,430

 

 

 

 

 

 

 

Premises and equipment, net

 

10,434

 

9,205

 

Repossessed collateral, net

 

2,633

 

834

 

Accrued interest receivable

 

2,068

 

1,840

 

Federal Home Loan Bank stock, at cost

 

4,602

 

4,602

 

Federal Reserve Bank stock, at cost

 

871

 

871

 

Intangible assets, net

 

3,957

 

4,487

 

Bank owned life insurance

 

14,148

 

14,295

 

Other assets

 

5,052

 

6,212

 

Total assets

 

$

704,710

 

$

669,196

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Demand

 

$

48,136

 

$

45,323

 

Savings and interest checking

 

86,231

 

90,204

 

Money market

 

58,351

 

45,024

 

Time deposits

 

308,800

 

241,637

 

Total deposits

 

501,518

 

422,188

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

43,213

 

43,450

 

Structured repurchase agreements

 

25,637

 

66,183

 

Short-term borrowings

 

1,570

 

1,209

 

Junior subordinated debentures issued to affiliated trusts

 

8,186

 

8,106

 

Capital lease obligation

 

1,827

 

1,911

 

Other liabilities

 

7,828

 

7,010

 

Total liabilities

 

589,779

 

550,057

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at December 31, 2012; 4,227 shares issued and outstanding at June 30, 2012; liquidation preference of $1,000 per share

 

0

 

4

 

Voting common stock, $1.00 par value, 25,000,000 and 13,500,000 shares authorized at December 31, 2012 and June 30, 2012, respectively; 9,467,372 and 9,307,127 issued and outstanding at December 31, 2012 and June 30, 2012, respectively

 

9,467

 

9,307

 

Non-voting common stock, $1.00 par value, 3,000,000 and 1,500,000 shares authorized at December 31, 2012 and June 30, 2012, respectively; 916,069 and 1,076,314 issued and outstanding at December 31, 2012 and June 30, 2012, respectively

 

916

 

1,076

 

Warrants to purchase common stock

 

0

 

406

 

Additional paid-in capital

 

92,570

 

96,080

 

Unearned restricted stock

 

(109

)

(127

)

Retained earnings

 

12,534

 

12,235

 

Accumulated other comprehensive (loss) income

 

(447

)

158

 

Total stockholders’ equity

 

114,931

 

119,139

 

Total liabilities and stockholders’ equity

 

$

704,710

 

$

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 December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

8,267

 

$

5,874

 

$

15,608

 

$

11,011

 

Interest on available-for-sale securities

 

348

 

541

 

695

 

1,180

 

Other interest and dividend income

 

109

 

57

 

198

 

116

 

Total interest and dividend income

 

8,724

 

6,472

 

16,501

 

12,307

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

1,028

 

836

 

2,006

 

1,673

 

Federal Home Loan Bank advances

 

259

 

258

 

518

 

516

 

Structured repurchase agreements

 

161

 

249

 

380

 

497

 

Short-term borrowings

 

5

 

3

 

11

 

8

 

Junior subordinated debentures issued to affiliated trusts

 

191

 

185

 

384

 

368

 

Obligation under capital lease agreements

 

23

 

25

 

47

 

51

 

Total interest expense

 

1,667

 

1,556

 

3,346

 

3,113

 

 

 

 

 

 

 

 

 

 

 

Net interest and dividend income before provision for loan losses

 

7,057

 

4,916

 

13,155

 

9,194

 

Provision for loan losses

 

247

 

134

 

475

 

534

 

Net interest and dividend income after provision for loan losses

 

6,810

 

4,782

 

12,680

 

8,660

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Fees for other services to customers

 

462

 

370

 

772

 

710

 

Net securities gains

 

0

 

433

 

792

 

380

 

Gain on sales of loans held for sale

 

914

 

770

 

1,670

 

1,426

 

Gain on sales of portfolio loans

 

998

 

203

 

998

 

203

 

Gain recognized on repossessed collateral, net

 

0

 

73

 

451

 

50

 

Investment commissions

 

799

 

704

 

1,474

 

1,391

 

Bank-owned life insurance income

 

358

 

126

 

481

 

253

 

Other noninterest income

 

13

 

13

 

56

 

57

 

Total noninterest income

 

3,544

 

2,692

 

6,694

 

4,470

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,413

 

3,729

 

8,470

 

7,446

 

Occupancy and equipment expense

 

1,147

 

916

 

2,225

 

1,765

 

Professional fees

 

399

 

277

 

822

 

692

 

Data processing fees

 

284

 

289

 

552

 

563

 

Marketing expense

 

252

 

254

 

439

 

345

 

Loan acquisition and collection expense

 

479

 

288

 

933

 

570

 

FDIC insurance premiums

 

122

 

122

 

239

 

239

 

Intangible asset amortization

 

265

 

337

 

530

 

673

 

Other noninterest expense

 

771

 

665

 

1,425

 

1,237

 

Total noninterest expense

 

8,132

 

6,877

 

15,635

 

13,530

 

 

 

 

 

 

 

 

 

 

 

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

 

2,222

 

597

 

3,739

 

(400

)

Income tax expense (benefit)

 

705

 

179

 

1,189

 

(224

)

Net income (loss) from continuing operations

 

$

1,517

 

$

418

 

$

2,550

 

$

(176

)

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

0

 

$

0

 

$

0

 

$

186

 

Gain on sale of discontinued operations

 

0

 

0

 

0

 

1,529

 

Income tax expense

 

0

 

0

 

0

 

592

 

Net income from discontinued operations

 

$

0

 

$

0

 

$

0

 

$

1,123

 

Net income

 

$

1,517

 

$

418

 

$

2,550

 

$

947

 

Net income available to common stockholders

 

$

1,259

 

$

320

 

$

2,195

 

$

751

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

10,383,441

 

3,494,498

 

10,383,441

 

3,494,498

 

Diluted

 

10,383,441

 

3,511,994

 

10,383,441

 

3,494,498

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.12

 

$

0.09

 

$

0.21

 

$

(0.11

)

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.32

 

Net income

 

$

0.12

 

$

0.09

 

$

0.21

 

$

0.21

 

Diluted:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.12

 

$

0.09

 

$

0.21

 

$

(0.11

)

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.32

 

Net income

 

$

0.12

 

$

0.09

 

$

0.21

 

$

0.21

 

Cash dividends declared per common share

 

$

0.09

 

$

0.09

 

$

0.18

 

$

0.18

 

 

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

 

4



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income

 

$

1,517

 

$

418

 

$

2,550

 

$

947

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

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

 

(311

)

(273

)

(154

)

1,363

 

Reclassification adjustment for net gains included in net income

 

0

 

(433

)

(792

)

(380

)

Total available-for-sale securities

 

(311

)

(706

)

(946

)

983

 

Derivatives and hedging activities:

 

 

 

 

 

 

 

 

 

Change in accumulated loss on effective cash flow hedges

 

59

 

55

 

65

 

(143

)

Reclassification adjustments for net gains included in net income

 

(19

)

(21

)

(37

)

(43

)

Total derivatives and hedging activities

 

40

 

34

 

28

 

(186

)

Total other comprehensive (loss) income , before tax

 

(271

)

(672

)

(918

)

797

 

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

 

(93

)

(229

)

(313

)

271

 

Other comprehensive (loss) income, net of tax

 

(178

)

(443

)

(605

)

526

 

Comprehensive income (loss)

 

$

1,339

 

$

(25

)

$

1,945

 

$

1,473

 

 

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)

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

Unearned

 

 

 

Accumulated
Other

 

Total

 

 

 

Preferred Stock

 

Voting Common Stock

 

Non-voting Common Stock

 

to Purchase

 

Additional

 

Restricted

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Common Stock

 

Paid-in Capital

 

Stock

 

Earnings

 

Income (Loss)

 

Equity

 

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

 

947

 

0

 

947

 

Other comprehensive income, net of tax

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

526

 

526

 

Dividends on preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(106

)

0

 

(106

)

Dividends on common stock at $0.18 per share

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(631

)

0

 

(631

)

Stock-based compensation

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

192

 

18

 

0

 

0

 

210

 

Accretion of preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

90

 

0

 

(90

)

0

 

0

 

Balance at December 31, 2011

 

4,227

 

$

4

 

3,312,173

 

$

3,312

 

195,351

 

$

195

 

$

406

 

$

49,982

 

$

(145

)

$

11,846

 

$

300

 

$

65,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2,550

 

0

 

2,550

 

Other comprehensive loss, net of tax

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(605

)

(605

)

Conversion of non-voting common stock to voting common stock

 

0

 

0

 

160,245

 

160

 

(160,245

)

(160

)

0

 

0

 

0

 

0

 

0

 

0

 

Dividends on preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(113

)

0

 

(113

)

Dividends on common stock at $0.18 per share

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(1,870

)

0

 

(1,870

)

Offering costs

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

(60

)

0

 

0

 

0

 

(60

)

Stock-based compensation

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

194

 

18

 

0

 

0

 

212

 

Redemption of preferred stock and warrants

 

(4,227

)

(4

)

0

 

0

 

0

 

0

 

(406

)

(3,912

)

0

 

0

 

0

 

(4,322

)

Accretion of preferred stock

 

0

 

0

 

0

 

0

 

0

 

0

 

0

 

268

 

0

 

(268

)

0

 

0

 

Balance at December 31, 2012

 

0

 

$

0

 

9,467,372

 

$

9,467

 

916,069

 

$

916

 

0

 

$

92,570

 

$

(109

)

$

12,534

 

$

(447

)

$

114,931

 

 

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

 

6



Table of Contents

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

Operating activities:

 

 

 

 

 

Net income

 

$

2,550

 

$

947

 

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

 

 

 

 

 

Provision for loan losses

 

475

 

534

 

Gain on sale or impairment of repossessed collateral, net

 

(451

)

(50

)

Accretion of fair value adjustments on loans, net

 

(3,505

)

(1,124

)

Accretion of fair value adjustments on deposits, net

 

(537

)

(716

)

Accretion of fair value adjustments on borrowings, net

 

(703

)

(1,088

)

Originations of loans held for sale

 

(73,982

)

(72,454

)

Net proceeds from sales of loans held for sale

 

77,272

 

70,867

 

Gain on sales of loans held for sale

 

(1,670

)

(1,426

)

Gain on sales of portfolio loans

 

(998

)

(203

)

Amortization of intangible assets

 

530

 

742

 

Bank-owned life insurance income, net

 

(481

)

(253

)

Depreciation of premises and equipment

 

842

 

604

 

Loss on sale of premises and equipment

 

0

 

2

 

Net gain on sale of available-for-sale securities

 

(792

)

(380

)

Stock-based compensation

 

212

 

210

 

Gain on sale of assets of insurance division

 

