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Table of Contents
PART IV
Table of Contents
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) |
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|
ý |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2015 |
OR |
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from to |
Commission file number (1-14588)
NORTHEAST BANCORP
(Exact name of registrant as specified in its charter)
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Maine
(State or other jurisdiction of
incorporation or organization) |
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01-0425066
(I.R.S. Employer
Identification No.) |
500 Canal Street, Lewiston, Maine
(Address of principal executive offices) |
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04240
(Zip Code) |
Registrant's
telephone number, including area code:
(207) 786-3245
Securities
registered pursuant to Section 12(b) of the Act:
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|
Title of each class: |
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Name of each exchange on which registered: |
Voting Common Stock, $1.00 par value |
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The NASDAQ Stock Market LLC |
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ý
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 subject to such filing requirements for the
past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 the
definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller Reporting Company ý |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No ý
The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates, computed by reference to the last reported sales price
of the registrant's voting common stock on the NASDAQ Global Market on December 31, 2014 was approximately $65,212,768.
As
of September 18, 2015, the registrant had outstanding 8,523,666 shares of voting common stock, $1.00 par value per share, and 1,012,717 shares of non-voting common
stock, $1.00 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the registrant's proxy statement for the 2015 Annual Meeting of Shareholders to be held on November 20, 2015 are incorporated by reference in Items 10, 11, 12,
13 and 14 of Part III of this Annual Report on Form 10-K. The registrant intends to file such proxy statement with the Securities and Exchange Commission no later than 120 days
after the end of its fiscal year ended June 30, 2015.
Table of Contents
Table of Contents
2
Table of Contents
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 our 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, 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".
Such
forward-looking statements reflect our current views and expectations based largely on information currently available to our management, and on our current expectations,
assumptions,
plans, estimates, judgments, and projections about our business and our industry, and they involve inherent risks and uncertainties. Although the Company believes that these forward-looking statements
are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors.
Accordingly, the Company cannot give you any assurance that our expectations will in fact occur or that our 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, the factors referenced in this report under Item 1A. "Risk Factors";
changes in interest rates; competitive pressures from other financial institutions; the effects of a 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 our 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 we may not be
successful in the implementation of our business strategy; the risk that intangibles recorded in the Company's financial statements will become impaired; and changes in assumptions used in making such
forward-looking statements. 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.
3
Table of Contents
PART I
Item 1. Business
Overview
Northeast Bancorp ("we," "our," "us," "Northeast" or the "Company"), incorporated under Maine law in 1987, is a bank holding company,
registered with the Board of Governors of the Federal Reserve System (the "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"), a Maine state-chartered bank originally organized in 1872.
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, 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. On June 28, 2013, the Federal Reserve approved the amendment of the commitment to hold
commercial real estate loans to within 300% of total risk-based capital to exclude owner-occupied commercial real estate loans. All other commitments made to the Federal Reserve in connection with the
merger remain unchanged. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve.
As
of June 30, 2015, the Company, on a consolidated basis, had total assets of $850.8 million, total deposits of $674.8 million, and stockholders' equity of
$112.8 million. The Company gathers retail deposits through the Community Banking Division's ten full-service branches in Maine and through its online deposit program, ableBanking; originates
loans through its Community Banking Division; purchases and originates commercial loans on a nationwide basis through its Loan Acquisition and Servicing Group ("LASG"); and originates Small Business
Administration ("SBA") loans on a nationwide basis through the Small Business Administration National group ("SBA National").
Unless
the context otherwise requires, references herein to the Company include the Company and its subsidiary on a consolidated basis.
Strategy
The Company's goal is to prudently grow its franchise, while maintaining sound operations and risk management, by implementing the
following strategies:
Measured growth of our national commercial loan portfolio. The Company purchases performing commercial real estate loans, on a
nationwide basis,
typically at a discount from their outstanding principal balances, producing yields higher than those normally achieved on our originated loan portfolio. These loans are purchased from a variety of
sources, including banks, insurance companies, investment funds and government agencies, either directly or indirectly through a broker. We also
4
Table of Contents
originate
commercial real estate and commercial business loans on a nationwide basis, including loans partially guaranteed by the SBA.
Focus on core deposits. The Company offers a full line of deposit products to customers in the Community Banking Division's market area
through its
ten-branch network. In addition, in June 2012, we launched our online deposit program, ableBanking, a division of Northeast Bank, to provide an additional channel through which to raise core deposits
to fund the Company's asset strategy.
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 allows us to attract and retain core deposits in support of balance sheet growth, and to continue to generate
new commercial and residential mortgage loans.
Market Area and Competition
Northeast Bancorp is the holding company for Northeast Bank, a full-service bank headquartered in Lewiston, Maine. We offer traditional
banking services through the Community Banking Division, which operates ten full-service branches that serve customers located in western and central Maine. From our Maine and Boston locations, we
also lend throughout the New England area. The LASG purchases and originates commercial loans on a nationwide basis. SBA National originates SBA loans on a nationwide basis for the Bank's portfolio,
and sells the guaranteed portion on certain loans originated. ableBanking, a division of Northeast Bank, offers savings products to consumers online.
The
Community Banking Division's market area covers the six New England states, with the majority of its activities centered in the western and central regions of the State of Maine. We
encounter significant competition in the Community Banking Division market area in originating loans, attracting deposits, and selling other customer products and services. Our competitors include
savings banks, commercial banks, credit unions, mutual funds, insurance companies, brokerage and investment banking companies, finance companies, and other financial intermediaries. Many of our
primary competitors there have substantially greater resources, larger established customer bases, higher lending limits, extensive branch networks, numerous ATMs and greater advertising and
marketing budgets. They may also offer services that we do not currently provide.
The
LASG has a nationwide scope in its loan purchasing, origination, and servicing activities. It competes with regional banks, national private equity funds, and community banks in its
bid to acquire performing commercial loans. SBA National has a national scope in its SBA loan origination activities, and competes with regional banks and community banks in its bid to originate
loans. ableBanking also has nationwide scope in its deposit gathering activities and competes with banks and credit unions, as well as other, larger, online direct banks having a national reach.
Lending Activities
General
We conduct our loan-related activities through three primary channels: the Community Banking Division, the LASG, and SBA National. The
Community Banking Division originates loans directly to consumers and businesses located in its market area. The LASG purchases primarily performing commercial real estate loans, on a nationwide
basis, typically at a discount from their outstanding principal balances, producing yields higher than those normally achieved on the Company's originated loan portfolio. The LASG also originates
commercial real estate and commercial business loans on a nationwide basis. Pursuant to commitments made to the Federal Reserve in connection with the merger, the Company is required to limit
purchased loans to 40% of total loans. At June 30, 2015, the Company's ratio of purchased loans to total loans, including loans held for sale, was 32.6%. SBA National originates loans to small
businesses, primarily through the SBA 7(a) program, which provides
5
Table of Contents
the
partial guarantee of the SBA. At June 30, 2015, of our total loan portfolio of $612.1 million, $220.2 million, or 36.0%, was originated by the Community Banking Division,
$380.9 million, or 62.2%, was purchased or originated by the LASG and $11.0 million, or 1.8%, was originated by SBA National, excluding loans held for sale.
The
following table sets forth certain information concerning our portfolio loan purchases and originations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Loans, including loans held for sale, beginning of year |
|
$ |
528,361 |
|
$ |
443,970 |
|
Additions: |
|
|
|
|
|
|
|
LASG Purchases and Originations: |
|
|
|
|
|
|
|
Originations |
|
|
130,502 |
|
|
61,665 |
|
Purchases |
|
|
82,654 |
|
|
79,823 |
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
213,156 |
|
|
141,488 |
|
SBA National Originations: |
|
|
|
|
|
|
|
Originations |
|
|
34,544 |
|
|
4,613 |
|
Community Bank Originations: |
|
|
|
|
|
|
|
Residential mortgages held for sale |
|
|
97,438 |
|
|
91,366 |
|
Residential mortgage held to maturity |
|
|
7,857 |
|
|
45,525 |
|
Home equity |
|
|
1,024 |
|
|
1,498 |
|
Commercial real estate |
|
|
13,580 |
|
|
1,854 |
|
Commercial business |
|
|
6,317 |
|
|
1,256 |
|
Consumer |
|
|
211 |
|
|
191 |
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
126,427 |
|
|
141,690 |
|
|
|
|
|
|
|
|
|
Total originations and purchases |
|
|
374,127 |
|
|
287,791 |
|
|
|
|
|
|
|
|
|
Reductions: |
|
|
|
|
|
|
|
Sales of residential loans held for sale |
|
|
(106,045 |
) |
|
(88,015 |
) |
Sales of portfolio loans |
|
|
(22,351 |
) |
|
(8,779 |
) |
Charge-offs |
|
|
(238 |
) |
|
(405 |
) |
Pay-downs and amortization, net |
|
|
(152,682 |
) |
|
(106,201 |
) |
|
|
|
|
|
|
|
|
Total reductions |
|
|
(281,316 |
) |
|
(203,400 |
) |
|
|
|
|
|
|
|
|
Loans, including loans held for sale, end of year |
|
$ |
621,172 |
|
$ |
528,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual percentage increase in loans |
|
|
17.57 |
% |
|
19.01 |
% |
We
individually underwrite the loans that we originate and all loans that we purchase. Our loan underwriting policies are reviewed and approved annually by our board of directors. Each
loan, regardless of whether it is originated or purchased, must meet underwriting criteria set forth in our lending policies and the requirements of applicable federal and state regulators. We
typically retain servicing rights for all loans that we originate or purchase, except for residential loans that we originate and sell servicing released in the secondary market.
Community Bank Originations
Originated Loan Portfolio. Our Community Bank originated loan portfolio consists primarily of loans to consumers and businesses in the
Community
Banking Division's market area.
-
- Residential Mortgage Loans. We originate residential
mortgage loans secured by one- to four-family properties throughout Maine, southern New Hampshire, and Massachusetts. Such
6
Table of Contents
loans
may be originated for sale in the secondary market or to be held on the Bank's balance sheet. We also offer home equity loans and home equity lines of credit, which are secured by first or
second mortgages on one- to four-family owner-occupied properties and which are held on our balance sheet. At June 30, 2015, portfolio residential loans totaled $130.5 million, or 21.3%
of total loans. Of the residential loans we held for investment at June 30, 2015, approximately 51.0% were adjustable rate. Included in residential loans are home equity lines of credit and
other second mortgage loans aggregating approximately $24.3 million.
-
- Commercial Real Estate Loans. We originate multi-family
and other commercial real estate loans secured by property located primarily in the Community Banking Division's market area. At June 30, 2015, commercial real estate loans outstanding were
$70.6 million, or 11.5% of total loans. Although the largest commercial real estate loan originated by the Community Banking Division had a principal balance of $3.2 million at
June 30, 2015, the majority of the commercial real estate loans originated by the Community Banking Division had principal balances less than $500 thousand.
-
- Commercial Business Loans. We originate commercial
business loans, including term loans, lines of credit and equipment and receivables financing to businesses located primarily in the Community Banking Division's market area. At June 30, 2015,
commercial business loans outstanding were $11.9 million, or 1.9% of total loans. At June 30, 2015, there were 122 commercial business loans outstanding with an average principal balance
of $97 thousand. The largest of these commercial business loans had a principal balance of $2.7 million at June 30, 2015.
-
- Consumer Loans. We originate, on a direct basis,
automobile, boat and recreational vehicle loans. At June 30, 2015, consumer loans outstanding were $7.7 million, or 1.3% of total loans.
Underwriting of Originated Loans. Most residential loans, including those held for investment, are originated in accordance with the
standards of the
Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation, the Federal Housing Authority, or other third party correspondent lenders. Our underwriting and approval process for all other loans originated by the Community Banking
Division is as follows:
-
- Most of our Community Bank originated loans are sourced through relationships between loan officers and their third party referral
sources or current or previous customers.