0

 

(1,529

)

Amortization of securities, net

 

794

 

843

 

Changes in other assets and liabilities:

 

 

 

 

 

Interest receivable

 

(228

)

(517

)

Decrease in prepaid FDIC assessment

 

220

 

323

 

Other assets and liabilities

 

2,099

 

372

 

Net cash provided by (used in) operating activities

 

1,647

 

(4,296

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Proceeds from sales of available-for-sale securities

 

159,579

 

49,053

 

Purchases of available-for-sale securities

 

(167,294

)

(51,274

)

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

 

6,668

 

12,223

 

Loan purchases

 

(63,887

)

(51,662

)

Loan originations and principal collections, net

 

24,193

 

14,141

 

Purchases of premises and equipment

 

(2,071

)

(1,754

)

Proceeds from sales of portfolio loans

 

5,189

 

711

 

Proceeds from sales of repossessed collateral

 

907

 

660

 

Proceeds from life insurance benefits

 

628

 

0

 

Proceeds from sale of assets of insurance division

 

0

 

9,726

 

Net cash used in investing activities

 

(36,088

)

(18,176

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Net increase in deposits

 

79,867

 

622

 

Net increase (decrease) in short-term borrowings

 

361

 

(771

)

Dividends paid on preferred stock

 

(113

)

(106

)

Dividends paid on common stock

 

(1,870

)

(631

)

Stock offering costs

 

(60

)

0

 

Repayment of structured repurchase agreements

 

(40,000

)

0

 

Repayment of other borrowings

 

0

 

(2,129

)

Redemption of preferred stock and warrants

 

(4,322

)

0

 

Repayment of capital lease obligation

 

(84

)

(81

)

Net cash provided by (used in) financing activities

 

33,779

 

(3,096

)

Net decrease in cash and cash equivalents

 

(662

)

(25,568

)

Cash and cash equivalents, beginning of period

 

128,274

 

83,931

 

Cash and cash equivalents, end of period

 

$

127,612

 

$

58,363

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Transfers from loans to repossessed collateral

 

$

3,310

 

$

757

 

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

December 31, 2012

 

1.  Basis of Presentation

 

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

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position at December 31, 2012, the results of operations for the three and six months ended December 31, 2012 and 2011, comprehensive income for the three and six months ended December 31, 2012 and 2011, the changes in stockholders’ equity for the six months ended December 31, 2012 and 2011, and the cash flows for the six months ended December 31, 2012 and 2011. Operating results for the six months ended December 31, 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:

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

45,556

 

$

45,618

 

$

45,824

 

$

45,808

 

Agency mortgage-backed securities

 

88,128

 

87,745

 

86,816

 

87,456

 

 

 

$

133,684

 

$

133,363

 

$

132,640

 

$

133,264

 

 

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

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Gross

 

Gross

 

Gross

 

Gross

 

 

 

Unrealized

 

Unrealized

 

Unrealized

 

Unrealized

 

 

 

Gains

 

Losses

 

Gains

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

62

 

$

0

 

$

5

 

$

21

 

Agency mortgage-backed securities

 

95

 

478

 

640

 

0

 

 

 

$

157

 

$

478

 

$

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 December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Gross realized gains

 

$

0

 

$

433

 

$

831

 

$

447

 

Gross realized losses

 

0

 

0

 

(39

)

(67

)

Net security gains

 

$

0

 

$

433

 

$

792

 

$

380

 

 

At December 31, 2012, investment securities with a fair value of approximately $43.1 million were pledged as collateral to secure outstanding borrowings.

 

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

 

 

 

December 31, 2012

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

Agency mortgage-backed securities

 

68,560

 

478

 

0

 

0

 

68,560

 

478

 

 

 

$

68,560

 

$

478

 

$

0

 

$

0

 

$

68,560

 

$

478

 

 

 

 

June 30, 2012

 

 

 

Less than 12 Months

 

More than 12 Months

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

(Dollars in thousands)

 

U.S. Government agency securities

 

$

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 and six months ended December 31, 2012 or 2011.

 

At December 31, 2012, the Company did not have any securities in a continuous loss position for greater than twelve months.  At December 31, 2012, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or

 

9



Table of Contents

 

government-sponsored enterprises.  The decline in fair value of the Company’s available-for-sale securities at December 31, 2012 is attributable to changes in interest rates.

 

Management of the Company, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company’s investment portfolio, also considers the Company’s ability and intent to hold such securities to maturity or recovery of cost.  Management does not believe any of the Company’s available-for-sale securities are other-than-temporarily impaired at December 31, 2012.

 

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

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

(Dollars in thousands)

 

Due within one year

 

$

12,080

 

$

12,096

 

Due after one year through five years

 

33,476

 

33,522

 

Due after five years through ten years

 

47,276

 

47,135

 

Due after ten years

 

40,852

 

40,610

 

 

 

$

133,684

 

$

133,363

 

 

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 the Bank’s 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.  Interest on nonaccrual loans is accounted for on a cash-basis or using the cost-recovery method when collectability is doubtful.  A loan is returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a reasonable period of time.

 

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”).  Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. For loans accounted for under ASC 310-30, the Company evaluates whether it has granted a concession by comparing the restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition.  As a result, if an ASC 310-30 loan is modified to be consistent with, or better than, the Company’s expectations at acquisition, the loan would not qualify as a TDR. Nonaccrual loans that are restructured generally remain on nonaccrual 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.

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Originated

 

Purchased

 

Total

 

Originated

 

Purchased

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate

 

$

84,678

 

$

4,254

 

$

88,932

 

$

90,944

 

$

3,931

 

$

94,875

 

Home equity

 

39,041

 

0

 

39,041

 

42,696

 

0

 

42,696

 

Commercial real estate

 

103,071

 

129,470

 

232,541

 

100,196

 

80,539

 

180,735

 

Construction

 

42

 

0

 

42

 

1,187

 

0

 

1,187

 

Commercial business

 

17,134

 

0

 

17,134

 

19,612

 

0

 

19,612

 

Consumer

 

14,893

 

0

 

14,893

 

17,149

 

0

 

17,149

 

Total loans

 

$

258,859

 

$

133,724

 

$

392,583

 

$

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 six months ended December 31, 2012 and 2011.

 

 

 

PCI Loans Acquired

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Contractually required payments receivable

 

$

44,575

 

$

10,064

 

Nonaccretable difference

 

(10,814

)

(2,958

)

Cash flows expected to be collected

 

33,761

 

7,106

 

Accretable yield

 

(14,214

)

(3,122

)

Fair value of loans acquired

 

$

19,547

 

$

3,984

 

 

 

 

PCI Loans: Activity in Accretable Yield

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

7,169

 

$

0

 

Accretion

 

(2,052

)

(564

)

Acquisitions

 

14,214

 

3,122

 

Reclassifications from nonaccretable difference

 

894

 

210

 

Disposals and transfers

 

(2,951

)

(614

)

Other changes

 

23

 

0

 

End balance

 

$

17,297

 

$

2,154

 

 

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

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

(Dollars in thousands)

 

Unpaid principal balance

 

$

49,768

 

$

21,359

 

Carrying amount

 

$

30,104

 

$

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:  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 and six months ended December 31, 2012.

 

The allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial business and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment based on the group’s historical loss experience adjusted for qualitative factors.  Accordingly, the Company does not 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 December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

301

 

$

71

 

$

53

 

$

243

 

$

0

 

$

668

 

Provision (benefit)

 

199

 

32

 

(6

)

22

 

0

 

247

 

Recoveries

 

0

 

0

 

0

 

5

 

0

 

5

 

Charge-offs

 

(8

)

(1

)

0

 

(36

)

0

 

(45

)

Ending balance

 

$

492

 

$

102

 

$

47

 

$

234

 

$

0

 

$

875

 

 

 

 

Three months ended December 31, 2011

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

124

 

$

114

 

$

418

 

$

54

 

$

0

 

$

710

 

Provision (benefit)

 

33

 

33

 

(191

)

259

 

0

 

134

 

Recoveries

 

1

 

0

 

12

 

13

 

0

 

26

 

Charge-offs

 

(33

)

0

 

(8

)

(92

)

0

 

(133

)

Ending balance

 

$

125

 

$

147

 

$

231

 

$

234

 

$

0

 

$

737

 

 


(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.

 

 

 

Six months ended December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

214

 

$

93

 

$

292

 

$

225

 

$

0

 

$

824

 

Provision (benefit)

 

412

 

9

 

(42

)

96

 

0

 

475

 

Recoveries

 

1

 

0

 

0

 

7

 

0

 

8

 

Charge-offs

 

(135

)

0

 

(203

)

(94

)

0

 

(432

)

Ending balance

 

$

492

 

$

102

 

$

47

 

$

234

 

$

0

 

$

875

 

 

 

 

Six months ended December 31, 2011

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Purchased (1)

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

 

$

34

 

$

147

 

$

238

 

$

18

 

$

0

 

$

437

 

Provision (benefit)

 

147

 

24

 

(33

)

396

 

0

 

534

 

Recoveries

 

1

 

0

 

34

 

28

 

0

 

63

 

Charge-offs

 

(57

)

(24

)

(8

)

(208

)

0

 

(297

)

Ending balance

 

$

125

 

$

147

 

$

231

 

$

234

 

$

0

 

$

737

 

 


(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.

 

14



Table of Contents

 

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

 

 

 

December 31, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

Business

 

Consumer

 

Total

 

 

 

(Dollars in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

248

 

$

74

 

$

44

 

$

28

 

$

394

 

Collectively evaluated

 

244

 

28

 

3

 

206

 

481

 

Purchased (1)

 

0

 

0

 

0

 

0

 

0

 

Total

 

$

492

 

$

102

 

$

47

 

$

234

 

$

875

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

2,617

 

$

2,052

 

$

119

 

$

154

 

$

4,942

 

Collectively evaluated

 

121,102

 

101,061

 

17,015

 

14,739

 

253,917

 

Purchased (1) 

 

4,254

 

129,470

 

0

 

0

 

133,724

 

Total

 

$

127,973

 

$

232,583

 

$

17,134

 

$

14,893

 

$

392,583

 

 

 

 

June 30, 2012

 

 

 

Residential

 

Commercial

 

Commercial

 

 

 

 

 

 

 

Real Estate

 

Real Estate

 

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.

 

15



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 December 31, 2012

 

At June 30, 2012

 

 

 

 

 

Unpaid

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Principal

 

Related

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Balance

 

Allowance

 

 

 

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

996

 

$

1,061

 

$

0

 

$

293

 

$

483

 

$

0

 

Consumer

 

82

 

87

 

0

 

0

 

0

 

0

 

Commercial real estate

 

1,321

 

1,408

 

0

 

1,482

 

1,738

 

0

 

Commercial business

 

75

 

129

 

0

 

377

 

692

 

0

 

Purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

0

 

0

 

0

 

1,055

 

1,462

 

0

 

Residential real estate

 

0

 

0

 

0

 

0

 

0

 

0

 

Total

 

2,474

 

2,685

 

0

 

3,207

 

4,375

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

1,621

 

1,578

 

248

 

106

 

103

 

3

 

Consumer

 

72

 

74

 

28

 

0

 

0

 

0

 

Commercial real estate

 

730

 

787

 

74

 

575

 

565

 

41

 

Commercial business

 

44

 

79

 

44

 

750

 

817

 

284

 

Purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

0

 

0

 

0

 

0

 

0

 

0

 

Residential real estate

 

0

 

0

 

0

 

0

 

0

 

0

 

Total

 

2,467

 

2,518

 

394

 

1,431

 

1,485

 

328

 

Total impaired loans

 

$

4,941

 

$

5,203

 

$

394

 

$

4,638

 

$

5,860

 

$

328

 

 

16



Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31, 2012

 

December 31, 2012

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Recognized

 

Investment

 

Recognized

 

 

 

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

904

 

$

8

 

$

700

 

$

13

 

Consumer

 

64

 

1

 

42

 

2

 

Commercial real estate

 

1,285

 

19

 

1,351

 

29

 

Commercial business

 

119

 

0

 

205

 

3

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

0

 

0

 

352

 

0

 

Residential real estate

 

0

 

0

 

0

 

0

 

Total

 

2,372

 

28

 

2,650

 

57

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

1,178

 

17

 

821

 

26

 

Consumer

 

74

 

1

 

49

 

2

 

Commercial real estate

 

628

 

7

 

610

 

13

 

Commercial business

 

46

 

0

 

280

 

0

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

0

 

0

 

0

 

0

 

Residential real estate

 

0

 

0

 

0

 

0

 

Total

 

1,926

 

25

 

1,760

 

41

 

Total impaired loans

 

$

4,298

 

$

53

 

$

4,410

 

$

98

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31, 2011

 

December 31, 2011

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 

 

Investment

 

Recognized

 

Investment

 

Recognized

 

 

 

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

271

 

$

7

 

$

181

 

$

8

 

Consumer

 

0

 

0

 

0

 

0

 

Commercial real estate

 

1,549

 

37

 

1,148

 

58

 

Commercial business

 

340

 

1

 

578

 

5

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

0

 

0

 

0

 

0

 

Residential real estate

 

0

 

0

 

0

 

0

 

Total

 

2,160

 

45

 

1,907

 

71

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

Originated:

 

 

 

 

 

 

 

 

 

Residential real estate

 

73

 

0

 

49

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

Commercial real estate

 

268

 

3

 

469

 

3

 

Commercial business

 

678

 

0

 

741

 

0

 

Purchased:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

0

 

0

 

0

 

0

 

Residential real estate

 

0

 

0

 

0

 

0

 

Total

 

1,019

 

3

 

1,259

 

3

 

Total impaired loans

 

$

3,179

 

$

48

 

$

3,166

 

$

74

 

 

17



Table of Contents

 

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 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.

 

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

 

 

 

December 31, 2012

 

 

 

Originated Portfolio

 

 

 

 

 

Commercial

 

 

 

Commercial

 

Purchased

 

 

 

Real Estate

 

Construction

 

Business

 

Portfolio

 

 

 

(Dollars in thousands)

 

Loans rated 1- 6

 

$

99,849

 

$

42

 

$

16,819

 

$

132,487

 

Loans rated 7

 

1,947

 

0

 

52

 

112

 

Loans rated 8

 

1,275

 

0

 

263

 

1,125

 

Loans rated 9

 

0

 

0

 

0

 

0

 

Loans rated 10

 

0

 

0

 

0

 

0

 

 

 

$

103,071

 

$

42

 

$

17,134

 

$

133,724

 

 

 

 

June 30, 2012

 

 

 

Originated Portfolio

 

 

 

 

 

Commercial

 

 

 

Commercial

 

Purchased

 

 

 

Real Estate

 

Construction

 

Business

 

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

 

 

18



Table of Contents

 

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

 

 

 

December 31, 2012

 

 

 

 

 

 

 

Past Due

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days or

 

90 Days or

 

Total

 

 

 

 

 

Non-

 

 

 

30-59

 

60-89

 

More-Still

 

More-

 

Past

 

Total

 

Total

 

Accrual

 

 

 

Days

 

Days

 

Accruing

 

Nonaccrual

 

Due

 

Current

 

Loans

 

Loans

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

369

 

$

667

 

$

0

 

$

3,020

 

$

4,056

 

$

80,622

 

$

84,678

 

$

3,512

 

Home equity

 

9

 

56

 

0

 

302

 

367

 

38,674

 

39,041

 

620

 

Commercial real estate

 

735

 

0

 

0

 

374

 

1,109

 

101,962

 

103,071

 

624

 

Construction

 

0

 

0

 

0

 

0

 

0

 

42

 

42

 

0

 

Commercial business

 

18

 

10

 

0

 

44

 

72

 

17,062

 

17,134

 

123

 

Consumer

 

284

 

202

 

0

 

147

 

633

 

14,260

 

14,893

 

166

 

Total originated portfolio

 

1,415

 

935

 

0

 

3,887

 

6,237

 

252,622

 

258,859

 

5,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

45

 

0

 

0

 

0

 

45

 

4,209

 

4,254

 

0

 

Commercial real estate

 

1,588

 

332

 

0

 

1,706

 

3,626

 

125,844

 

129,470

 

2,144

 

Total purchased portfolio

 

1,633

 

332

 

0

 

1,706

 

3,671

 

130,053

 

133,724

 

2,144

 

Total loans

 

$

3,048

 

$

1,267

 

$

0

 

$

5,593

 

$

9,908

 

$

382,675

 

$

392,583

 

$

7,189

 

 

 

 

June 30, 2012

 

 

 

 

 

 

 

Past Due

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90 Days or

 

90 Days or

 

Total

 

 

 

 

 

Non-

 

 

 

30-59

 

60-89

 

More-Still

 

More-

 

Past

 

Total

 

Total

 

Accrual

 

 

 

Days

 

Days

 

Accruing

 

Nonaccrual

 

Due

 

Current

 

Loans

 

Loans

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

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

 

 

The following table shows loans modified in a TDR for the periods indicated 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 periods.

 

 

 

Three Months Ended December 31, 2012

 

Six Months Ended December 31, 2012

 

 

 

 

 

Recorded

 

Recorded

 

 

 

Recorded

 

Recorded

 

 

 

Number of

 

Investment

 

Investment

 

Number of

 

Investment

 

Investment

 

 

 

Contracts

 

Pre-Modification

 

Post-Modification

 

Contracts

 

Pre-Modification

 

Post-Modification

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

3

 

$

453

 

$

453

 

4

 

$

675

 

$

675

 

Home equity

 

2

 

278

 

278

 

2

 

278

 

278

 

Commercial real estate

 

0

 

0

 

0

 

0

 

0

 

0

 

Construction

 

0

 

0

 

0

 

0

 

0

 

0

 

Commercial business

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer

 

3

 

8

 

8

 

3

 

8

 

8

 

Total originated portfolio

 

8

 

739

 

739

 

9

 

961

 

961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

8

 

$

739

 

$

739

 

9

 

$

961

 

$

961

 

 

Further, during the first quarter of Fiscal 2013, 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.

 

19



Table of Contents

 

The following table shows the Company’s post-modification balance of TDRs by type of modification.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31, 2012

 

December 31, 2012

 

 

 

Number of

 

Recorded

 

Number of

 

Recorded

 

 

 

Contracts

 

Investment

 

Contracts

 

Investment

 

 

 

(Dollars in thousands)

 

Extended maturity

 

1

 

$

242

 

1

 

$

242

 

Adjusted interest rate

 

0

 

0

 

0

 

0

 

Rate and maturity

 

6

 

461

 

7

 

683

 

Court ordered concession

 

1

 

36

 

1

 

36

 

 

 

8

 

$

739

 

9

 

$

961

 

 

The Company considers TDRs past due 90 days or more to be in payment default.  One loan modified in a troubled debt restructuring in the last twelve months defaulted during the three and six months ended December 31, 2012; the recorded investment of such loan was $36 thousand.  As of December 31, 2012, there were no further commitments to lend associated with loans modified in a TDR.

 

There were no loans modified in a TDR during the three or six months ended December 31, 2011. At December 31, 2011, there were no material payment defaults of loans modified in a TDR during the preceding twelve months.

 

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

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

On Accrual

 

On Nonaccrual

 

 

 

On Accrual

 

On Nonaccrual

 

 

 

 

 

Status

 

Status

 

Total

 

Status

 

Status

 

Total

 

 

 

(Dollars in thousands)

 

Originated portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

932

 

$

800

 

$

1,732

 

$

92

 

$

139

 

$

231

 

Home equity

 

33

 

297

 

330

 

20

 

0

 

20

 

Commercial real estate

 

1,068

 

0

 

1,068

 

1,053

 

0

 

1,053

 

Construction

 

0

 

0

 

0

 

0

 

0

 

0

 

Commercial business

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer

 

121

 

33

 

154

 

0

 

0

 

0

 

Total originated portfolio

 

2,154

 

1,130

 

3,284

 

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

 

$

2,154

 

$

1,130

 

$

3,284

 

$

1,165

 

$

139

 

$

1,304

 

 

20



Table of Contents

 

5.  Stock-Based Compensation

 

At the 2012 annual meeting of shareholders held on November 28, 2012, the Company’s shareholders approved the Northeast Bancorp Amended and Restated 2010 Stock Option and Incentive Plan (the “Restated Plan”). The Restated Plan amends and restates the Northeast Bancorp 2010 Option and Incentive Plan (the “2010 Plan”).  The key material differences between the 2010 Plan and the Restated Plan are:

 

·                  The maximum number of shares of common stock to be issued under the Restated Plan is increased by 600,000 shares, from 810,054 shares to 1,410,054 shares;

·                  The method by which shares subject to previously granted awards are added back to the Restated Plan has been revised so that the only shares added back to the Restated Plan are those subject to awards that are forfeited, canceled or otherwise terminated. The following shares shall not be added back to the Restated Plan: (i) shares tendered or held back upon exercise of an option or settlement of an award to cover the exercise price or tax withholding, and (ii) shares subject to a stock appreciation right that are not issued in connection with the stock settlement of the stock appreciation right upon exercise thereof.

·                  Minimum vesting periods are required for grants of restricted stock, restricted stock units and performance share awards; and

·                  The term of the Restated Plan will now expire on November 28, 2022, while grants of incentive options under the Restated Plan may be made until September 21, 2022.