-
- After a loan officer has taken basic information from the borrower, the request is submitted to the Community Banking Division's loan
production department. The loan production department obtains comprehensive information from the borrower and third parties, and conducts verification and analysis of the borrower information, which
is assembled into a single underwriting package that is submitted for final approval.
-
- Loans of $500 thousand or more (determined on a relationship basis) require approval from the Community Banking Division Credit
Committee, which is comprised of senior managers of the Bank. Loans of less than $500 thousand (determined on a relationship basis) require approval from two officers with appropriate lending
authority.
SBA National
General. SBA National, launched in November 2014, originates loans to small businesses nationwide, most often through the SBA's 7(a)
program, which
provides a partial government guarantee. Our loans are typically secured by liens on business assets and mortgages on commercial properties, as well as the SBA guarantees. We seek to build a loan
portfolio that is diverse with respect to geography, loan type and collateral type.
7
Table of Contents
The
following table summarizes the SBA National loan portfolio as of June 30, 2015.
|
|
|
|
|
|
|
SBA National |
|
|
|
(Dollars in thousands)
|
|
Non-owner occupied commercial real estate |
|
$ |
3,865 |
|
Owner occupied commercial real estate |
|
|
4,461 |
|
Commercial business |
|
|
2,637 |
|
1 - 4 family residential |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's SBA loan portfolio includes owner and non-owner occupied loans as defined under regulatory call report instructions. The regulatory call report instructions primarily
consider the primary source of repayment on the loan for this determination. However, these loans meet the SBA requirements to be considered owner occupied as the owner or controlling entity are
actively involved in the daily operations of the underlying core business.
In
addition to the loans held in the SBA National loan portfolio, as of June 30, 2015, $1.9 million in the loans held for sale portfolio were attributable to SBA National,
which relates to the guaranteed portion of the SBA National loans we expect to sell in the secondary market.
Secondary Market for SBA Guarantees. We typically sell the SBA-guaranteed portion of our variable-rate originations (generally 75% of
the principal
balance) at a premium in the secondary market. We generally retain a 25% unguaranteed interest and the accompanying servicing rights to the entire loan. We hold most fixed-rate SBA loan originations
in portfolio.
Competition for SBA Loans. SBA National competes primarily with community banks and regional banks nationwide. Capitalizing on our LASG
origination
loan infrastructure, SBA National is in a position to review and act quickly on a variety of lending opportunities. Risk management, approvals, underwriting and other due diligence for these loans is
similar to that for the LASG loans. We believe that SBA National has an advantage in originating commercial loans because of its ability to utilize in-house staff to quickly and accurately screen loan
opportunities and accelerate the underwriting process.
Underwriting of SBA National Loans. Our loan policies and procedures establish guidelines governing our SBA lending program. Generally,
these
guidelines address the types of loans that we seek, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations.
All loans or credit lines are subject to approval procedures and amount limitations. Our policies are reviewed and approved at least annually by our board of directors. We supplement our own
supervision of the loan underwriting and approval process with periodic loan audits by internal personnel and outside professionals experienced in loan review.
Loan Servicing. We conduct all loan servicing for SBA National loans with an in-house team of experienced asset managers who actively
manage the loan
portfolio. Asset managers initiate and maintain regular borrower contact, and ensure that the loan credit analysis is accurate. Collateral valuations, property inspections, and other collateral
characteristics are updated periodically as a result
of our ongoing in-house real estate analysis. All asset management activity and analysis is contained within a central database.
LASG Purchases and Originations
General. The LASG purchases and originates commercial loans secured by income-producing collateral, and on a nationwide basis. Although
the Bank's
legal lending limit was $22.3 million at
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Table of Contents
June 30,
2015, our credit policy currently requires prior Board approval for the purchase or origination of a loan with an initial investment greater than 10% of the Company's Tier 1
capital, determined on a relationship basis. We focus primarily on loans with balances between $1.0 million and $5.0 million. Purchased loans are sourced on a nationwide basis from
banks, insurance companies, investment funds and government agencies, either directly or indirectly through advisors. We seek to build a loan portfolio that is diverse with respect to geography, loan
type and collateral type. Of the loans originated or purchased by the LASG that were outstanding as of June 30, 2015, $269.8 million, or 70.8%, consisted of commercial real estate loans.
The following table summarizes the LASG loan portfolio as of June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased |
|
Originated |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Non-owner occupied commercial real estate |
|
$ |
128,182 |
|
$ |
53,051 |
|
$ |
181,233 |
|
Owner occupied commercial real estate |
|
|
72,069 |
|
|
16,507 |
|
|
88,576 |
|
Commercial business |
|
|
273 |
|
|
108,577 |
|
|
108,850 |
|
1 - 4 family residential |
|
|
2,068 |
|
|
137 |
|
|
2,205 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
202,592 |
|
$ |
178,272 |
|
$ |
380,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since
the inception of the LASG through June 30, 2015, we have purchased loans for an aggregate investment of $386.3 million, of which $82.7 million was purchased
during fiscal 2015. We have also originated loans totaling $235.3 million, of which $130.5 million was originated in fiscal 2015. As of June 30, 2015, the unpaid principal balance
of loans purchased or originated by the LASG ranged from $1 thousand to $12.0 million, with an average balance of $892 thousand. Included in the balance are non-real estate
secured loans to broker-dealers, which have balances of $12.0 million each. The real estate loans were secured principally by retail, industrial, mixed use, multi-family and office properties
in 36 states.
The
following table shows the LASG loan portfolio stratified by book value as of June 30, 2015.
|
|
|
|
|
|
|
|
Range
|
|
Amount |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
$0 - $500 |
|
$ |
54,930 |
|
|
14.42 |
% |
$500 - $1,000 |
|
|
48,480 |
|
|
12.73 |
% |
$1,000 - $2,000 |
|
|
69,332 |
|
|
18.20 |
% |
$2,000 - $3,000 |
|
|
56,659 |
|
|
14.88 |
% |
$3,000 - $4,000 |
|
|
24,857 |
|
|
6.53 |
% |
Greater than $4,000 |
|
|
126,606 |
|
|
33.24 |
% |
|
|
|
|
|
|
|
|
|
|
$ |
380,864 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Table of Contents
The
following tables show the LASG loan portfolio by location and type of collateral as of June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral Type
|
|
Amount |
|
Percent
of Total |
|
State
|
|
Amount |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
|
|
(Dollars in thousands)
|
|
Multifamily |
|
$ |
57,752 |
|
|
15.16 |
% |
CA |
|
$ |
66,972 |
|
|
17.58 |
% |
Office |
|
|
44,125 |
|
|
11.59 |
% |
NY |
|
|
66,722 |
|
|
17.52 |
% |
Hospitality |
|
|
50,893 |
|
|
13.36 |
% |
NJ |
|
|
25,060 |
|
|
6.58 |
% |
Retail |
|
|
54,121 |
|
|
14.21 |
% |
FL |
|
|
10,509 |
|
|
2.76 |
% |
Industrial |
|
|
34,225 |
|
|
8.99 |
% |
GA |
|
|
9,065 |
|
|
2.38 |
% |
Mixed use |
|
|
20,758 |
|
|
5.45 |
% |
IL |
|
|
17,348 |
|
|
4.55 |
% |
Securities |
|
|
71,630 |
|
|
18.81 |
% |
TX |
|
|
10,107 |
|
|
2.65 |
% |
Other real estate |
|
|
15,281 |
|
|
4.01 |
% |
Non-real estate |
|
|
92,773 |
|
|
24.36 |
% |
All other |
|
|
32,079 |
|
|
8.42 |
% |
All other |
|
|
82,308 |
|
|
21.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
380,864 |
|
|
100.00 |
% |
|
|
$ |
380,864 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Purchase Strategies. The LASG's loan purchasing strategy involves the acquisition of commercial loans, typically secured by real
estate or other
business assets located throughout the United States. The LASG includes a team of credit analysts, real estate analysts, servicing specialists and legal counsel with extensive experience in the loan
acquisition business.
We
acquire performing commercial loans typically at a discount to their unpaid principal balances. While we acquire loans on a nationwide basis, we seek to avoid significant
concentration in any geographic region or in any one collateral type. We do not seek acquisition opportunities for which the primary collateral is land, construction, or one- to four-family
residential property, although in a very limited number of cases, loans secured by such collateral may be included in a pool of otherwise desirable loans.
We
focus on servicing released, whole loan or lead participation transactions so that we can control the management of our portfolio through our experienced asset management
professionals. Purchased loans can be acquired as a single relationship or combined with other borrowers in a larger pool. We generally avoid small average balance transactions (i.e. less than
$250 thousand) due to the relatively higher operational and opportunity costs of managing and underwriting these assets. Loans are bid to a minimal acceptable yield to maturity based on the
overall risk of the loan, including expected repayment terms and the underlying collateral value. Updated loan-to-value ratios and loan terms both influence the amount of discount the Bank requires in
determining whether a loan meets the Bank's guidelines. We often achieve actual results in excess of our minimal acceptable yield to maturity when a loan is prepaid.
At
June 30, 2015, purchased loans had an unpaid principal balance of $239.9 million and a book value of $202.6 million, representing discount across the portfolio of
15.5%.
10
Table of Contents
The following table shows the purchased loan portfolio as of June 30, 2015 by original purchase price percentage.
|
|
|
|
|
|
|
|
Initial Investment as a % of Unpaid Principal Balance
|
|
Amount |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
0% - 60% |
|
$ |
4,558 |
|
|
2.25 |
% |
60% - 70% |
|
|
5,102 |
|
|
2.52 |
% |
70% - 80% |
|
|
30,282 |
|
|
14.95 |
% |
80% - 90% |
|
|
68,698 |
|
|
33.91 |
% |
90% - 100% |
|
|
93,952 |
|
|
46.37 |
% |
|
|
|
|
|
|
|
|
|
|
$ |
202,592 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secondary Market for Commercial Loans. Commercial whole loans are typically sold either directly by sellers or through loan sale
advisors. Because a
central database for commercial whole loans does not exist, we attempt to compile our own statistics by both polling major loan sale advisors to obtain their aggregate trading volume and tracking the
deal flow that we see directly via a proprietary database. This data reflects only a portion of the total market, as commercial whole loans that are sold in private direct sales or through other loan
sale advisors are not included in our surveys. In recent years, the ratio of performing loans to total loans in the market has increased, in part, because, we believe, sellers have worked through
their most troubled, non-performing loans or are looking to minimize the discount they would receive in a secondary market transaction. While the recent economic crisis has led to a high level of
trading volume, we also expect the market to remain active in times of economic prosperity, as sellers tend to have additional reserve capacity to sell their unwanted assets. Furthermore, we believe
that the continued consolidation of the banking industry will create secondary market activity as acquirers often sell non-strategic borrowing relationships or assets that create excess loan
concentrations.
Underwriting of Purchased Loans. We review many loan purchase opportunities and commence underwriting on a relatively small percentage
of them.
During fiscal 2015, we reviewed approximately 128 transactions representing loans with $1.2 billion in unpaid principal balance. Of those transactions that we reviewed, we placed bids in 40
transactions representing loans with $161.5 million in unpaid principal balance. Ultimately, we closed 22 transactions in which we acquired $93.7 million in unpaid principal balance for
an aggregate purchase price of $82.7 million, or 88.2% of the unpaid principal balance.
Each
of our purchased loans is individually underwritten by a team of in-house, seasoned analysts before being considered for approval. Prior to commencing underwriting, each loan or
portfolio of loans is analyzed for its performance characteristics, loan terms, collateral quality, and price expectations. We also consider whether the loan or portfolio of loans would make our total
purchased loan portfolio more or less diverse with respect to geography, loan type and collateral type. The opportunity is underwritten once it has been identified as fitting our investment
parameters. While the extent of underwriting may vary based on investment size, procedures generally include the following:
-
- A loan analyst reviews and analyzes financial statements and third party research, including credit reports and other data with
respect to the borrower, guarantors, corporate sponsors and any major tenants, in order to assess credit risk.
-
- With the assistance of local counsel, where appropriate, an in-house attorney makes a determination regarding the quality of loan
documentation and enforceability of loan terms.
-
- An in-house real estate specialist performs a detailed evaluation of all real estate collateral, including canvassing local market
experts, conducting original market research for trends and
11
Table of Contents
Collateral Valuation. The estimated value of the real property collateralizing the loan is determined by the LASG's in-house real
estate group, which
considers, among other factors, the type of property, its condition, location and its highest and best use in its marketplace. An inspection is conducted for the real property securing all loans bid
upon, and for all loans that represent an investment in excess of $1.0 million, members of the LASG typically conduct an in-person site inspection.
We
generally view cash flow from operations as the primary source of repayment on purchased loans. The LASG analyzes the current and likely future cash flows generated by the collateral
to repay the loan. Also considered are minimum debt service coverage ratios, consisting of the ratio of net operating income to total principal and interest payments. For example, our credit policy
provides that the debt service coverage ratio for a purchased commercial real estate loan generally should not be less than 120 percent of the monthly principal and interest payments resulting
from a re-amortization of the Bank's basis, at a market interest rate.
Loan Pricing. In determining the amount that we are willing to bid to acquire individual loans or loan pools, the LASG considers the
following:
-
- Collateral securing the loan;
-
- Geographic location;
-
- Financial resources of the borrower or guarantors, if any;
-
- Recourse nature of the loan;
-
- Age and performance of the loan;
-
- Length of time during which the loan has performed in accordance with its repayment term;
-
- Yield expected to be earned; and
-
- Servicing restrictions, if any.
In
addition to the factors listed above and despite the fact that purchased loans are typically performing loans, the LASG also estimates the amount that we may realize through
collection efforts or foreclosure and sale of the collateral, net of expenses, and the length of time and costs required to complete the collection or foreclosure process in the event a loan becomes
non-performing or is non-performing at the time of purchase.
Approvals. All loan purchases must be approved by the LASG Credit Committee. This committee is comprised of members of the executive
management team
and senior management from the LASG. Our credit policy currently requires prior Board approval for the purchase of a loan with an initial investment greater than 10% of the Company's Tier 1
capital, determined on a relationship basis.
12
Table of Contents
Competition for Purchased Loans. The LASG competes primarily with community banks, regional banks and private equity funds operating
nationwide. We
believe that we often have a competitive advantage in bidding against private equity funds on performing loans because those funds generally have higher funding costs and, therefore, higher
expectations for return on investment than we do. Furthermore, private equity funds typically do not compete for small balance commercial loans and typically pursue larger, bulk transactions.
Due
to improving credit quality over the past several years and the continued low interest rate environment, the supply of loans available for purchase has declined, competition has
increased, and spreads have tightened. Despite these trends, we believe that we continue to have a competitive advantage in bidding against other banks because we have a specialized group with
experience in purchasing commercial real estate loans. Additionally, most banks we compete against are community banks looking to acquire loans in their market; these banks usually have specific
criteria for their acquisition activities and do not pursue pools with collateral or geographic diversity.
Loan Originations. In addition to purchasing loans, the LASG also originates commercial loans on a nationwide basis. Capitalizing on
our purchased
loan infrastructure, LASG is in a position to review and act quickly on a variety of lending opportunities. Risk management, approvals, underwriting and other due diligence for these loans is similar
to that for purchased loans, with the exception of the appraisal and documentation process, which mirrors more traditional lenders in employing local attorneys and real estate appraisers to assist in
the process. We believe that the LASG has an advantage in originating commercial loans because of its ability to utilize in-house staff to quickly and accurately screen loan opportunities and
accelerate the underwriting process.
Loan Servicing. We conduct all loan servicing for purchased and originated loans with an in-house team of experienced asset managers
who actively
manage the loan portfolio. Asset managers initiate and maintain regular borrower contact, and ensure that the loan credit analysis is accurate. Collateral valuations, property inspections, and other
collateral characteristics are updated periodically as a result of our ongoing in-house real estate analysis. All asset management activity and analysis is contained within a central database.
Investment Activities
Our securities portfolio and short-term investments provide and maintain liquidity, assist in managing the interest rate sensitivity of
our balance sheet, and serve as collateral for certain of our obligations. Individual investment decisions are made based on the credit quality of the investment, liquidity requirements, potential
returns, cash flow targets, and consistency with our asset/liability management objectives.
Sources of Funds
Deposits have traditionally been the primary source of the Bank's funds for lending and other investment purposes. In addition to
deposits, the Bank obtains funds from the amortization and prepayment of loans and mortgage-backed securities, the sale, call or maturity of investment securities, advances from the Federal Home Loan
Bank of Boston (the "FHLB"), other term borrowings and cash flows generated by operations.
Deposits
We offer a full line of deposit products to customers in western and south-central Maine through our ten-branch network. Our deposit
products consist of demand deposit, NOW, money market, savings and certificate of deposit accounts. Our customers access their funds through ATMs, MasterCard® Debit Cards, Automated
Clearing House funds (electronic transfers) and checks. We also offer telephone banking, online banking and bill payment, mobile banking and remote deposit capture
13
Table of Contents
services.
Interest rates on our deposits are based upon factors that include prevailing loan demand, deposit maturities, alternative costs of funds, interest rates offered by competing financial
institutions and other financial service firms, and general economic conditions. At June 30, 2015, we had core
deposits of $674.2 million, representing 99.9% of total deposits. We define core deposits as non-maturity deposits and non-brokered insured time deposits.
Our
online deposit program, ableBanking, provides an additional channel through which to obtain core deposits to support our growth. ableBanking, which was launched in late fiscal 2012
as a division of Northeast Bank, had $149.2 million in money market and time deposits as of June 30, 2015. We also use deposit listing services to gather deposits from time to time, in
support of our liquidity and asset/liability management objectives. At June 30, 2015, listing service deposits totaled $169.6 million, bearing a weighted average term of
1.49 years.
Borrowings
While we currently consider core deposits (defined as non-maturity deposits and non-brokered insured time deposits) as our primary
source of funding to support asset growth, advances from the FHLB and other sources of wholesale funding remain an important part of our liquidity contingency planning. Northeast Bank may borrow up to
50.0% of its total assets from the FHLB, and borrowings are typically collateralized by mortgage loans and securities pledged to the FHLB. At June 30, 2015, we had $45.7 million of
available borrowing capacity based on collateral. Northeast Bank can also borrow from the Federal Reserve Bank of Boston, with any such borrowing collateralized by consumer loans pledged to the
Federal Reserve.
For
the foreseeable future, we expect to rely less on borrowings than other banks of similar size, because of our regulatory commitment to fund 100% of our loans with core deposits,
although the availability of FHLB and Federal Reserve Bank of Boston advances and other sources of wholesale funding remain an important part of our liquidity contingency planning.
Recent Technology and Operational Enhancements
Over the past few years, we have made investments in technology and customer service to develop the infrastructure to support the LASG,
SBA National Group, ableBanking, and the Community Banking Division. In fiscal 2014, we successfully converted the Bank's core banking system from an "in-house" platform to a service-bureau solution
offering enhanced features and capabilities. We expect that future investments in technology, customer service and operational support functions will generally be proportionate to our growth.
Employees
As of June 30, 2015, the Company employed 174 full-time and 17 part-time employees. The Company's employees are not represented
by any collective bargaining unit. The Company believes that its relations with its employees are good.
Other Subsidiaries
At June 30, 2015, the Bank had four wholly-owned non-bank subsidiaries:
-
- Northeast Bank Insurance Group, Inc. ("NBIG"). The insurance agency assets of NBIG were sold on September 1, 2011. The
entity currently holds the real estate formerly used in its insurance agency business.
-
- 200 Elm Realty, LLC, which was established to hold commercial real estate acquired as a result of loan workouts.
14
Table of Contents
-
- 500 Pine Realty, LLC, which was established to hold residential real estate acquired as a result of loan workouts.
-
- 17 Dogwood Realty, LLC, which was established to hold commercial real estate acquired as a result of loan workouts.
The
Company's wholly-owned subsidiary, ASI Data Services, Inc. ("ASI"), is an inactive corporate subsidiary. ASI initially provided data processing services to the Company and its
subsidiaries. The Company's board transferred the assets and operations of ASI to the Bank in 1996.
Supervision and Regulation
General
As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Company is subject to
regulation and supervision by the Federal Reserve. As a Federal Deposit Insurance Corporation ("FDIC") insured Maine-chartered bank, the Bank is subject to regulation and supervision by the Maine
Bureau of Financial Institutions (the "Bureau") and the FDIC. This regulatory framework is intended to protect depositors, the federal deposit insurance fund, consumers and the banking system as a
whole, and not necessarily investors in the Company. The following discussion is qualified in its entirety by reference to the full text of the statutes, regulations, policies and guidelines described
below.
Bank Holding Company Regulation
Unless a bank holding company becomes a financial holding company under the Gramm-Leach-Bliley Act ("GLBA") as discussed below, the
BHCA generally prohibits a bank holding company from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or a bank holding
company. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire substantially all of the assets of any bank, or ownership or control of
any voting shares of a bank, if,
after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting stock of such bank. In addition, the BHCA generally prohibits a bank holding company from engaging
directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks. However, a bank holding company may engage in, and may
own shares of companies engaged in certain activities, that the Federal Reserve had determined as of November 11, 1999 to be so closely related to banking or managing and controlling banks so
as to be incident thereto.
Under
GLBA, bank holding companies that qualify and have elected to be treated as financial holding companies are permitted to offer their customers virtually any type of service that is
financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking. Under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, (the "Dodd-Frank Act") however, a bank holding company and its affiliates are prohibited from engaging in proprietary trading and from sponsoring and investing in hedge funds
and private equity funds, except as permitted under certain limited circumstances. In order to engage in financial activities under GLBA, a bank holding company must qualify and register with the
Federal Reserve as a "financial holding company" by demonstrating that the bank holding company and each of its depository institution subsidiaries is "well capitalized" and "well managed." A
financial holding company may not engage in new activities not permissible for all bank holding companies or acquire a company engaged in any activity that is not permissible for all bank holding
companies if any depository institution subsidiary of the company has received on its most recent examination under the Community Reinvestment Act of 1977 ("CRA") a rating less than "satisfactory."
Although the Company believes that it meets the qualifications to become a financial holding company under GLBA,
15
Table of Contents
it
has not elected "financial holding company" status, but rather to retain its pre-GLBA bank holding company regulatory status for the present time.
The
Company is required by the BHCA to file an annual report and additional reports required with the Federal Reserve. The Federal Reserve also makes periodic inspections of the Company
and its subsidiaries.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Bank. The revenue of the Company (on a parent company only basis) is
derived primarily from interest and
dividends from the Bank. The right of the Company, and consequently the right of shareholders of the Company, to participate in any distribution of the assets or earnings of the Bank through the
payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Bank (including depositors), except to the extent that certain claims of the Company in a creditor
capacity may be recognized.
It
is the policy of the Federal Reserve that bank holding companies should pay dividends only out of current earnings and only if, after paying such dividends, the bank holding company
would remain adequately capitalized. The Federal Reserve has the authority to prohibit a bank holding company, such as the Company, from paying dividends if it deems such payment to be an unsafe or
unsound practice.
The
FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound
practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. Maine law requires the
approval of the Bureau for any dividend that would reduce a bank's capital below prescribed limits.