 

At December 31, 2012, no incentive awards had been issued under the Restated Plan.

 

A summary of stock option activity for the six months ended December 31, 2012 follows.

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Shares

 

Exercise Price

 

Outstanding at beginning of period

 

796,049

 

$

13.98

 

Granted

 

0

 

0.00

 

Exercised

 

0

 

0.00

 

Forfeited

 

(18,301

)

13.40

 

Outstanding at end of period

 

777,748

 

14.00

 

Exercisable

 

126,714

 

$

14.08

 

 

The following table summarizes information about stock options outstanding at December 31, 2012.

 

Options Outstanding

 

Options Exercisable

 

Weighted

 

 

 

Weighted
Average

 

Aggregate

 

Weighted

 

 

 

Weighted
Average

 

Aggregate

 

Average
Exercise Price

 

Number

 

Remaining
Life

 

Intrinsic
Value

 

Average
Exercise Price

 

Number

 

Remaining
Life

 

Intrinsic
Value

 

$

12.63

 

32,500

 

9.1 years

 

$

0

 

$

12.63

 

0

 

9.1 years

 

$

0

 

13.93

 

583,238

 

8.0 years

 

0

 

13.93

 

94,312

 

8.0 years

 

0

 

14.52

 

162,010

 

8.0 years

 

0

 

14.52

 

32,402

 

8.0 years

 

0

 

14.00

 

777,748

 

8.1 years

 

0

 

14.08

 

126,714

 

8.1 years

 

0

 

 

At December 31, 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 vested on December 29, 2012, and the remainder will vest in three equal annual installments commencing on December 29, 2013.

 

At December 31, 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

 

$

208

 

$

388

 

$

375

 

$

250

 

$

65

 

$

1,286

 

Restricted stock

 

18

 

36

 

36

 

18

 

0

 

108

 

 

 

$

226

 

$

424

 

$

411

 

$

268

 

$

65

 

$

1,394

 

 

21



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 six months ended December 31, 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 December 31, 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.

 

22



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 December 31,

 

Six months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

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

 

Net income

 

$

1,517

 

$

418

 

$

2,550

 

$

947

 

Preferred stock dividends and accretion

 

(258

)

(98

)

(355

)

(196

)

Net income available to common shareholders

 

$

1,259

 

$

320

 

$

2,195

 

$

751

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in calculation of basic EPS

 

10,383,441

 

3,494,498

 

10,383,441

 

3,494,498

 

Incremental shares from assumed exercise of dilutive securities

 

0

 

17,496

 

0

 

0

 

Weighted average shares used in calculation of diluted EPS

 

10,383,441

 

3,511,994

 

10,383,441

 

3,494,498

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.12

 

$

0.09

 

$

0.21

 

$

(0.11

)

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.32

 

Earnings per common share

 

$

0.12

 

$

0.09

 

$

0.21

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.12

 

$

0.09

 

$

0.21

 

$

(0.11

)

Income from discontinued operations

 

0.00

 

0.00

 

0.00

 

0.32

 

Diluted earnings per common share

 

$

0.12

 

$

0.09

 

$

0.21

 

$

0.21

 

 

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

 

 

 

Three Months Ended December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Stock options

 

783,149

 

756,049

 

787,449

 

756,049

 

Warrants

 

65,742

 

67,958

 

66,850

 

67,958

 

 

 

848,891

 

824,007

 

854,299

 

824,007

 

 

23



Table of Contents

 

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 during 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.

 

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.

 

24



Table of Contents

 

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.

 

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.

 

 

 

December 31, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

$

45,618

 

$

0

 

$

45,618

 

$

0

 

Agency mortgage-backed securities

 

88,745

 

0

 

88,745

 

0

 

Other assets — interest rate caps

 

0

 

0

 

0

 

0

 

Liabilities

 

 

 

 

 

 

 

 

 

Other liabilities - interest rate swap

 

$

514

 

$

0

 

$

514

 

$

0

 

 

 

 

June 30, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

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 three and six months ended December 31, 2012 or 2011.

 

25



Table of Contents

 

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

 

 

 

December 31, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Impaired loans

 

$

1,346

 

$

0

 

$

0

 

$

1,346

 

Repossessed collateral

 

1,117

 

0

 

0

 

1,117

 

 

 

 

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

 

 

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

 

 

 

Carrying

 

Fair Value Measurements at December 31, 2012

 

 

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(Dollars in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

127,612

 

$

127,612

 

$

127,612

 

$

0

 

$

0

 

Available-for-sale securities

 

133,363

 

133,363

 

0

 

133,363

 

0

 

Regulatory stock

 

5,473

 

5,473

 

0

 

5,473

 

0

 

Loans held for sale

 

8,262

 

8,267

 

0

 

8,267

 

0

 

Loans, net

 

391,708

 

410,313

 

0

 

0

 

410,313

 

Accrued interest receivable

 

2,068

 

2,068

 

0

 

2,068

 

0

 

Interest rate caps

 

0

 

0

 

0

 

0

 

0

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

501,518

 

504,651

 

0

 

504,651

 

0

 

FHLB advances

 

43,213

 

45,190

 

0

 

45,190

 

0

 

Structured repurchase agreements

 

25,637

 

26,622

 

0

 

26,622

 

0

 

Short-term borrowings

 

1,570

 

1,570

 

0

 

1,570

 

0

 

Capital lease obligation

 

1,827

 

2,105

 

0

 

2,105

 

0

 

Subordinated debentures

 

8,186

 

8,040

 

0

 

0

 

8,040

 

Interest rate swaps

 

514

 

514

 

0

 

514

 

0

 

 

 

 

Carrying

 

Fair Value Measurements at June 30, 2012

 

 

 

Amount

 

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

 

 

26



Table of Contents

 

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.

 

The Company currently holds derivative instruments that contain credit-risk related features that are in a net liability position, which may require that collateral be assigned to dealer banks.  At December 31, 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; no additional collateral was necessary at these dates to immediately settle the interest rate swap.

 

The Company does not offset fair value amounts recognized for derivative instruments.  The Company does not net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement.

 

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.

 

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 and six months ended December 31, 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 and six months ended December 31, 2012 and 2011 related to the balance sheet hedging of long-term debt indicates that the hedges were effective.

 

The table below presents amounts recognized in income related to both hedge ineffectiveness and amounts excluded from effectiveness testing.

 

 

 

Three Months Ended December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Dollars in thousands)

 

Interest income (expense):

 

 

 

 

 

 

 

 

 

Interest rate caps

 

$

(6

)

$

(4

)

$

(14

)

$

(7

)

Interest rate swap

 

25

 

25

 

51

 

50

 

Total

 

$

19

 

$

21

 

$

37

 

$

43

 

 

The Company expects to record interest income of $100 thousand related to interest rate swap ineffectiveness in the next twelve months.  The Company expects to record interest expense of $28 thousand related to its purchased interest rate caps in the next twelve months.

 

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

 

27



Table of Contents

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Interest

 

Interest

 

Interest

 

Interest

 

 

 

Rate Caps

 

Rate Swap

 

Rate Caps

 

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

 

 

 

2.31

%

 

 

2.36

%

Strike rate based on three month LIBOR

 

2.51

%

 

 

2.51

%

 

 

Weighted average maturity in years

 

2.75

 

2.17

 

2.25

 

2.67

 

Unrealized loss

 

$

57

 

$

299

 

$

69

 

$

315

 

 

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

 

December 31, 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

 

$

514

 

 

 

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

 

 

28



Table of Contents

 

10.  Other Comprehensive (Loss) Income

 

The components of other comprehensive (loss) income follow.

 

 

 

Three Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

Pre-tax

 

Tax Expense

 

After-tax

 

Pre-tax

 

Tax Expense

 

After-tax

 

 

 

Amount

 

(Benefit)

 

Amount

 

Amount

 

(Benefit)

 

Amount

 

 

 

(Dollars in thousands)

 

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

 

$

(311

)

$

(107

)

$

(204

)

$

(273

)

$

(93

)

$

(180

)

Reclassification adjustment for net gains included in net income

 

0

 

0

 

0

 

(433

)

(147

)

(286

)

Total available-for-sale securities

 

(311

)

(107

)

(204

)

(706

)

(240

)

(466

)

Change in accumulated loss on effective cash flow hedges

 

59

 

20

 

39

 

55

 

19

 

36

 

Reclassification adjustment for net gains included in net income

 

(19

)

(6

)

(13

)

(21

)

(8

)

(13

)

Total derivatives and hedging activities

 

40

 

14

 

26

 

34

 

11

 

23

 

Total other comprehensive loss

 

$

(271

)

$

(93

)

$

(178

)

$

(672

)

$

(229

)

$

(443

)

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

Pre-tax

 

Tax Expense

 

After-tax

 

Pre-tax

 

Tax Expense

 

After-tax

 

 

 

Amount

 

(Benefit)

 

Amount

 

Amount

 

(Benefit)

 

Amount

 

 

 

(Dollars in thousands)

 

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

 

$

(154

)

$

(52

)

$

(102

)

$

1,363

 

$

463

 

$

900

 

Reclassification adjustment for net gains included in net income

 

(792

)

(270

)

(522

)

(380

)

(129

)

(251

)

Total available-for-sale securities

 

(946

)

(322

)

(624

)

983

 

334

 

649

 

Change in accumulated loss on effective cash flow hedges

 

65

 

22

 

43

 

(143

)

(49

)

(94

)

Reclassification adjustment for net gains included in net income

 

(37

)

(13

)

(24

)

(43

)

(14

)

(29

)

Total derivatives and hedging activities

 

28

 

9

 

19

 

(186

)

(63

)

(123

)

Total other comprehensive (loss) income

 

$

(918

)

$

(313

)

$

(605

)

$

797

 

$

271

 

$

526

 

 

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

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

(Dollars in thousands)

 

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

 

$

(321

)

$

624

 

Tax effect

 

109

 

(212

)

Net-of-tax amount

 

(212

)

412

 

Unrealized loss on cash flow hedges

 

(356

)

(384

)

Tax effect

 

121

 

130

 

Net-of-tax amount

 

(235

)

(254

)

Accumulated other comprehensive (loss) income

 

$

(447

)

$

158

 

 

11.  Stockholders’ Equity

 

Troubled Asset Relief Capital Purchase Program

 

During the quarter ended December 31, 2012, the Company paid $4.2 million to redeem, at par value, all shares of preferred stock issued to the U.S. Department of the Treasury (the “UST”) under the Troubled Asset Relief Program (“TARP”).  The Company also repurchased the warrant for 67,958 shares of common stock issued to the UST in connection with TARP for $95 thousand during the quarter ended December 31, 2012.