Source of Strength
Under the Dodd-Frank Act, the Company is required to serve as a source of financial strength for the Bank in the event of the financial
distress of the Bank. This provision codifies the longstanding policy of the Federal Reserve. In addition, any capital loans by a bank holding company to any of its bank subsidiaries are subordinate
to the payment of deposits and to certain other indebtedness. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Certain Transactions by Bank Holding Companies with their Affiliates
There are various statutory restrictions on the extent to which bank holding companies and their non-bank subsidiaries may borrow,
obtain credit from or otherwise engage in "covered transactions" with their insured depository institution subsidiaries. The Dodd-Frank Act amended the definition of affiliate to include any
investment fund for which the depository institution or one of its affiliates is an investment adviser. An insured depository institution (and its subsidiaries) may not lend money to, or engage in
other covered transactions with, its non-depository institution affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the
proposed transaction, exceeds the following limits: (a) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its
subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. For this purpose, "covered transactions" are defined by
statute to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate, the acceptance of securities
issued by an affiliate as collateral for a loan or extension of credit to any
16
Table of Contents
person
or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, securities borrowing or lending transactions with an affiliate that creates a credit exposure
to such affiliate, or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate. Covered transactions are also subject to collateral security requirements. Covered
transactions as well as other types of transactions between a bank and a bank holding company must be on market terms and not otherwise unduly favorable to the holding company or an affiliate of the
holding company. Moreover, Section 106 of the Bank Holding Company Act Amendments of 1970 provides that, to further competition, a bank holding company and its subsidiaries are prohibited from
engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.
Regulation of the Bank
As a Maine-chartered bank, the Bank is subject to the supervision of and regulation by the Bureau and the FDIC, as the Bank's insurer
of deposits. This supervision and regulation is for the protection of depositors, the FDIC's Deposit Insurance Fund ("DIF"), and consumers, and is not for the protection of the Company's shareholders.
The prior approval of the Bureau and the FDIC is required, among other things, for the Bank to establish or relocate an additional branch office, assume deposits, or engage in any merger,
consolidation, purchase or sale of all or substantially all of the assets of any bank. Under the Dodd-Frank Act, the Federal Reserve may directly examine the subsidiaries of the Company, including the
Bank.
Capital Adequacy and Safety and Soundness
Regulatory Capital Requirements. The Federal Reserve has issued risk-based and leverage capital rules applicable to bank holding
companies such as
the Company, and the FDIC has issued similar rules that apply to insured state nonmember banks, such as the Bank. These guidelines are intended to reflect the relationship between the banking
organization's capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items. The FRB and the FDIC may from time to
time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization's financial condition or actual or anticipated growth.
The
capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain.
Common equity Tier 1 capital for banks and bank holding companies consists of common stockholders' equity and related surplus. Tier 1 capital for banks and bank holding companies
generally consists of the sum of common shareholders' equity, non-cumulative perpetual preferred stock, and related surplus and, in certain cases and subject to limitations, minority interest in
consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt
and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses.
The sum of Tier 1 and Tier 2 capital less certain required deductions represents qualifying total risk-based capital.
Prior
to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred
stock in Tier 1 capital, subject to limitations. However, the FRB's capital rule applicable to bank holding companies permanently grandfathers nonqualifying capital instruments, including trust
preferred securities, issued before May 19, 2010 by depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, subject to a limit
of 25% of Tier 1 capital. In addition, under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in Tier 1
capital; however, the Company was permitted to make a one-time, permanent
17
Table of Contents
election
to continue to exclude accumulated other comprehensive income from capital. In March 2015, the Company made a one time, permanent election to continue to exclude accumulated other
comprehensive income from capital.
Under
the capital rules, risk-based capital ratios are calculated by dividing Tier 1 and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance
sheet credit equivalents are assigned to one of several risk-weight categories, based primarily on relative risk. The rules require banks and bank holding companies to maintain a minimum common equity
Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6%, a total capital ratio of 8% and a leverage ratio of 4%. Additionally, subject to a transition schedule, the capital
rules require a bank holding company to establish a capital conservation buffer of Tier 1 capital in an amount above the minimum risk-based capital requirements for "adequately capitalized"
institutions equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.
Under
rules effective January 1, 2015, a bank holding company, such as the Company, is considered "well capitalized" if the bank holding company (i) has a total risk based
capital ratio of at least 10%, (ii) has a Tier 1 risk-based capital ratio of at least 6%, and (iii) 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. In addition, the FDIC has amended its prompt corrective action rules to reflect the revisions made by
the revised capital rules described above. Under the FDIC's revised rules, which became effective January 1, 2015, an insured state nonmember bank is considered "well capitalized" if it
(i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of 6.5%
or greater, (iv) 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.
The
Company and the Banks are considered "well capitalized" under all regulatory definitions.
Generally,
a bank, upon receiving notice that it is not adequately capitalized (i.e., that it is "undercapitalized"), becomes subject to the prompt corrective action provisions of
Section 38 of FDIA that, for example, (i) restrict payment of capital distributions and management fees, (ii) require that the Federal Reserve monitor the condition of the
institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the institution's assets and (v) require
prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a performance guarantee by each company that controls
the bank. A bank that is "critically undercapitalized" (i.e., has a ratio of tangible equity to total assets that is equal to or less than 2.0%) will be subject to further restrictions, and
generally will be placed in conservatorship or receivership within 90 days.
Deposit Insurance. Deposits in the Bank are insured by the FDIC to the maximum extent permitted by law. Pursuant to the Dodd-Frank Act,
FDIC deposit
insurance has been permanently increased from $100,000 to $250,000 per depositor for deposits maintained by the depositor in the same right and capacity. The FDIA, as amended by the Federal Deposit
Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set a ratio of deposit insurance reserves to estimated insured deposits of the Bankthe designated reserve
ratioof 1.35%. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level and supervisory
rating ("CAMELS rating"). CAMELS ratings reflect the applicable bank regulatory agency to applicable limits by the DIF and are subject to deposit, management, earnings, liquidity and sensitivity to
risk. Assessment rates may also vary for certain institutions based on long term debt issuer ratings, secured or brokered deposits. Pursuant to the Dodd-Frank Act, deposit premiums are based on assets
rather than insurable deposits. To determine its actual deposit
18
Table of Contents
insurance
premiums, the Bank computes the base amount on its average consolidated assets less its average tangible equity (defined as the amount of Tier 1 capital) and its applicable assessment
rate. Assessment rates range from 2.5 to 9 basis points on the broader assessment base for banks in the lowest risk category up to 30 to 45 basis points for banks in the highest risk category.
Under
the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Safety and Soundness Standard. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or
guidelines, relating
to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general
standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal shareholder. In addition, the federal banking agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been
given notice by an agency that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable
compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is
subject under the "prompt corrective action" provisions of FDIA. See "Regulatory Capital Requirements" above. If an institution fails to comply with such an order, the agency may seek to
enforce such order in judicial proceedings and to impose civil money penalties.
Depositor Preference. The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution,
the claims
of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over
other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of
unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they
have made to such insured depository institution.
Activities and Investments of Insured State Banks
The powers of a Maine-chartered bank, such as the Bank, include provisions designed to provide Maine banks with competitive equity to
the powers of national banks. GLBA includes a section of the FDIA governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to
conduct in a financial subsidiary. This provision permits state banks, to the extent permitted under state law, to engage in certain new activities, which are permissible for subsidiaries of a
financial holding company. Further, it expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Maine law explicitly permits banks chartered by the state to engage
in all activities permissible for federally-chartered banks, the Bank is permitted to form subsidiaries to engage in the activities authorized by GLBA. In order to form a financial subsidiary,
a
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state
bank must be well-capitalized, and the state bank would be subject to certain capital deduction, risk management and affiliate transaction rules.
Consumer Protection Regulation
The Company and the Bank are subject to a number of federal and state laws designed to protect consumers and prohibit unfair or
deceptive business practices. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, Home Ownership Protection Act, the Fair Credit Reporting Act, as amended by the Fair and
Accurate Credit Transactions Act of 2003 ("FACT Act"), GLBA, the Truth in Lending Act, CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance
Act, Electronic Funds Transfer Act, Truth in Savings Act, Secure and Fair Enforcement Act, Expedited Funds Availability Act, and various state law counterparts. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services.
Further, the Dodd-Frank Act established the CFPB, which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services.
The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure
to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The FDIC examines the Bank for compliance with CFPB rules
and enforces CFPB rules with respect to the Bank.
Mortgage Reform
The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan,
including verifying a borrower's ability to repay such mortgage loan. The Dodd-Frank Act also allows borrowers to assert violations of certain provisions of the Truth-in-Lending Act as a defense to
foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection
with a residential mortgage loan or home equity line of credit. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement
and for negative amortization loans and hybrid adjustable rate mortgages. Additionally, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential
mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer.
Privacy and Customer Information Security
GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information
about consumers to nonaffiliated third parties. In general, the Bank must provide its customers with an annual disclosure that explains its policies and procedures regarding the disclosure of such
nonpublic personal information and, except as otherwise required or permitted by law, the Bank is prohibited from disclosing such information except as provided in such policies and procedures. GLBA
also requires that the Bank develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information (as defined
under GLBA), to protect against anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could
result in substantial harm or inconvenience to any customer. The Bank is also required to send a notice to customers whose "sensitive information" has been compromised if unauthorized use of this
information is "reasonably possible." Most states, including Maine, have enacted legislation concerning breaches of data security and the duties of the Bank in response to a data breach. Congress
continues to consider federal legislation that would require consumer notice of
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data
security breaches. Pursuant to the FACT Act, the Bank must also develop and implement a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection
with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from
an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making
of such solicitations.
Regulatory Enforcement Authority
The enforcement powers available to the federal banking agencies include, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of law and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities. Under certain
circumstances, federal and state law requires public disclosure and reports of certain criminal offenses and also final enforcement actions by the federal banking agencies.
Community Reinvestment Act
Pursuant to the CRA, regulatory authorities review the performance of the Bank in meeting the credit needs of the communities it
serves. The applicable regulatory authorities consider compliance with this law in connection with the applications for, among other things, approval for de
novo branches, branch relocations and acquisitions of banks and bank holding companies. The Bank received a "satisfactory" rating at its CRA examination dated June 10,
2013, its most recent exam.
Failure
of an institution to receive at least a "satisfactory" rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in
activities permitted for a financial holding company under GLBA, and acquisitions of other financial institutions. The FDIC must take into account the record of performance of banks in meeting the
credit needs of the entire community served, including low- and moderate-income neighborhoods. Current CRA regulations for large banks primarily rely on objective criteria of the performance of
institutions under three key assessment tests: a lending test, a service test and an investment test. For smaller banks, current CRA regulations primarily evaluate the performance of institutions
under two key assessment tests: a lending test and a community development test. The Company is committed to meeting the existing or anticipated credit needs of its entire community, including low-
and moderate-income neighborhoods, consistent with safe and sound banking operations.
Branching and Acquisitions
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended ("Riegle-Neal") and the Dodd-Frank Act permit well
capitalized and well managed bank holding companies, as determined by the Federal Reserve, to acquire banks in any state subject to certain concentration limits and other conditions. Riegle-Neal also
generally authorizes the interstate merger of banks. In addition, among other things, Riegle-Neal and the Dodd-Frank Act permit banks to establish new branches on an interstate basis to the same
extent a bank chartered by the host state may establish branches. Bank holding companies and banks are required to obtain prior Federal Reserve approval to acquire more than 5% of a class of voting
securities, or substantially all of the assets, of a bank holding company, bank or savings association.
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Anti-Money Laundering and the Bank Secrecy Act
Under the Bank Secrecy Act ("BSA"), a financial institution is required to have systems in place to detect certain transactions, based
on the size and nature of the transaction. Financial institutions are generally required to report to the United States Treasury any cash transactions involving more than $10,000. In addition,
financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect
involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system. The USA
PATRIOT Act has significant implications for financial institutions and businesses of other types involved in the transfer of money. The USA PATRIOT Act, together with the implementing regulations of
various federal regulatory agencies, has caused financial institutions, such as the Bank, to adopt and implement additional policies or amend existing policies and procedures with respect to, among
other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. In evaluating an application under
Section 3 of the BHCA to acquire a bank or an application under the Bank Merger Act to merge banks or affect a purchase of assets and assumption of deposits and other liabilities, the
applicable federal banking regulator must consider the anti-money laundering compliance record of both the applicant and the target.
The
United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the Treasury
Office of Foreign Assets Control ("OFAC"), take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a
sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to
making investments in, or providing investment-related advice or assistance to, a sanctioned country; (ii) a blocking of assets in which the government or specially designated nationals of the
sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons); and (iii) restrictions
on transactions with or involving certain persons or entities. Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a
license from OFAC.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Boston (the "FHLBB"), which is one of the regional Federal Home Loan Banks
comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank provides a central credit facility primarily for member institutions. Member institutions are required to acquire and hold
shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning
of each year and 4.5% of its advances (borrowings) from the FHLBB. The Bank was in compliance with this requirement with an investment in FHLBB stock as of June 30, 2015 of $4.1 million.
The Bank receives dividends on its FHLBB stock. The FHLBB has recently declared dividends equal to an annual yield of approximately the daily average three-month LIBOR yield for the quarter for which
the dividend has been declared. Dividend income on FHLBB stock of $67 thousand was recorded during the most recent fiscal year.
Any
advances from the FHLBB must be secured by specified types of collateral, and long-term advances may be used for the purpose of providing funds for residential housing finance,
commercial lending and to purchase investments. Long term advances may also be used to help manage interest rate risk for asset and liability management purposes. As of June 30, 2015, the Bank
had $30.2 million in outstanding FHLBB advances.
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Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties,
together with all other information in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. Any of the risk factors we describe
below could adversely affect our business, financial condition or results of operations. The trading price of our voting common stock could decline if one or more of these risks or uncertainties
actually occur, causing you to lose all or part of your investment. Certain statements below are forward-looking statements. See "A Note About Forward-Looking Statements."
Risks Associated With Our Business
We are subject to regulatory conditions that could constrain our ability to grow our business.
In conjunction with the regulatory approvals received for the merger with FHB Formation LLC, we committed to maintain a
Tier 1 leverage ratio of at least 10%, fund 100% of our loans with core deposits, limit purchased loans to 40% of total loans and hold non-owner occupied commercial real estate loans to within
300% of total risk-based capital. Core deposits, for purposes of this commitment, are defined as non-brokered non-maturity deposits and non-brokered insured time deposits. At June 30, 2015, the
ratio of our purchased loans to total loans was 32.6%. Our ability to purchase loans will be dependent on our ability to grow our originated loan portfolio. To the extent that our ability to originate
loans is constrained by market forces or for any other reason, our ability to execute our loan acquisition strategy would be similarly constrained.
If our allowance for loan losses is not sufficient to absorb actual losses or if we are required to
increase our allowance, our financial condition and results of operations could be adversely affected.
We are exposed to the risk that our borrowers may default on their obligations. A borrower's default on its obligations under one or
more loans of the Bank may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out
of the loan. In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, the Bank may have to write off the loan in whole or in part. In
such situations, the Bank may acquire real estate or other assets, if any, that secure the loan through foreclosure or other similar available remedies, and often the amount owed under the defaulted
loan exceeds the value of the assets acquired.
We
periodically make a determination of an allowance for loan losses based on available information, including, but not limited to, our historical loss experience, the quality of the
loan portfolio, certain economic conditions, the value of the underlying collateral, expected cash flows from purchased loans, and the level of non-accruing and criticized loans. We rely on our loan
quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the amount of provision required for the allowance for loan losses. Provisions to this
allowance result in an expense for the period. If, as a result of general economic conditions, previously incorrect assumptions, or an
increase in defaulted loans, we determine that additional increases in the allowance for loan losses are necessary, we will incur additional expenses.
Determining
the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all
of which may undergo material changes. At any time, there are likely to be loans in our portfolio that will result in losses but that have not been identified as nonperforming or potential problem
credits. We cannot be sure that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans that are identified. We
have in the past been, and in the future may be, required to increase our allowance for loan losses for any of several reasons. State and federal regulators, in reviewing our loan portfolio as part of
a regulatory examination, may request
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that
we increase our allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other
factors, both within and outside of our control, may require an increase in our allowance for loan losses. In addition, if charge-offs in future periods exceed those estimated in our determination of
our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any increases in our allowance for loan losses will result in a decrease in our net income and,
possibly, our capital, and could have an adverse effect on our financial condition and results of operations.
A significant portion of loans held in our loan portfolio were originated by third parties, and such
loans may not have been subject to the same level of due diligence that Northeast Bank would have conducted had it originated the loans.
At June 30, 2015, 32.6% of the loans held in our loan portfolio were originated by third parties, and therefore may not have
been subject to the same level of due diligence that Northeast Bank would have conducted had it originated the loans. Although the Loan Acquisition and Servicing Group conducts a comprehensive review
of all loans that it purchases, loans originated by third parties may lack current financial information and may have incomplete legal documentation and outdated appraisals. As a result, the Loan
Acquisition and Servicing Group may not have information with respect to an acquired loan which, if known at the time of acquisition, would have caused it to reduce its bid price or not bid for the
loan at all. This may adversely affect our yield on loans or cause us to increase our provision for loan losses.
Our experience with loans held in our loan portfolio that were originated by third parties is
limited.
At June 30, 2015, the 32.6% of the loans held in our loan portfolio that were originated by third parties had been held by us
for approximately 1.6 years, calculated on a weighted average basis. Consequently, we have had only a relatively short period of time to evaluate the performance of those loans and the price at
which we purchased them. Further experience with these loans may provide us with information that could cause us to increase our provision for loan losses.
Our loan portfolio includes commercial loans, which are generally riskier than other types of loans.
At June 30, 2015, our commercial real estate mortgage and commercial business loan portfolios comprised 77.1% of total loans.
Commercial loans generally carry larger loan balances and involve a higher risk of nonpayment or late payment than residential mortgage loans. These loans, and purchased loans in particular, may lack
standardized terms and may include a balloon payment feature. Moreover, some of these loans may be secured by assets located outside of the Community Banking Division's market area. The ability of a
borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions and prevailing interest rates.
Repayment of these loans is generally more dependent on the economy and the successful operation of a business. Because of the risks associated with commercial loans, we may experience higher rates of
default than if the portfolio were more heavily weighted toward residential mortgage loans. Higher rates of default could have an adverse effect on our financial condition and results of operations.
Environmental liability associated with our lending activities could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans we have originated or purchased that are in
default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we might be required to remove these
substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. We may not have adequate remedies against
the prior owner or other responsible parties and could find it difficult or
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impossible
to sell the affected properties. These events could have an adverse effect on our financial condition and results of operations.
We may not be able to attract and retain qualified key employees, which could adversely affect our
business prospects, including our competitive position and results of operations.
Our success is dependent upon our ability to attract and retain highly skilled individuals. There is significant competition for those
individuals with the experience and skills required to conduct many of our business activities. We may not be able to hire or retain the key personnel that we depend upon for success. The unexpected
loss of services of one or more of these or other key personnel could have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of
industry experience and the difficulty of promptly finding qualified replacement personnel.
We are subject to liquidity risk.
Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. Our liquidity is used principally to originate
or purchase loans, to repay deposit liabilities and other liabilities when they come due, and to fund operating costs. Customer demand for non-maturity deposits can be difficult to predict. Changes in
market interest rates, increased competition within our markets, and other factors may make deposit gathering more difficult. Disruptions in the capital markets or interest rate changes may make the
terms of wholesale funding sourceswhich include Federal Home Loan Bank advances, the Federal Reserve's Borrower-in-Custody program, securities sold under repurchase agreements, federal
funds purchased and brokered certificates of depositless favorable and may make it difficult to sell securities when needed to provide additional liquidity. As a result, there is a risk
that the cost of funding will increase or that we will not have sufficient funds to meet our obligations when they come due.
We are subject to security and operational risks relating to our use of technology.
Communication and information systems are critical to the conduct of our business because we use these systems to manage our customer
relationships and process accounting and financial reporting information. Although we have established policies and procedures to prevent or limit the impact of system failures, interruptions and
security breaches, including cyber security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, any compromise of our
security systems could prevent customers from using our website and our online banking services, both of which involve the transmission of confidential information. Although we rely on security and
processing systems to provide the security and authentication necessary to securely transmit data, these precautions may not protect our systems from compromises or breaches of security. Information
security risks have increased significantly due to the use of online, telephone and mobile banking channels by clients and the increased sophistication and activities of organized crime, hackers,
terrorists and other external parties. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in the loss of business,
subject us to increased regulatory scrutiny or expose us to civil litigation and possible financial liability, including the costs of customer notification and remediation efforts. Any of these
occurrences could have an adverse effect on our financial condition and results of operations.
We rely on other companies to provide key components of our business infrastructure.
Third party vendors provide key components of our business infrastructure such as internet connections, network access and core
application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not
providing us their services for any reason or their performing their services
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poorly,
could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors could
also entail significant delay and expense.
Damage to our reputation could significantly harm our business, including our competitive position
and business prospects.
We are dependent on our reputation within our market area, as a trusted and responsible financial company, for all aspects of our
relationships with customers, employees, vendors, third-party service providers, and others, with whom we conduct business or potential future business. Our ability to attract and retain customers and
employees could be adversely affected if our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could cause harm to us and our
business prospects. These issues also include, but are not limited to, legal and regulatory requirements; properly maintaining customer and employee personal information; record keeping;
money-laundering; sales and trading practices; ethical issues; appropriately addressing potential conflicts of interest; and the proper identification of the legal, reputational, credit, liquidity and
market risks inherent in our products. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions and legal risks, which could, among other
consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.
Internal controls may fail or be circumvented.
Effective controls over financial reporting are necessary to help ensure reliable financial reporting and prevent fraud. Management is
responsible for maintaining an effective system of internal control and assessing system effectiveness. Our system of internal control is a process designed to provide reasonable, not absolute,
assurance that system objectives are being met. Failure or circumvention of the system of internal control could have an adverse effect on our business, profitability, and financial condition, and
could further result in regulatory actions and loss of investor confidence.
Difficult economic conditions, both in the Community Banking Division's market area and more
generally, could adversely affect our financial condition and results of operations.
Our Community Banking Division primarily serves individuals and businesses located in western and south-central Maine. As a result, a
significant portion of our earnings are closely tied to the economy of Maine. In addition, our loan portfolio includes commercial loans acquired by the Loan Acquisition and Servicing Group that are
secured by assets located nationwide. Deterioration in the economic conditions of the Community Banking Division's market area in Maine, and deterioration of the economy nationally could result in the
following consequences:
-
- Loan delinquencies may increase;
-
- Problem assets and foreclosures may increase;
-
- Demand for our products and services may decline;
-
- Collateral for our loans may decline in value, in turn reducing a customer's borrowing power and reducing the value of collateral
securing a loan; and
-
- The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
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Our future growth, if any, may require us to raise additional capital, but that capital may not be
available when we need it.
As a bank, we are required by regulatory authorities to maintain adequate levels of capital to support our operations. In addition, in
conjunction with the regulatory approvals received for the merger with FHB Formation LLC, we committed to maintain a Tier 1 leverage ratio of
at least 10% and a total risk-based capital ratio of at least 15%. We may need to raise additional capital to support our operations or our growth, if any. Our ability to raise additional capital will
depend, in part, on conditions in the capital markets and our financial performance at that time. Accordingly, we may be unable to raise additional capital, if and when needed, on acceptable terms, or
at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we decide
to raise additional equity capital, investors' interests could be diluted. Our failure to meet any applicable regulatory guideline related to our lending activities or any capital requirement
otherwise imposed upon us or to satisfy any other regulatory requirement could subject us to certain activity restrictions or to a variety of enforcement remedies available to the regulatory
authorities, including limitations on our ability to pay dividends or pursue acquisitions, the issuance by regulatory authorities of a capital directive to increase capital and the termination of
deposit insurance by the FDIC.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to many different counterparties, and
we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial
institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide
liquidity problems and losses or defaults by us or by other institutions and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or client.