 

Authorized Shares

 

At the 2012 annual meeting of shareholders held on November 28, 2012, the Company’s shareholders approved an amendment (the “Amendment”) to the Company’s Amended and Restated Articles of Incorporation, as amended. The Amendment increased (i) the authorized shares of voting common stock, par value $1.00 per share, from 13,500,000 to 25,000,000 shares, and (ii) the authorized shares of non-voting common stock, par value $1.00 per share, from 1,500,000 to 3,000,000 shares. As a result, the total number of authorized shares of all classes of stock, including 1,000,000 shares of preferred stock, increased from 16,000,000 to 29,000,000 shares.

 

29



Table of Contents

 

12.       Commitments and Contingencies

 

Commitments

 

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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Financial instruments with contract amounts which represent credit risk are as follows:

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

(Dollars in thousands)

 

Commitments to originate loans:

 

 

 

 

 

Residential real estate mortgages

 

$

13,262

 

$

10,279

 

Construction loans

 

0

 

106

 

Consumer

 

0

 

25

 

Commercial real estate mortgages

 

0

 

361

 

Commercial business loans

 

135

 

1,145

 

 

 

$

13,397

 

$

11,916

 

Unused lines of credit

 

$

34,422

 

$

36,276

 

Standby letters of credit

 

417

 

602

 

Unadvanced portions of construction loans

 

0

 

162

 

 

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 commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness 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 of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Contingencies

 

The Company and its subsidiary are parties to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims will not be material to the Company’s consolidated financial position or results of operations.

 

In August 2011, the Bank received a summons and complaint in TSM Properties, LLC v. Northeast Bank and Daniel G. Thompson, Docket No. BCD-CV-12-10, State of Maine Superior Court Business and Consumer Docket sitting in Portland, Cumberland County, Maine, in connection with a dispute regarding  transfers of money that involves the Bank. Damages sought include $2.2 million and additional unspecified amounts.  The Bank intends to vigorously defend against these claims.  While it is not feasible to predict or determine the outcome of these proceedings, the Company believes that a loss resulting from an adverse outcome to this matter is reasonably possible, though the amount of the loss is not determinable at this time.  As such, the Company has not established a reserve against potential damages arising from this matter.

 

30



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”.  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; 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”). 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 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 December 31, 2012, the Company, on a consolidated basis, had total assets of $704.7 million, total deposits of $501.5 million, and stockholders’ equity of $114.9 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 primarily performing commercial real estate loans at a discount and, to a lesser extent, originates commercial loans through the

 

31



Table of Contents

 

Bank’s 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 five loan production offices that serve individuals and businesses located in western and south-central Maine, southern New Hampshire, and southeastern Massachusetts. 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.

 

During the quarter ended December 31, 2012, the Company redeemed, at par value, all shares of preferred stock issued to the U.S. Department of the Treasury (the “UST”) under the Troubled Asset Relief Program (“TARP”).  The Company also repurchased the warrant for 67,958 shares of common stock issued to the UST in connection with TARP for $95 thousand during the quarter ended December 31, 2012.

 

Unless the context otherwise requires, references herein to the Company include the Company and its subsidiary, the Bank, 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 primarily 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. To a lesser extent, the LASG originates commercial loans opportunistically on a nationwide basis.

 

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 six months ended December 31, 2012.

 

32



Table of Contents

 

Overview

 

Net income was $1.5 million for the quarter ended December 31, 2012, compared to $418 thousand for the quarter ended December 31, 2011.  Net income for the six months ended December 31, 2012 was $2.6 million, compared to $947 thousand for the six months ended December 31, 2011.  Net income for the six months ended December 31, 2011 included $1.1 million from discontinued operations.

 

Net income available to common stockholders was $1.3 million, or $0.12 per diluted common share, for the quarter ended December 31, 2012, compared $320 thousand, or $0.09 per diluted common share, for the quarter ended December 31, 2011.  Net income available to common stockholders for the six months ended December 31, 2012 was $2.2 million, or $0.21 per diluted common share, compared to $751 thousand, or $0.21 per diluted common share, for the six months ended December 31, 2011.  Weighted average shares outstanding increased to 10.4 million in each of the current year periods from 3.5 million in 2011 as a result of the Company’s public offering of common stock in May 2012.

 

Net interest and dividend income increased by $2.1 million, or 43.6%, to $7.1 million for the quarter ended December 31, 2012 compared to the quarter ended December 31, 2011, principally due to growth in the purchased loan portfolio.  This result is evident in the net interest margin, which increased to 4.28% for the quarter ended December 31, 2012, compared to 3.53% for the quarter ended December 31, 2011.

 

In the quarter ended December 31, 2012, the LASG purchased loans totaling $32.9 million, growing the purchased loan portfolio on a net basis to $133.7 million at quarter end.  Additionally, the LASG originated $4.0 million in commercial loans, increasing its originated loan portfolio to $15.9 million at December 31, 2012.  An overview of the LASG portfolio follows:

 

 

 

LASG Portfolio Overview

 

 

 

Three Months Ended December 31, 2012

 

Six Months Ended December 31, 2012

 

 

 

Purchased

 

Originated

 

Total LASG

 

Purchased

 

Originated

 

Total LASG

 

 

 

(Dollars in thousands)

 

Purchased or originated during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

$

47,295

 

$

4,026

 

$

51,321

 

$

89,568

 

$

12,825

 

$

102,393

 

Net investment basis

 

32,864

 

4,026

 

36,890

 

64,213

 

12,825

 

77,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals as of period end:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

 

 

 

$

172,030

 

$

15,937

 

$

187,967

 

Net investment basis

 

 

 

 

 

 

 

133,724

 

15,945

 

149,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Returns during the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Yield

 

13.34

%

9.72

%

12.96

%

14.09

%

9.65

%

13.64

%

Total Return (1)

 

15.95

%

9.72

%

15.30

%

16.53

%

9.65

%

15.83

%

 


(1) The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, and other noninterest income recorded during the period divided by the average invested balance, on an annualized basis.

 

Financial Condition

 

Overview

 

Total assets increased by $35.5 million, or 5.3%, to $704.7 million at December 31, 2012, compared to June 30, 2012. The principal components of the change in the balance sheet were as follows:

 

1.              The loan portfolio grew by $36.3 million, or 10.2%, principally due to net growth of $49.3 million in the purchased loan portfolio and $10.9 million of commercial loans originated by the LASG, offset in part by net amortization and payoffs of $23.8 million in the Community Banking Division loan portfolio.

2.              Deposits increased by $79.3 million, or 18.8%, due to a $38.7 million increase in deposits raised through ableBanking, the Bank’s online affinity deposit platform, and $40.6 million raised through the Community Banking Division’s branch network and deposit listing service referrals.

3.              Borrowed funds decreased by $40.3 million, or 33.9%, as a result of the repayment of structured repurchased agreements.

4.              Stockholders’ equity decreased by $4.2 million, or 3.5%, primarily due to the redemption of TARP preferred stock and warrants totaling $4.3 million.

 

33



Table of Contents

 

Assets

 

Cash, Short-term Investments and Securities

 

Cash and short-term investments were $127.6 million as of December 31, 2012, a decrease of $662 thousand, or 0.5%, 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 $36.3 million, (ii) net reduction in borrowed funds of $40.3 million, (iii) a net reduction in stockholders’ equity of $4.2 million, principally due to the redemption of TARP preferred stock and warrants, and (iv) net deposit growth of $79.3 million.

 

Available-for-sale securities, consisting of securities issued by government agencies and government-sponsored enterprises, totaled $133.4 million as of December 31, 2012. At December 31, 2012, securities with a fair value of $43.1 million were pledged for outstanding borrowings.

 

Loan Portfolio

 

Total loans, excluding loans held for sale, amounted to $392.6 million as of December 31, 2012, an increase of $36.3 million, or 10.2%, from $356.3 million as of June 30, 2012. The increase consisted of growth in the purchased loan portfolio of $49.3 million, partially offset by a $12.9 million decrease in originated loans.  The net decrease in originated loans consisted of an $23.8 million decrease in loans originated by the Community Banking Division and a net increase of $10.9 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 December 31, 2012 totaled $75.6 million, resulting in net gains of $1.7 million.

 

The composition of the Company’s loan portfolio follows.

 

 

 

December 31, 2012

 

 

 

Community
Banking Division

 

LASG

 

Total

 

Percent of Total

 

 

 

(Dollars in thousands)

 

Originated loans:

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

84,527

 

$

151

 

$

84,678

 

21.58

%

Home equity

 

39,041

 

0

 

39,041

 

9.94

%

Commercial real estate

 

90,682

 

12,389

 

103,071

 

26.26

%

Construction

 

42

 

0

 

42

 

0.01

%

Commercial business

 

13,729

 

3,405

 

17,134

 

4.36

%

Consumer

 

14,893

 

0

 

14,893

 

3.79

%

Subtotal

 

242,914

 

15,945

 

258,859

 

65.94

%

Purchased loans:

 

 

 

 

 

 

 

 

 

Residential real estate

 

0

 

4,254

 

4,254

 

1.08

%

Commercial real estate

 

0

 

129,470

 

129,470

 

32.98

%

Subtotal

 

0

 

133,724

 

133,724

 

34.06

%

Total

 

$

242,914

 

$

149,669

 

$

392,583

 

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

%

 

34



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, or 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 Bank.  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 OREO and in substance foreclosures.  Gains and losses on disposition are recognized in noninterest income.

 

35



Table of Contents

 

The following table shows details the Company’s nonperforming assets and other credit quality indicators as of December 31, 2012 and June 30, 2012.  The net increase in nonperforming assets during the six months ended December 31, 2012 was principally due to a net increase in nonperforming LASG loans and OREO of $1.1 million and $1.5 million, respectively.  Increases in both nonperforming assets and past due loans during the six months ended December 31, 2012 were principally due to acquisition of nonperforming and subperforming loans incidental to larger acquisitions.  Management believes that, based on their carrying amounts, nonperforming assets are well secured based on the estimated fair value of underlying collateral.