In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument
exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Risks Associated With the Industry
Competition in the financial services industry is intense and could result in us losing business or
experiencing reduced margins.
Our future growth and success will depend on our ability to continue to compete effectively in the Community Banking Division's market
area, in the markets in which the Loan Acquisition and Servicing Group and the SBA National group operate and in the markets in which ableBanking operates. We face aggressive competition from other
domestic and foreign lending institutions and from numerous other providers of financial services. The ability of non-banking financial institutions to provide services previously limited to
commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate
with greater flexibility and lower cost structures. Securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. This
may significantly change the competitive environment in which we conduct our business. Some of our competitors have significantly greater financial resources and/or face fewer regulatory constraints.
As a result of these various sources of competition, we could lose business to competitors or could be forced to price products and services on less advantageous terms to retain or attract clients,
either of which would adversely affect its profitability.
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Changes in interest rates could adversely affect our net interest income and profitability.
The majority of our assets and liabilities are monetary in nature. As a result, our earnings and growth are significantly affected by
interest rates, which are subject to the influence of economic conditions generally, both domestic and foreign, to events in the capital markets and also to the monetary and fiscal policies of the
United States and its agencies, particularly the Federal Reserve. The nature and timing of any changes in such policies or general economic conditions and their effect on us cannot be controlled and
are extremely difficult to predict. Changes in interest rates can affect our net interest income as well as the value of our assets and liabilities. Net interest income is the difference between
(i) interest income on interest-earning assets, such as loans and securities, and (ii) interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in
market interest rates, changes in the relationships between short-term and long-term market interest rates, or the yield curve, or changes in the relationships between different interest rate indices
can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities. This difference could result in an increase in interest
expense relative to interest income, and therefore reduce our net interest income. Further, declines in market interest rates may trigger loan prepayments, which in many cases are within our
customers' discretion,
and which in turn may serve to reduce our net interest income if we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates.
We operate in a highly regulated industry, and laws and regulations, or changes in them, could limit
or restrict our activities and could have an adverse impact in our operations.
We are subject to regulation and supervision by the Federal Reserve, and our banking subsidiary, Northeast Bank, is subject to
regulation and supervision by the FDIC and the Maine Bureau of Financial Institutions. Federal and state laws and regulations govern numerous matters, including changes in the ownership or control of
banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments,
permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The Federal Reserve, the FDIC and the Maine Bureau of Financial Institutions have the
power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the Federal Reserve possesses similar powers with
respect to bank holding companies. These and other restrictions limit the manner in which we and Northeast Bank may conduct business and obtain financing.
Because
our business is highly regulated, the laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. It is
impossible to predict the competitive impact that any such changes would have on the banking and financial services industry in general or on our business in particular. Such changes may, among other
things, increase the cost of doing business, limit permissible activities, or affect the competitive balance between banks and other financial institutions. The Dodd-Frank Act instituted major changes
to the banking and financial institutions regulatory regimes in light of government intervention in the financial services sector following the 2008 financial crisis. Other changes to statutes,
regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes
could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products,
among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material
adverse effect on our business, financial condition, and results of operations. See "Supervision and Regulation" in Item 1, "Business."
28
Table of Contents
Additional requirements imposed by the Dodd-Frank Act could adversely affect us.
Current and future legal and regulatory requirements, restrictions, and regulations, including those imposed under the Dodd-Frank Act,
may adversely impact our profitability and may have a material and adverse effect on our business, financial condition, and results of operations, may require us to invest significant management
attention and resources to evaluate and make any changes required by the legislation and related regulations and may make it more difficult for us to attract and retain qualified executive officers
and employees. The Dodd-Frank Act comprehensively reformed the regulation of financial institutions, products and services. Certain provisions of the Dodd-Frank Act that affect deposit insurance
assessments, the payment of interest on demand deposits and interchange fees could increase the costs associated with our banking subsidiaries' deposit-generating activities, as well as place
limitations on the revenues that those deposits may generate. In addition, the Dodd-Frank Act established the CFPB. The CFPB has the authority to prescribe rules for all depository institutions
governing the provision of consumer financial products and services, which may result in rules and regulations that reduce the profitability of such products and services or impose greater costs on
the Company and its subsidiaries. The Dodd-Frank Act also established new minimum mortgage underwriting standards for residential mortgages, and the regulatory agencies have focused on the examination
and supervision of mortgage lending and servicing activities. See "Supervision and RegulationThe Dodd-Frank Act" in Item 1, "Business."
We are subject to more stringent capital requirements.
The federal banking agencies issued a joint final rule, or the "Final Capital Rule," that implemented the Basel III capital standards
and established the minimum capital levels required under the Dodd-Frank Act. As of January 1, 2015, we became required to comply with the Final Capital Rule. The Final Capital Rule established
a minimum common equity Tier I capital ratio of 6.5% of risk-weighted assets for a "well capitalized" institution and increased the minimum Tier I capital ratio for a "well capitalized"
institution from 6.0% to 8.0%. Additionally, subject to a transition period, the Final Capital Rule requires an institution to maintain a 2.5% common equity Tier I capital conservation buffer
over the 6.5% minimum risk-based capital requirement to avoid restrictions on the ability to pay dividends, discretionary bonuses, and engage in share repurchases. The Final Capital Rule permanently
grandfathers trust preferred securities issued before May 19, 2010, subject to a limit of 25% of Tier I capital. The Final Capital Rule increased the required capital for certain
categories of assets, including high-volatility construction real estate loans and certain exposures related to securitizations; however, the Final Capital Rule retained the current capital treatment
of residential mortgages. Under the Final Capital Rule, we made a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital in March 2015. Implementation
of these standards, or any other new regulations, may adversely affect our ability to pay dividends, or require us to reduce business levels or raise capital, including in ways that may adversely
affect our results of operations or financial condition.
The FDIC's assessment rates could adversely affect our financial condition and results of
operations.
The FDIC insures deposits at FDIC-insured depository institutions, such as Northeast Bank, up to applicable limits. As a result of
recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased deposit insurance assessment rates. If these increases are insufficient for the deposit insurance fund of the
FDIC to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. We are generally unable to control the amount of premiums that we
are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Any
future additional assessments, increases or required prepayments in FDIC
29
Table of Contents
insurance
premiums may materially adversely affect results of operations, including by reducing our profitability or limiting our ability to pursue certain business opportunities.
Changes in accounting standards can materially impact our financial statements.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From
time to time, the Financial Accounting Standards Board or regulatory authorities change the financial accounting and reporting standards that govern the preparation of our financial statements. These
changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised
standard retroactively, resulting in our restating prior period financial statements.
We may incur fines, penalties and other negative consequences from regulatory violations, possibly
even inadvertent or unintentional violations.
We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations. However, some
legal/regulatory frameworks provide for the
imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to
ensure compliance. For example, we are subject to regulations issued by the Office of Foreign Assets Control, or "OFAC," that prohibit financial institutions from participating in the transfer of
property belonging to the governments of certain foreign countries and designated nationals of those countries and certain other persons or entities whose interest in property is blocked by
OFAC-administered sanctions. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. There may be other negative
consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage our reputation as described below and could restrict the ability of
institutional investment managers to invest in our securities.
Risks Associated With Our Common Stock
Market volatility has affected and may continue to affect the value of our common stock.
The performance of our common stock has been and may continue to be affected by many factors, including volatility in the credit,
mortgage and housing markets, and the markets with respect to financial institutions generally. Government action and changes in government regulations, such as the Dodd-Frank Act, may affect the
value of our common stock. More general market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or interest rate changes could also
cause the value of our common stock to decrease regardless of our operating results.
Our common stock trading volume may not provide adequate liquidity for investors.
Our voting common stock is listed on the NASDAQ Global Market. The average daily trading volume for Northeast voting common stock is
less than the corresponding trading volume for larger financial institutions. Due to this relatively low trading volume, significant sales of Northeast voting common stock, or the expectation of these
sales, may place significant downward pressure on the market price of Northeast voting common stock. No assurance can be given that a more active trading market in our common stock will develop in the
foreseeable future or can be maintained. There can also be no assurance that the offering will result in a material increase in the "float" for our common stock, which we define as the aggregate
market value of our voting common
stock held by shareholders who are not affiliates of Northeast, because our affiliates may purchase shares of voting common stock in the offering.
30
Table of Contents
There is a limited market for and restrictions on the transferability of our non-voting common
stock.
Our non-voting common stock is not and will not be listed on any exchange. Additionally, the non-voting common stock can only be
transferred in certain limited circumstances set forth in our articles of incorporation. Accordingly, holders of our non-voting common stock may be required to bear the economic consequences of
holding such non-voting common stock for an indefinite period of time.
If we defer payments of interest on our outstanding junior subordinated debt securities or if
certain defaults relating to those debt securities occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common
stock.
As of June 30, 2015, we had outstanding $16.5 million in aggregate principal amount of junior subordinated debt
securities issued in connection with the sale of trust preferred securities by affiliates of ours that are statutory business trusts. We have also guaranteed those trust preferred securities. The
indenture under which the junior subordinated debt securities were issued, together with the guarantee, prohibits us, subject to limited exceptions, from declaring or paying any dividends or
distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any of our capital stock (including the Series A preferred stock and our common
stock) at any time when (i) there shall have occurred and be continuing an event of default under the indenture; (ii) we are in default with respect to payment of any obligations under
the guarantee; or (iii) we have elected to defer payment of interest on the junior subordinated debt securities. In that regard, we are entitled, at our option but subject to certain
conditions, to defer payments of interest on the junior subordinated debt securities from time to time for up to five years.
Events
of default under the indenture generally consist of our failure to pay interest on the junior subordinated debt securities under certain circumstances, our failure to pay any
principal of or premium on such junior subordinated debt securities when due, our failure to comply with certain covenants under the indenture, and certain events of bankruptcy, insolvency or
liquidation relating to us.
As
a result of these provisions, if we were to elect to defer payments of interest on the junior subordinated debt securities, or if any of the other events described in
clause (i) or (ii) of the first paragraph of this risk factor were to occur, we would be prohibited from declaring or paying any dividends on the Series A preferred stock and our
common stock, from redeeming, repurchasing or otherwise acquiring any of the Series A preferred stock or our common stock, and from making any payments to holders of the Series A
preferred stock or our common stock in the event of our liquidation, which would likely have a material adverse effect on the market value of our common stock.
We are dependent upon our subsidiaries for dividends, distributions and other payments.
We are a separate and distinct legal entity from Northeast Bank, and depend on dividends, distributions and other payments from
Northeast Bank to fund dividend payments on our common stock and to fund all payments on our other obligations. We and Northeast Bank are subject to laws that authorize regulatory authorities to block
or reduce the flow of funds from Northeast Bank to us. Regulatory action of that kind could impede access to the funds that Northeast needs in order to make payments on its obligations or dividend
payments. In addition, if Northeast Bank does not maintain sufficient capital levels or its earnings are not sufficient to make dividend payments to us, we may not be able to make dividend payments to
our common and preferred shareholders. Further, our right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of Northeast
Bank's creditors.
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Table of Contents
We may not be able to pay dividends and, if we pay dividends, we cannot guarantee the amount and
frequency of such dividends.
The continued payment of dividends on shares of our common stock will depend upon our debt and equity structure, earnings and financial
condition, need for capital in connection with possible future acquisitions, growth and other factors, including economic conditions, regulatory restrictions, and tax considerations. We cannot
guarantee that we will pay dividends or, if we pay dividends, the amount and frequency of these dividends.
We may issue additional shares of common or preferred stock in the future, which could dilute a
shareholder's ownership of common stock.
Our articles of incorporation authorize our board of directors, generally without shareholder approval, to, among other things, issue
additional shares of common or preferred stock. The issuance of any additional shares of common or preferred stock could be dilutive to a shareholder's ownership of our common stock. To the extent
that we issue options or warrants to purchase common stock in the future and the options or warrants are exercised, our shareholders may experience further dilution. Holders of shares of our common
stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, shareholders may not be permitted to invest in
future issuances of Northeast common or preferred stock. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Accordingly,
regulatory requirements and/or deterioration in our asset quality may require us to sell common stock to raise capital under circumstances and at prices that result in substantial dilution.
We may issue debt and equity securities that are senior to our common stock as to distributions and
in liquidation, which could negatively affect the value of our common stock.
In the future, we may increase our capital resources by entering into debt or debt-like financing or issuing debt or equity securities,
which could include issuances of senior notes, subordinated notes, preferred stock or common stock. In the event of our liquidation, our lenders and holders of its debt or preferred securities would
receive a distribution of our available assets before distributions to the holders of Northeast common stock. Our decision to incur debt and issue securities in future offerings will depend on market
conditions and other factors beyond our control. We cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Future offerings could reduce the value of
shares of our common stock and dilute a shareholder's interest in Northeast.
Our common stock is not insured by any governmental entity.
Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental
entity.
Anti-takeover provisions could negatively impact our shareholders.
Federal law imposes restrictions, including regulatory approval requirements, on persons seeking to acquire control over Northeast.
Provisions of Maine law and provisions of our articles of incorporation and by-laws could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third
party from attempting to acquire control of us. We have a classified board of directors, meaning that approximately one-third of our directors are elected annually. Additionally, our articles of
organization authorize our board of directors to issue preferred stock without shareholder approval and such preferred stock could be issued as a defensive measure in response to a takeover proposal.
Other provisions that could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our shareholders include supermajority voting requirements to
remove a director from office without cause; restrictions on shareholders calling a special meeting; a
32
Table of Contents
requirement
that only directors may fill a board vacancy; and provisions regarding the timing and content of shareholder proposals and nominations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At June 30, 2015, the Company conducted its business from its main office in Lewiston, Maine and an office in Boston,
Massachusetts. The Company also conducts business from its ten full-service bank branches and six loan production offices located in western and south-central Maine and southern New Hampshire.
In
addition to its Lewiston, Maine, and Boston, Massachusetts, offices, the Company leases eleven of its other locations. For information regarding the Company's lease commitments,
please refer to "Lease Obligations" under Note 15 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.
Item 3. Legal Proceedings
From time to time, the Company and its subsidiaries are subject to certain legal proceedings and claims in the ordinary course of
business. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not be material to the Company or its consolidated financial position.
The Company establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Legal proceedings are
subject to inherent uncertainties, and unfavorable rulings could occur that could cause the Company to establish litigation reserves or could have, individually or in the aggregate, a material adverse
effect on its business, financial condition, or operating results.
Item 4. Mine Safety Disclosures
Not applicable.
33
Table of Contents
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
(a) The
Company's voting common stock currently trades on the NASDAQ under the symbol "NBN." There is no established public trading market for the Company's non-voting
common stock. As of the close of business on September 18, 2015, there were approximately 368 registered shareholders of record.
The
following table sets forth the high and low closing sale prices of the Company's voting common stock, as reported on NASDAQ, and quarterly dividends paid on the Company's voting and
non-voting common stock during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2015
|
|
High |
|
Low |
|
Dividend Paid |
|
Jul 1 - Sep 30 |
|
$ |
9.60 |
|
$ |
9.19 |
|
$ |
0.01 |
|
Oct 1 - Dec 31 |
|
|
9.68 |
|
|
8.79 |
|
|
0.01 |
|
Jan 1 - Mar 31 |
|
|
9.73 |
|
|
8.92 |
|
|
0.01 |
|
Apr 1 - Jun 30 |
|
|
10.25 |
|
|
9.14 |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended June 30, 2014
|
|
High |
|
Low |
|
Dividend Paid |
|
Jul 1 - Sep 30 |
|
$ |
10.79 |
|
$ |
9.53 |
|
$ |
0.09 |
|
Oct 1 - Dec 31 |
|
|
10.23 |
|
|
9.37 |
|
|
0.09 |
|
Jan 1 - Mar 31 |
|
|
9.74 |
|
|
9.16 |
|
|
0.09 |
|
Apr 1 - Jun 30 |
|
|
10.00 |
|
|
9.30 |
|
|
0.01 |
|
On
September 18, 2015, the last reported sale price of the Company's voting common stock, as reported on NASDAQ was $10.50. Holders of the Company's voting and non-voting common
stock are entitled to receive dividends when and if declared by the Board of Directors out of funds legally available. The amount and timing of future dividends payable on the Company's voting and
non-voting common stock will depend on, among other things, the financial condition of the Company, regulatory considerations, and other factors. The Company is a legal entity separate from the Bank,
but its revenues are derived primarily from the Bank. Accordingly, the ability of the Company to pay cash dividends on its stock in the future generally will be dependent upon the earnings of the Bank
and the Bank's ability to pay dividends to the Company. The payment of dividends by the Bank will depend on a number of factors, including capital requirements, regulatory limitations, the Bank's
results of operations and financial condition, tax considerations, and general economic conditions. National banking laws regulate and restrict the ability of the Bank to pay dividends to the Company.
See "Item 1. BusinessSupervision and Regulation."
Information
regarding securities authorized for issuance under our equity compensation plans will be included in the Proxy Statement relating to our 2015 Annual Meeting of Shareholders
and is incorporated herein by reference.
(b) Not
applicable.
(c) On
April 23, 2014, the Company announced that its Board of Directors authorized the Company to purchase up to 870,000 shares of its common stock, representing
8.3% of the Company's outstanding common shares and approximately $8.4 million based on the Company's closing stock price on April 22, 2014. Such purchases will be made in open market or
in privately negotiated transactions from time to time and in such amounts as market conditions warrant. The timing and actual number of shares repurchased will depend on a variety of factors
including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The stock
34
Table of Contents
repurchase
program may be suspended or terminated at any time without prior notice, and will expire on April 23, 2016.
On
April 30, 2015, The Board of Directors voted to amend the existing stock repurchase program to authorize the Company to purchase an additional 500,000 shares of its common
stock, representing 5.1% of the Company's outstanding common shares or approximately $4.7 million based on the Company's closing price on April 29, 2015. Such purchases will be made in
open market or in privately negotiated transactions from time to time and in such amounts as market conditions warrant. The timing and actual number of shares repurchased will depend on a variety of
factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The stock repurchase program may be suspended or
terminated at any time without prior notice, and will expire on April 30, 2017.
(d) The
following table sets forth information with respect to purchases made by us of our common stock during the year ended June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares
Purchased(1) |
|
Weighted Average
Price Per share |
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Programs |
|
Maximum Number of
Shares that May Yet
Be Purchased Under
the Program(2) |
|
Jul. 1 - Jul. 31 |
|
|
2,100 |
|
$ |
9.23 |
|
|
293,300 |
|
|
576,700 |
|
Aug. 1 - Aug. 31 |
|
|
12,300 |
|
|
9.34 |
|
|
305,600 |
|
|
564,400 |
|
Sep. 1 - Sep. 30 |
|
|
|
|
|
|
|
|
305,600 |
|
|
564,400 |
|
Oct. 1 - Oct. 31 |
|
|
1,800 |
|
|
9.03 |
|
|
307,400 |
|
|
562,600 |
|
Nov. 1 - Nov. 30 |
|
|
36,900 |
|
|
9.05 |
|
|
344,300 |
|
|
525,700 |
|
Dec. 1 - Dec. 31 |
|
|
395,586 |
|
|
9.14 |
|
|
739,886 |
|
|
130,114 |
|
Jan. 1 - Jan. 31 |
|
|
10,150 |
|
|
9.27 |
|
|
750,036 |
|
|
119,964 |
|
Feb. 1 - Feb. 28 |
|
|
11,500 |
|
|
9.25 |
|
|
761,536 |
|
|
108,464 |
|
Mar. 1 - Mar. 31 |
|
|
9,600 |
|
|
9.29 |
|
|
771,136 |
|
|
98,864 |
|
Apr. 1 - Apr. 30 |
|
|
13,400 |
|
|
9.37 |
|
|
784,536 |
|
|
585,464 |
|
May 1 - May 31 |
|
|
37,930 |
|
|
9.76 |
|
|
822,466 |
|
|
547,534 |
|
Jun. 1 - Jun. 30 |
|
|
179,396 |
|
|
9.91 |
|
|
1,001,862 |
|
|
368,138 |
|
- (1)
- Based
on trade date, not settlement date
- (2)
- On
April 30, 2015, The Board of Directors voted to amend the existing stock repurchase program to authorize the Company to purchase an additional
500,000 shares of its common stock, representing 5.1% of the Company's outstanding common shares or approximately $4.7 million based on the Company's closing price on April 29, 2015. On
that date, 86,664 shares remained available for repurchase under the existing program, prior to the 500,000 share increase in the repurchase plan. The amended stock repurchase program will expire on
April 30, 2017.