 

 

 

Non-Performing Assets at December 31, 2012

 

 

 

Community
Banking Division

 

LASG

 

Total

 

 

 

(Dollars in thousands)

 

Loans:

 

 

 

 

 

 

 

Residential real estate

 

$

3,512

 

$

0

 

$

3,512

 

Home equity

 

620

 

0

 

620

 

Commercial real estate

 

624

 

2,144

 

2,768

 

Construction

 

0

 

0

 

0

 

Commercial business

 

123

 

0

 

123

 

Consumer

 

166

 

0

 

166

 

Subtotal

 

5,045

 

2,144

 

7,189

 

Repossessed collateral

 

1,117

 

1,516

 

2,633

 

Total

 

$

6,162

 

$

3,660

 

$

9,822

 

Ratio of nonperforming loans to total loans

 

 

 

 

 

1.83

%

Ratio of nonperforming assets to total assets

 

 

 

 

 

1.39

%

Ratio of loans past due to total loans

 

 

 

 

 

2.52

%

Nonperforming loans that are current

 

 

 

 

 

$

1,336

 

Commercial loans risk rated substandard or worse

 

 

 

 

 

$

2,663

 

Troubled debt restructurings:

 

 

 

 

 

 

 

On accrual status

 

 

 

 

 

$

2,154

 

On nonaccrual status

 

 

 

 

 

$

1,130

 

 

 

 

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

 

 

36



Table of Contents

 

Allowance for Loan Losses

 

In connection with the application of the acquisition method of accounting for the merger with FHB 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 $875 thousand as of December 31, 2012, which represents an increase of $51 thousand from $824 thousand as of June 30, 2012.  The increase during the six months ended December 31, 2012 was principally due to an increase in specific reserves on TDRs.

 

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

 

 

 

December 31, 2012

 

June 30, 2012

 

December 31, 2011

 

Allowance for loan losses to nonperforming loans

 

12.17

%

13.48

%

10.69

%

Allowance for loan losses to total loans

 

0.22

%

0.23

%

0.21

%

 

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 decreased $147 thousand, or 1.0% to $14.1 million at December 31, 2012, compared to $14.3 million at June 30, 2012. The decrease during the period represents earnings of $481 thousand, offset by death benefit proceeds received of $628 thousand.  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 11.7% of the Company’s total risk-based capital at December 31, 2012.

 

Intangible assets totaled $4.0 million and $4.5 million at December 31, 2012 and June 30, 2012, respectively. The $530 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 December 31, 2012, non-maturity accounts and certificates of deposit with balances less than $250 thousand represented 98.4% of total deposits.

 

Total deposits increased $79.3 million to $501.5 million as of December 31, 2012 from $422.2 million as of June 30, 2012. The increase was the result of a $38.7 million increase in deposits raised through ableBanking, the Bank’s online affinity deposit platform, $12.9 million raised through the Bank’s community banking branch network, and $27.7 million generated through deposit listing service referrals. The composition of total deposits at December 31, 2012 and June 30, 2012 follows.

 

 

 

December 31, 2012

 

June 30, 2012

 

 

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

 

(Dollars in thousands)

 

Demand deposits

 

$

48,136

 

9.60

%

$

45,323

 

10.74

%

NOW accounts

 

54,304

 

10.83

%

57,477

 

13.61

%

Regular and other savings

 

31,927

 

6.37

%

32,727

 

7.75

%

Money market deposits

 

58,351

 

11.63

%

45,024

 

10.66

%

Total non-certificate accounts

 

192,718

 

38.43

%

180,551

 

42.76

%

Term certificates less than $250 thousand

 

300,985

 

60.01

%

232,948

 

55.18

%

Term certificates of $250 thousand or more

 

7,815

 

1.56

%

8,689

 

2.06

%

Total certificate accounts

 

308,800

 

61.57

%

241,637

 

57.24

%

Total deposits

 

$

501,518

 

100.00

%

$

422,188

 

100.00

%

 

Borrowed Funds

 

Advances from the FHLB were $43.2 million and $43.5 million at December 31, 2012 and June 30, 2012, respectively. At December 31, 2012, the Company had pledged investment securities with a fair value of $12.2 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 $25.6 million and $66.2 million at December 31, 2012 and June 30, 2012, respectively. During

 

37



Table of Contents

 

the six months ended December 31, 2012, the Company repaid at maturity structured repurchase agreements totaling $40.0 million.  At December 31, 2012, the Company had pledged investment securities with a fair value of $30.9 million as collateral for outstanding structured repurchase agreements.

 

Short-term borrowings, consisting of sweep accounts, were $1.6 million and $1.2 million as of December 31, 2012 and June 30, 2012, respectively.  At December 31, 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 December 31, 2012, in addition to traditional retail deposit products.

 

Brokered time deposits

 

$

175,883

 

Subject to policy limitation of 25% of total assets

 

Federal Home Loan Bank of Boston

 

6,200

 

Subject to eligible and qualified collateral

 

Federal Reserve Discount Window Borrower-in-Custody

 

172

 

Subject to the pledge of indirect auto loans

 

Total unused borrowing capacity

 

182,255

 

 

 

Unencumbered investment securities

 

90,297

 

 

 

Total sources of liquidity

 

$

272,552

 

 

 

 

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 December 31, 2012, the Company had $272.6 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 $127.6 million of cash and cash equivalents at December 31, 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 $8.2 million and $16.5 million, respectively, as of December 31, 2012. This debt represents qualifying Tier 1 capital for the Company, up to a maximum of 25% of total Tier 1 capital.  At December 31, 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.

 

Total stockholders’ equity was $114.9 million and $119.1 million at December 31, 2012 and June 30, 2012, respectively. The change reflects net income for the period, repayment of TARP preferred stock and warrants, dividends paid, and other comprehensive loss during the period.  Book value per outstanding common share was $11.07 at December 31, 2012 and June 30, 2012.  Tier 1 capital to total average assets of the Company was 17.44% as of December 31, 2012 and 19.91% at June 30, 2012.

 

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 that 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.

 

38



Table of Contents

 

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 Bureau 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 December 31, 2012.

 

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

 

 

 

 

 

 

 

Minimum

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

Minimum

 

Capitalized Under

 

 

 

 

 

Capital

 

Prompt Correction

 

 

 

Actual

 

Requirements

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollars in thousands)

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

121,330

 

29.35

%

$

33,074

 

>8.0

%

$

N/A

 

N/A

 

Bank

 

87,612

 

21.15

%

33,137

 

>8.0

%

41,422

 

>10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

120,455

 

29.14

%

16,537

 

>4.0

%

N/A

 

N/A

 

Bank

 

83,182

 

20.08

%

16,569

 

>4.0

%

24,853

 

>6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to average assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

120,455

 

17.44

%

27,633

 

>4.0

%

N/A

 

N/A

 

Bank

 

83,182

 

12.11

%

27,479

 

>4.0

%

34,439

 

>5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

124,452

 

33.34

%

$

29,863

 

>8.0

%

$

N/A

 

N/A

 

Bank

 

75,081

 

20.14

%

29,824

 

>8.0

%

37,280

 

>10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

123,628

 

33.12

%

14,931

 

>4.0

%

N/A

 

N/A

 

Bank

 

70,414

 

18.89

%

14,910

 

>4.0

%

22,365

 

>6.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to average assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

123,628

 

19.91

%

24,837

 

>4.0

%

N/A

 

N/A

 

Bank

 

70,414

 

11.43

%

24,642

 

>4.0

%

30,802

 

>5.0

%

 

Off-balance Sheet Financial Instruments

 

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.

 

See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements — Note 12:  Commitments and Contingencies” for further discussion.

 

39



Table of Contents

 

Results of Operations — Continuing Operations

 

General

 

Net income was $1.5 million for the quarter ended December 31, 2012, compared to $418 thousand for the quarter ended December 31, 2011.  Net income for the six months ended December 31, 2012 was $2.6 million, compared to a net loss of $176 thousand for the six months ended December 31, 2011.

 

In both the quarter and six months ended December 31, 2012, higher average balances in the Company’s purchased loan portfolio and transactional income from unscheduled loan payoffs and asset sales contributed significantly to increased net interest income and overall earnings, compared to the same periods in Fiscal 2012.  Increases in both net interest income and noninterest income in the current year periods were partially offset by higher levels of noninterest expense, principally due to increased employee headcount, incentive compensation, and other operating expenses associated with implementation of the Company’s business strategy over the past twelve months.

 

The following table details the “total return” on purchased loans, which includes transactional income of $1.9 million for the quarter and $3.7 million for the six months ended December 31, 2012.  This compares to transactional income of $482 thousand for both the quarter and six months ended December 31, 2011.

 

 

 

Total Return on Purchased Loans

 

 

 

Three Months Ended December 31,

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

Income

 

Return (1)

 

Income

 

Return (1)

 

Income

 

Return (1)

 

Income

 

Return (1)

 

 

 

(Dollars in thousands)

 

Regularly scheduled interest and accretion

 

$

2,859

 

9.57

%

$

772

 

9.88

%

$

4,770

 

9.32

%

$

972

 

10.56

%

Transactional income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains on loan sales

 

817

 

2.74

%

0

 

0.00

%

817

 

1.60

%

0

 

0.00

%

Gain on sale of real estate owned

 

0

 

0.00

%

0

 

0.00

%

473

 

0.92

%

0

 

0.00

%

Other noninterest income

 

0

 

0.00

%

0

 

0.00

%

36

 

0.07

%

0

 

0.00

%

Accelerated accretion and loan fees

 

1,086

 

3.64

%

482

 

6.17

%

2,363

 

4.62

%

482

 

5.24

%

Total transactional income

 

1,903

 

6.37

%

482

 

6.17

%

3,689

 

7.21

%

482

 

5.24

%

Total

 

$

4,762

 

15.95

%

$

1,254

 

16.05

%

$

8,459

 

16.53

%

$

1,454

 

15.79

%

 


(1) The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, and other noninterest income recorded during the period divided by the average invested balance, on an annualized basis.

 

40



Table of Contents

 

Net Interest Income

 

Three Months Ended December 31, 2012 and 2011

 

Net interest income for the three months ended December 31, 2012 and 2011 was $7.1 million and $4.9 million, respectively.  The increase of $2.2 million was largely attributable to growth in the LASG loan portfolio, which earned an average yield of 13.0% for the quarter ended December 31, 2012 on an average outstanding balance of $131.0 million.  The following table summarizes interest income and related yields recognized on the Company’s loans.

 

 

 

Three Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

 

 

Balance

 

Income

 

Yield

 

Balance

 

Income

 

Yield

 

 

 

(Dollars in thousands)

 

Community Banking Division

 

$

257,837

 

$

3,988

 

6.14

%

$

306,141

 

$

4,544

 

5.89

%

LASG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

 

13,631

 

334

 

9.72

%

3,030

 

76

 

9.95

%

Purchased

 

117,365

 

3,945

 

13.34

%

31,001

 

1,254

 

16.05

%

Total LASG

 

130,996

 

4,279

 

12.96

%

34,031

 

1,330

 

15.51

%

Total

 

$

388,833

 

$

8,267

 

8.44

%

$

340,172

 

$

5,874

 

6.85

%

 

In the quarter ended December 31, 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 December 31,

 

 

 

2012

 

2011

 

 

 

Average

 

Income

 

Effect on

 

Average

 

Income

 

Effect on

 

 

 

Balance

 

(Expense)

 

Yield / Rate

 

Balance

 

(Expense)

 

Yield / Rate

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

135,663

 

$

0

 

0.00

%

$

139,051

 

$

(22

)

-0.06

%

Loans

 

388,833

 

270

 

0.28

%

340,172

 

134

 

0.16

%

Other interest-earning assets

 

129,323

 

0

 

0.00

%

73,216

 

0

 

0.00

%

Total interest-earning assets

 

$

653,819

 

$

270

 

0.16

%

$

552,439

 

$

112

 

0.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

433,031

 

261

 

0.24

%

352,083

 

344

 

0.39

%

Short-term borrowings

 

1,063

 

0

 

0.00

%

631

 

0

 

0.00

%

Borrowed funds

 

78,782

 

302

 

1.52

%

113,100

 

578

 

2.03

%

Junior subordinated debentures

 

8,165

 

(40

)

-1.94

%

8,009

 

(37

)

-1.83

%

Total interest-bearing liabilities

 

$

521,041

 

$

523

 

0.40

%

$

473,823

 

$

885

 

0.74

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total effect of noncash accretion on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

793

 

 

 

 

 

$

997

 

 

 

Net interest margin

 

 

 

0.48

%

 

 

 

 

0.72

%

 

 

 

41



Table of Contents

 

The Company’s interest rate spread and net interest margin increased by 67 basis points and 75 basis points, respectively, for the quarter ended December 31, 2012 compared to the quarter ended December 31, 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 December 31, 2012 and 2011.

 

 

 

Three Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (1)

 

$

135,663

 

$

348

 

1.02

%

$

139,051

 

$

541

 

1.54

%

Loans (2) (3)

 

388,833

 

8,267

 

8.44

%

340,172

 

5,874

 

6.85

%

Regulatory stock

 

5,473

 

32

 

2.32

%

5,761

 

21

 

1.45

%

Short-term investments (4)

 

123,850

 

77

 

0.25

%

67,455

 

36

 

0.21

%

Total interest-earning assets

 

653,819

 

8,724

 

5.29

%

552,439

 

6,472

 

4.65

%

Cash and due from banks

 

2,922

 

 

 

 

 

2,981

 

 

 

 

 

Other non-interest earning assets

 

38,253

 

 

 

 

 

37,122

 

 

 

 

 

Total assets

 

$

694,994

 

 

 

 

 

$

592,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities & Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

54,733

 

$

37

 

0.27

%

$

54,806

 

$

54

 

0.39

%

Money market accounts

 

52,558

 

66

 

0.50

%

44,247

 

42

 

0.38

%

Savings accounts

 

31,100

 

11

 

0.14

%

32,360

 

18

 

0.22

%

Time deposits

 

294,640

 

914

 

1.23

%

220,670

 

722

 

1.30

%

Total interest-bearing deposits

 

433,031

 

1,028

 

0.94

%

352,083

 

836

 

0.94

%

Short-term borrowings

 

1,063

 

5

 

1.87

%

631

 

3

 

1.89

%

Borrowed funds

 

78,782

 

443

 

2.23

%

113,100

 

532

 

1.87

%

Junior subordinated debentures

 

8,165

 

191

 

9.28

%

8,009

 

185

 

9.16

%

Total interest-bearing liabilities

 

521,041

 

1,667

 

1.27

%

473,823

 

1,556

 

1.30

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities of discontinued operations (5)

 

0

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and escrow accounts

 

52,297

 

 

 

 

 

47,290

 

 

 

 

 

Other liabilities

 

4,717

 

 

 

 

 

5,723

 

 

 

 

 

Total liabilities

 

578,055

 

 

 

 

 

526,836

 

 

 

 

 

Stockholders’ equity

 

116,939

 

 

 

 

 

65,706

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

694,994

 

 

 

 

 

$

592,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Net interest income

 

 

 

$

7,057

 

 

 

 

 

$

4,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

4.02

%

 

 

 

 

3.35

%

Net interest margin (6)

 

 

 

 

 

4.28

%

 

 

 

 

3.53

%

 


(1)   Interest income and yield are stated on a 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 effect of interest-bearing liabilities associated with discontinued operations has been excluded from the calculation of average rates paid, interest rate spread, and net interest margin.

(6)   Net interest margin is calculated as net interest income divided by total interest-earning assets.

 

42



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) changes 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 December 31, 2012
Compared to the Three Months Ended December 31, 2011

 

 

 

Change Due to
Volume

 

Change Due to
Rate

 

Total Change

 

 

 

(Dollars in thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

Investments securities

 

$

(13

)

$

(180

)

$

(193

)

Loans

 

915

 

1,478

 

2,393

 

Regulatory stock

 

(1

)

12

 

11

 

Short-term investments

 

34

 

7

 

41

 

Total increase in interest income

 

935

 

1,317

 

2,252

 

Interest bearing liabilities:

 

 

 

 

 

 

 

Interest bearing deposits

 

241

 

(49

)

192

 

Short-term borrowings

 

2

 

0

 

2

 

Borrowed funds

 

(180

)

91

 

(89

)

Junior subordinated debentures

 

4

 

2

 

6

 

Total increase in interest expense

 

67

 

44

 

111

 

Total increase in net interest and dividend income

 

$

868

 

$

1,273

 

$

2,141

 

 

Six Months Ended December 31, 2012 and 2011

 

Net interest income for the six months ended December 31, 2012 and 2011 was $13.2 million and $9.2 million, respectively.  The increase of $4.0 million was largely attributable to growth in the LASG loan portfolio, which earned an average yield of 13.6% for the six months ended December 31, 2012 on an average outstanding balance of $111.8 million.  The following table summarizes interest income and related yields recognized on the Company’s loans.

 

 

 

Interest Income and Yield on Loans

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

Average

 

Interest

 

 

 

Average

 

Interest

 

 

 

 

 

Balance

 

Income

 

Yield

 

Balance

 

Income

 

Yield

 

 

 

(Dollars in thousands)

 

Community Banking Division

 

$

264,298

 

$

7,920

 

5.94

%

$

307,788

 

$

9,448

 

6.09

%

LASG:

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

 

11,412

 

555

 

9.65

%

2,160

 

109

 

10.01

%

Purchased

 

100,420

 

7,133

 

14.09

%

18,262

 

1,454

 

15.79

%

Total LASG

 

111,832

 

7,688

 

13.64

%

20,422

 

1,563

 

15.18

%

Total

 

$

376,130

 

$

15,608

 

8.23

%

$

328,210

 

$

11,011

 

6.66

%

 

43



Table of Contents

 

In the six months ended December 31, 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 period.  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.

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

Average

 

Income

 

Effect on

 

Average

 

Income

 

Effect on

 

 

 

Balance

 

(Expense)

 

Yield / Rate

 

Balance

 

(Expense)

 

Yield / Rate

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

133,730

 

$

(3

)

0.00

%

$

143,372

 

$

(83

)

-0.11

%

Loans

 

376,130

 

374

 

0.20

%

328,210

 

489

 

0.30

%

Other interest-earning assets

 

135,470

 

0

 

0.00

%

78,664

 

0

 

0.00

%

Total interest-earning assets

 

$

645,330

 

$

371

 

0.11

%

$

550,246

 

$

406

 

0.15

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

413,149

 

537

 

0.26

%

351,640

 

716

 

0.40

%

Short-term borrowings

 

1,157

 

0

 

0.00

%

886

 

0

 

0.00

%

Borrowed funds

 

89,484

 

783

 

1.74

%

113,423

 

1,157

 

2.02

%

Junior subordinated debentures

 

8,144

 

(80

)

-1.95

%

7,990

 

(72

)

-1.79

%

Total interest-bearing liabilities

 

$

511,934

 

$

1,240

 

0.48

%

$

473,939

 

$

1,801

 

0.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total effect of noncash accretion on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

1,611

 

 

 

 

 

$

2,207

 

 

 

Net interest margin

 

 

 

0.50

%

 

 

 

 

0.80

%

 

 

 

44



Table of Contents

 

The Company’s interest rate spread and net interest margin increased by 64 basis points and 73 basis points, respectively, for the six months ended December 31, 2012 compared to the six months ended December 31, 2011.  The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the six months ended December 31, 2012 and 2011.

 

 

 

Six Months Ended December 31,

 

 

 

2012

 

2011

 

 

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

 

Balance

 

Expense

 

Rate

 

Balance

 

Expense

 

Rate

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities (1)

 

$

133,730

 

$

695

 

1.03

%

$

143,372

 

$

1,180

 

1.63

%

Loans (2) (3)

 

376,130

 

15,608

 

8.23

%

328,210

 

11,011

 

6.66

%

Regulatory stock

 

5,473

 

38

 

1.38

%

5,761

 

33

 

1.14

%

Short-term investments (4)

 

129,997

 

160

 

0.24

%

72,903

 

83

 

0.23

%

Total interest-earning assets

 

645,330

 

16,501

 

5.07

%

550,246

 

12,307

 

4.44

%

Cash and due from banks

 

3,049

 

 

 

 

 

2,950

 

 

 

 

 

Other non-interest earning assets

 

37,973

 

 

 

 

 

37,965

 

 

 

 

 

Total assets

 

$

686,352

 

 

 

 

 

$

591,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities & Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

55,664

 

$

79

 

0.28

%

$

55,494

 

$

123

 

0.44

%

Money market accounts

 

49,954

 

119

 

0.47

%

45,114

 

92

 

0.40

%

Savings accounts

 

31,223

 

22

 

0.14

%

32,899

 

44

 

0.27

%

Time deposits

 

276,308

 

1,786

 

1.28

%

218,133

 

1,414

 

1.29

%

Total interest-bearing deposits

 

413,149

 

2,006

 

0.96

%

351,640

 

1,673

 

0.94

%

Short-term borrowings

 

1,157

 

11

 

1.89

%

886

 

8

 

1.79

%

Borrowed funds

 

89,484

 

945

 

2.09

%

113,423

 

1,064

 

1.86

%

Junior subordinated debentures

 

8,144

 

384

 

9.35

%

7,990

 

368

 

9.14

%

Total interest-bearing liabilities

 

511,934

 

3,346

 

1.30

%

473,939

 

3,113

 

1.30

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities of discontinued operations (5)

 

0

 

 

 

 

 

570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits and escrow accounts

 

51,056

 

 

 

 

 

46,524

 

 

 

 

 

Other liabilities

 

5,471

 

 

 

 

 

4,498

 

 

 

 

 

Total liabilities

 

568,461

 

 

 

 

 

525,531

 

 

 

 

 

Stockholders’ equity

 

117,891

 

 

 

 

 

65,630

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

686,352

 

 

 

 

 

$

591,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

13,155

 

 

 

 

 

$

9,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.78

%

 

 

 

 

3.14

%

Net interest margin (6)

 

 

 

 

 

4.04

%

 

 

 

 

3.31

%

 


(1)   Interest income and yield are stated on a 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 effect of interest-bearing liabilities associated with discontinued operations has been excluded from the calculation of average rates paid, interest rate spread, and net interest margin.

(6)   Net interest margin is calculated as net interest income divided by total interest-earning assets.

 

45



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) changes 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.

 

 

 

Six Months Ended December 31, 2012
Compared to the Six Months Ended December 31, 2011

 

 

 

Change Due to
Volume

 

Change Due to
Rate

 

Total Change

 

 

 

(Dollars in thousands)

 

Interest earning assets:

 

 

 

 

 

 

 

Investments securities

 

$

(75

)

$

(410

)

$

(485

)

Loans

 

1,753

 

2,844

 

4,597

 

Regulatory stock

 

(2

)

7

 

5

 

Short-term investments

 

70

 

7

 

77

 

Total increase in interest income

 

1,746

 

2,448

 

4,194

 

Interest bearing liabilities:

 

 

 

 

 

 

 

Interest bearing deposits

 

387

 

(54

)

333

 

Short-term borrowings

 

3

 

0

 

3

 

Borrowed funds

 

(243

)

124

 

(119

)

Junior subordinated debentures

 

7

 

9

 

16

 

Total increase in interest expense

 

154

 

79

 

233

 

Total increase in net interest and dividend income

 

$

1,592

 

$

2,369

 

$

3,961

 

 

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 as a result of credit deterioration 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.

 

Three Months Ended December 31, 2012 and 2011

 

The provision for loan losses for the three months ended December 31, 2012 and 2011 was $247 thousand and $134 thousand, respectively.  The $113 thousand increase was principally due to specific provisions required on residential and consumer loans modified in troubled debt restructurings during the quarter ended December 31, 2012.

 

Six Months Ended December 31, 2012 and 2011

 

The provision for loan losses for the six months ended December 31, 2012 and 2011 was $475 thousand and $534 thousand, respectively.  The $59 thousand decrease was principally due to lower consumer charge-offs trends during the six months ended December 31, 2012, partially offset by higher provisions required on troubled debt restructurings.

 

Noninterest Income

 

Three Months Ended December 31, 2012 and 2011

 

Noninterest income totaled $3.5 million for the three months ended December 31, 2012 compared to $2.7 million for the three months ended December 31, 2011, an increase of $852 thousand.  The primary components of this change included the following:

 

·                  Net gains realized on the sale of residential mortgage loans in the secondary market were $914 thousand for the quarter, an increase of $144 thousand, or 18.7%, compared to the quarter ended December 31, 2011.

·                  Net gains on the sale of portfolio loans of $998 thousand for the quarter, an increase of $795 thousand compared to the quarter ended December 31, 2011.  Results for the quarter ended December 31, 2012 include an $817 thousand gain on the sale of a purchased loan.

·                  Bank-owned life insurance income totaled $358 thousand for the quarter, an increase of $232 thousand compared to the quarter ended December 31, 2011, the result of life insurance death benefits received.

 

46



Table of Contents

 

·                  Investment commissions totaled $799 thousand for the quarter, an increase of $95 thousand compared to the quarter ended December 31, 2011.

·                  No securities gains were realized during the quarter ended December 31, 2012, as compared to gains of $433 thousand realized for the quarter ended December 31, 2011.

 

Six Months Ended December 31, 2012 and 2011

 

Noninterest income totaled $6.7 million for the six months ended December 31, 2012 compared to $4.5 million for the six months ended December 31, 2011, an increase of $2.2 million.  The primary components of this change included the following:

 

·                  Net gains realized on the sale of residential mortgage loans in the secondary market were $1.7 million for the six months ended December 31, 2012, an increase of $244 thousand, or 17.1%, compared to the six months ended December 31, 2011.

·                  Net gains on the sale of portfolio loans of $998 thousand for the six months ended December 31, 2012, an increase of $795 thousand compared to the six months ended December 31, 2011.  Results for the six months ended December 31, 2012 include an $817 thousand gain on the sale of a purchased loan.

·                  Net gains recognized on repossessed collateral were $451 thousand for the six months ended December 31, 2012, compared to net gains of $50 thousand for the six months ended December 31, 2012, an increase principally resulting from a $473 thousand gain realized on the sale of real estate previously securing a purchased loan.

·                  Bank-owned life insurance income totaled $481 thousand for the six months ended December 31, 2012, an increase of $228 thousand compared to the six months ended December 31, 2011, the result of life insurance death benefits received.

·                  Investment commissions totaled $1.5 million for the six months ended December 31, 2012, an increase of $83 thousand compared to the six months ended December 31, 2011.

·                  Net securities gains totaled $792 thousand for the six months ended December 31, 2012, an increase of $412 thousand compared to the six months ended December 31, 2011.  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.

 

Noninterest Expense

 

Three Months Ended December 31, 2012 and 2011

 

Noninterest expense totaled $8.1 million for the three months ended December 31, 2012, compared to $6.9 million the three months ended December 31, 2011, an increase of $1.2 million, principally due to the following:

 

·                  An increase of $684 thousand in employee compensation, due mainly to increases in staffing and in the cost of employee benefits programs.  Full-time equivalent employees increased by 14 over the past year, as the Company has added staff to several operational areas and the LASG. Benefits costs have increased as a result of the replacement of the Company’s self-insured benefits program by a third-party insurance program in the third quarter of Fiscal 2012.

·                  An increase of $231 thousand in occupancy and equipment expense, principally due to increased rent associated with the relocation of the Company’s office in Boston, Massachusetts, and depreciation of investments in new technology, principally those associated with ableBanking.

·                  An increase of $191 thousand in loan acquisition and collection expense, principally due to an increase in the size of the LASG portfolio, which has grown to $149.7 million from $54.5 million at December 31, 2011.

·                  An increase of $122 thousand in professional fees, principally due to increased legal and audit costs.

 

Six Months Ended December 31, 2012 and 2011

 

Noninterest expense totaled $15.6 million for the six months ended December 31, 2012, compared to $13.5 million the six months ended December 31, 2011, an increase of $2.1 million, principally due to the following:

 

·                  An increase of $1.0 million in employee compensation, due mainly to the aforementioned increases in staffing and in the cost of employee benefits programs.

·                  An increase of $460 thousand, principally due to increased rent and depreciation of investments in new technology.

·                  An increase of $363 thousand in loan acquisition and collection expense, principally due to an increase in the size of the LASG portfolio, which has grown to $149.7 million from $54.5 million at December 31, 2011, and an increase in the volume of loan acquisitions and related due diligence activities.

·                  An increase of $130 thousand in professional fees, principally due to increased legal and audit costs.

 

Income Taxes

 

Three Months Ended December 31, 2012 and 2011

 

The Company’s income tax expense was $705 thousand, or an effective rate of 31.7%, for the quarter ended December 31, 2012, compared to $179 thousand, or an effective rate of $30.0%, for the quarter ended December 31, 2011.  The effective rate for each quarter differs from the Company’s statutory rate because of favorable book to tax differences, such as tax credits and tax exempt life insurance

 

47



Table of Contents

 

income. The increase in the Company’s effective tax rate from the quarter ended December 31, 2011 to December 31, 2012 principally resulted from the higher level of pretax income relative to book to tax differences.

 

Six Months Ended December 31, 2012 and 2011

 

The Company’s income tax expense was $1.2 million, or an effective rate of 31.8%, for the six months ended December 31, 2012, as compared to a tax benefit of $224 thousand for the six months ended December 31, 2011.  The tax benefit in the 2011 quarter resulted from a pretax loss of $400 thousand.

 

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 six months ended December 31, 2011 was $1.1 million.  Income for the period 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%.

 

48



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 December 31, 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 December 31, 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

 

In the ordinary course of business, the Company is involved in various threatened and pending legal proceedings.

 

In August 2011, the Bank received a summons and complaint in TSM Properties, LLC v. Northeast Bank and Daniel G. Thompson, Docket No. BCD-CV-12-10, State of Maine Superior Court Business and Consumer Docket sitting in Portland, Cumberland County, Maine, in connection with a dispute regarding  transfers of money that involves the Bank. Damages sought include $2.2 million and additional unspecified amounts.  The Bank intends to vigorously defend against these claims.  While it is not feasible to predict or determine the outcome of these proceedings, the Company believes that a loss resulting from an adverse outcome to this matter is reasonably possible, though the amount of the loss is not determinable at this time.  As such, the Company has not established a reserve against potential damages arising from this matter.

 

 

 

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.

 

 

 

Item 6.

 

Exhibits

 

49



Table of Contents

 

 

Exhibits
No.

 

Description

3.1

 

Articles of Amendment to the Amended and Restated Articles of Incorporation of Northeast Bancorp, as amended, filed with the Secretary of State of the State of Maine on November 28, 2012 (incorporated by reference to Exhibit 3.1 of Northeast Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 29, 2012).

10.1

 

Form of Restricted Stock Award Agreement under Northeast Bancorp Amended and Restated 2010 Stock Option and Incentive Plan.*

10.2

 

Form of Non-Qualified Stock Option Agreement for Company Employees under Northeast Bancorp Amended and Restated 2010 Stock Option and Incentive Plan.*

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 December 31, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2012 and June 30, 2012; (ii) Consolidated Statements of Income for the three and six months ended December 31, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the six months ended December 31, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the six months ended December, 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.

 

50



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: February 14, 2013

 

NORTHEAST BANCORP

 

 

 

 

By:

/s/

 Richard Wayne

 

 

 

 Richard Wayne

 

 

 

 President and CEO

 

 

 

 

 

By:

/s/

 Claire S. Bean

 

 

 

 Claire S. Bean

 

 

 

 Chief Financial Officer

 

51



Table of Contents

 

NORTHEAST BANCORP

Index to Exhibits

 

Exhibits
No.

 

Description

3.1

 

Articles of Amendment to the Amended and Restated Articles of Incorporation of Northeast Bancorp, as amended, filed with the Secretary of State of the State of Maine on November 28, 2012 (incorporated by reference to Exhibit 3.1 of Northeast Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 29, 2012).

10.1

 

Form of Restricted Stock Award Agreement under Northeast Bancorp Amended and Restated 2010 Stock Option and Incentive Plan.*

10.2

 

Form of Non-Qualified Stock Option Agreement for Company Employees under Northeast Bancorp Amended and Restated 2010 Stock Option and Incentive Plan.*

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 December 31, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2012 and June 30, 2012; (ii) Consolidated Statements of Income for the three and six months ended December 31, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2012 and 2011; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the six months ended December 31, 2012 and 2011; (v) Consolidated Statements of Cash Flows for the six months ended December, 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.

 

52