Item 6. Selected Financial Data
The following table sets forth our selected financial and operating data on a historical basis. The data set forth below does not
purport to be complete. It should be read in conjunction with, and is
35
Table of Contents
qualified
in its entirety by, the more detailed information, including the Company's Consolidated Financial Statements and related notes, appearing elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
Company(2) |
|
|
|
Successor Company(1) |
|
|
|
|
|
|
|
|
|
Twelve Months
Ended
June 30, 2015 |
|
Twelve Months
Ended
June 30, 2014 |
|
Twelve Months
Ended
June 30, 2013 |
|
Twelve Months
Ended
June 30, 2012 |
|
184 Days
Ended
June 30, 2011 |
|
|
|
181 Days
Ended
Dec. 28, 2010 |
|
|
|
(Dollars in thousands, except per share data)
|
|
Selected operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
$ |
44,588 |
|
$ |
38,371 |
|
$ |
36,543 |
|
$ |
27,014 |
|
$ |
13,304 |
|
|
|
$ |
14,378 |
|
Interest expense |
|
|
7,220 |
|
|
6,653 |
|
|
6,596 |
|
|
6,317 |
|
|
3,207 |
|
|
|
|
5,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
37,368 |
|
|
31,718 |
|
|
29,947 |
|
|
20,697 |
|
|
10,097 |
|
|
|
|
8,501 |
|
Provision for loan losses |
|
|
717 |
|
|
531 |
|
|
1,122 |
|
|
946 |
|
|
707 |
|
|
|
|
912 |
|
Noninterest income(3) |
|
|
7,089 |
|
|
4,869 |
|
|
8,514 |
|
|
5,782 |
|
|
17,569 |
|
|
|
|
3,034 |
|
Net securities gains (losses) |
|
|
|
|
|
|
|
|
792 |
|
|
1,111 |
|
|
1,200 |
|
|
|
|
17 |
|
Noninterest expense(4) |
|
|
32,604 |
|
|
31,777 |
|
|
31,955 |
|
|
25,680 |
|
|
15,807 |
|
|
|
|
8,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
11,136 |
|
|
4,279 |
|
|
6,176 |
|
|
964 |
|
|
12,352 |
|
|
|
|
2,211 |
|
Income tax expense (benefit) |
|
|
3,995 |
|
|
1,579 |
|
|
1,881 |
|
|
102 |
|
|
(108 |
) |
|
|
|
646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
7,141 |
|
|
2,700 |
|
|
4,295 |
|
|
862 |
|
|
12,460 |
|
|
|
|
1,565 |
|
Net income (loss) from discontinued operations |
|
|
|
|
|
(8 |
) |
|
125 |
|
|
1,301 |
|
|
92 |
|
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,141 |
|
$ |
2,692 |
|
$ |
4,420 |
|
$ |
2,163 |
|
$ |
12,552 |
|
|
|
$ |
1,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.72 |
|
$ |
0.26 |
|
$ |
0.38 |
|
$ |
0.11 |
|
$ |
3.49 |
|
|
|
$ |
0.62 |
|
Discontinued operations |
|
|
0.00 |
|
|
0.00 |
|
|
0.01 |
|
|
0.30 |
|
|
0.03 |
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.72 |
|
$ |
0.26 |
|
$ |
0.39 |
|
$ |
0.41 |
|
$ |
3.52 |
|
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.72 |
|
$ |
0.26 |
|
$ |
0.38 |
|
$ |
0.11 |
|
$ |
3.44 |
|
|
|
$ |
0.61 |
|
Discontinued operations |
|
|
0.00 |
|
|
0.00 |
|
|
0.01 |
|
|
0.30 |
|
|
0.03 |
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.72 |
|
$ |
0.26 |
|
$ |
0.39 |
|
$ |
0.41 |
|
$ |
3.47 |
|
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
$ |
0.04 |
|
$ |
0.28 |
|
$ |
0.36 |
|
$ |
0.36 |
|
$ |
0.18 |
|
|
|
$ |
0.18 |
|
Book value |
|
|
11.77 |
|
|
11.05 |
|
|
10.89 |
|
|
11.07 |
|
|
17.33 |
|
|
|
|
19.79 |
|
Selected balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
850,830 |
|
$ |
761,931 |
|
$ |
670,639 |
|
$ |
669,196 |
|
$ |
596,393 |
|
|
|
$ |
627,984 |
|
Loans |
|
|
612,137 |
|
|
516,416 |
|
|
435,376 |
|
|
356,254 |
|
|
309,913 |
|
|
|
|
367,284 |
|
Deposits |
|
|
674,759 |
|
|
574,329 |
|
|
484,623 |
|
|
422,188 |
|
|
401,118 |
|
|
|
|
374,617 |
|
Borrowings |
|
|
52,568 |
|
|
66,005 |
|
|
64,069 |
|
|
120,859 |
|
|
126,706 |
|
|
|
|
199,326 |
|
Total stockholders' equity |
|
|
112,839 |
|
|
112,066 |
|
|
113,802 |
|
|
119,139 |
|
|
64,954 |
|
|
|
|
50,366 |
|
Other ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.89 |
% |
|
0.37 |
% |
|
0.64 |
% |
|
0.36 |
% |
|
4.09 |
% |
|
|
|
0.57 |
% |
Return on average equity |
|
|
6.35 |
% |
|
2.39 |
% |
|
3.79 |
% |
|
3.03 |
% |
|
38.23 |
% |
|
|
|
7.03 |
% |
Efficiency ratio |
|
|
73.34 |
% |
|
86.85 |
% |
|
81.41 |
% |
|
93.08 |
% |
|
54.76 |
% |
|
|
|
72.97 |
% |
Average equity to average total assets |
|
|
14.00 |
% |
|
15.38 |
% |
|
16.93 |
% |
|
11.90 |
% |
|
10.69 |
% |
|
|
|
8.18 |
% |
Common dividend payout ratio |
|
|
5.56 |
% |
|
107.69 |
% |
|
92.25 |
% |
|
71.26 |
% |
|
5.02 |
% |
|
|
|
25.02 |
% |
Tier 1 leverage capital ratio |
|
|
14.42 |
% |
|
15.90 |
% |
|
17.78 |
% |
|
19.91 |
% |
|
10.35 |
% |
|
|
|
N/A |
|
Total risk-based capital ratio |
|
|
20.04 |
% |
|
23.69 |
% |
|
27.54 |
% |
|
33.34 |
% |
|
18.99 |
% |
|
|
|
N/A |
|
- (1)
- "Successor
Company" means Northeast Bancorp and its subsidiary after the closing of the merger with FHB Formation LLC on December 29, 2010.
- (2)
- "Predecessor
Company" means Northeast Bancorp and its subsidiary before the closing of the merger with FHB Formation LLC on December 29, 2010.
- (3)
- Includes
primarily fees for deposits, investment brokerage services to customers through the second quarter of fiscal 2014, and gains on the sale of loans.
In the 184 days ended June 30, 2011, the total further includes a bargain purchase gain $15.4 million.
- (4)
- Includes
salaries, employee benefits, occupancy and equipment, and other expenses. In the 184 days ended June 30, 2011, the total includes
merger expenses totaling $3.2 million.
36
Table of Contents
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Northeast Bancorp (the "Company") is a Maine corporation and a bank holding company registered with the Federal Reserve under the Bank
Holding Company Act of 1956. The Company also is a registered Maine financial institution holding company, and is subject to regulation by both the Maine Bureau of Financial Institutions (the
"Bureau") and the Federal Reserve. The Company's principal asset is the capital stock of Northeast Bank (the "Bank"), a Maine state-chartered universal bank, which is regulated by the Federal Deposit
Insurance Corporation ("FDIC") and the Bureau. The Company's results of operations are primarily dependent on the results of the operations of the Bank.
The
Management's Discussion and Analysis of Financial Condition and Results of Operations, which follows, presents a review of the consolidated operating results of the Company for the
fiscal year ended June 30, 2015 ("fiscal 2015") and the fiscal year ended June 30, 2014 ("fiscal 2014"). This discussion and analysis is intended to assist you in understanding the
results of our operations and financial condition. You should read this discussion together with your review of the Company's
Consolidated Financial Statements and related notes and other statistical information included in this report. Certain amounts in the periods prior to fiscal 2015 have been reclassified to conform to
the fiscal 2015 presentation.
Overview
Financial Presentation
On December 29, 2010, the merger (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 our 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 (the "Successor Company"). In the application of ASC 805 to this transaction, the following was considered:
Identify the Accounting Acquirer
FHB was identified as the accounting acquirer. FHB, which was incorporated on March 9, 2009, acquired a controlling financial
interest of approximately 60% of the Successor Company's total outstanding voting and non-voting common stock in exchange for contributed capital and cash consideration.
In
the evaluation and identification of FHB as the accounting acquirer, it was concluded that FHB was a substantive entity involved in significant pre-merger activities, including the
following: raising capital; incurring debt; incurring operating expenses; leasing office space; hiring staff to develop the surviving company's business plan; retaining professional services firms;
and identifying acquisition targets and negotiating potential transactions, including the Merger.
Determine the Acquisition Date
December 29, 2010, the closing date of the Merger, was the date that FHB gained control of the combined entity.
Recognize assets acquired and liabilities assumed
Because neither Northeast Bancorp, the Predecessor Company (the acquired company), nor FHB (the accounting acquirer) exist as separate
entities after the Merger, a new basis of accounting at fair
37
Table of Contents
value
for the Successor Company's assets and liabilities was established in the consolidated financial statements. At the acquisition date, the Successor Company recognized the identifiable assets
acquired and the liabilities assumed based on their then fair values in accordance with ASC Topic 820, Fair Value Measurement ("ASC 820"). The Successor
Company recognized a bargain purchase gain as the difference between the total purchase price and the net assets acquired.
As
a result of application of the acquisition method of accounting to Northeast Bancorp after the merger on December 29, 2010, the Company's financial statements from the periods
prior to the transaction date are not directly comparable to the financial statements for periods subsequent to the transaction date. To make this distinction, the Company has labeled balances and
results of operations prior to the transaction date as "Predecessor Company" and balances and results of operations for periods subsequent to the transaction date as "Successor Company." The lack of
comparability arises from the assets and liabilities having new accounting bases as a result of recording them at their fair values as of the transaction date rather than at historical cost basis. To
denote this lack of comparability, a heavy black line has been placed between the Successor Company and Predecessor Company columns in the discussion herein.
In
connection with the transaction, as part of the regulatory approval process the Company made certain commitments to the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), the most significant of which are, (i) maintain a Tier 1 leverage ratio of at least 10%, (ii) maintain a total risk-based capital ratio of at least 15%,
(iii) limit purchased loans to 40% of total loans, (iv) fund 100% of the Company's loans with core deposits (defined as non-maturity deposits and non-brokered insured time deposits), and
(v) hold commercial real estate loans (including owner-occupied commercial real estate) to within 300% of total risk-based capital. On June 28, 2013, the Federal Reserve approved the
amendment of the commitment to hold commercial real estate loans to within 300% of total risk-based capital to exclude owner-occupied commercial real estate loans. All other commitments made to the
Federal Reserve in connection with the merger remain unchanged. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve. The Company's compliance ratios at
June 30, 2015 are as follows:
|
|
|
|
|
|
|
Condition
|
|
Ratio |
|
(i) |
|
Tier 1 leverage ratio |
|
|
14.42 |
% |
(ii) |
|
Total risk-based capital ratio |
|
|
20.04 |
% |
(iii) |
|
Ratio of purchased loans to total loans |
|
|
32.61 |
% |
(iv) |
|
Ratio of loans to core deposits |
|
|
91.85 |
% |
(v) |
|
Ratio of non-owner occupied commercial real estate loans to total risk-based capital |
|
|
188.49 |
% |
As
a result of the sale of the Company's insurance agency business in the first quarter of fiscal 2012 and discontinuation of further significant business activities in the insurance
agency segment, the Company has classified the results of its insurance agency division as discontinued operations in the Company's consolidated financial statements and discussion herein.
The
Company concluded all investment brokerage activities in the second quarter of fiscal 2014. Accordingly, operations associated with these activities have been classified as
discontinued operations in all periods in the Company's consolidated financial statements and discussion herein.
Fiscal 2015 Financial Highlights
The Company's financial and strategic highlights for fiscal 2015 include the
following:
-
- Earned net income of $7.1 million, or $0.72 per diluted share, from continuing operations as compared to $2.7 million,
or $0.26 per diluted share, from continuing operations in fiscal 2014.
38
Table of Contents
-
- LASG purchased loans totaling $82.7 million and originated loans totaling $82.5 million, earning average portfolio
yields of 13.0% and 6.4%, respectively. The purchased loan yield of 13.0% includes regularly scheduled interest and accretion, and accelerated accretion and fees recognized on loan payoffs. The
Company also monitors the "total return" on its purchased loan portfolio, a measure that includes gains on sales of purchased loans, as well as interest, scheduled accretion and accelerated accretion
and fees. On this basis, the purchased loan portfolio earned a total return of 13.3% for fiscal 2015. An overview of the LASG portfolio follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
|
|
Purchased |
|
Originated |
|
Secured
Loans to
Broker-
Dealers |
|
Total
LASG |
|
Purchased |
|
Originated |
|
Secured
Loans to
Broker-
Dealers |
|
Total
LASG |
|
|
|
(Dollars in thousands)
|
|
Loans purchased or originated during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
$ |
93,694 |
|
$ |
82,502 |
|
$ |
48,000 |
|
$ |
224,196 |
|
$ |
91,288 |
|
$ |
54,225 |
|
$ |
12,000 |
|
$ |
157,513 |
|
Net investment basis |
|
|
82,654 |
|
|
82,502 |
|
|
48,000 |
|
|
213,156 |
|
|
79,823 |
|
|
54,225 |
|
|
12,000 |
|
|
146,048 |
|
Loan returns during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield |
|
|
13.00 |
% |
|
6.44 |
% |
|
0.47 |
% |
|
9.73 |
% |
|
11.43 |
% |
|
7.49 |
% |
|
0.61 |
% |
|
9.70 |
% |
Total Return(1) |
|
|
13.33 |
% |
|
6.75 |
% |
|
0.48 |
% |
|
10.02 |
% |
|
11.76 |
% |
|
8.48 |
% |
|
0.61 |
% |
|
10.11 |
% |
Total loans as of period end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance |
|
$ |
239,933 |
|
$ |
118,416 |
|
$ |
60,000 |
|
$ |
418,349 |
|
$ |
242,631 |
|
$ |
65,558 |
|
$ |
12,000 |
|
$ |
320,219 |
|
Net investment basis |
|
$ |
202,592 |
|
$ |
118,261 |
|
$ |
60,011 |
|
$ |
380,864 |
|
$ |
203,450 |
|
$ |
65,561 |
|
$ |
12,000 |
|
$ |
281,011 |
|
- (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.
-
- Increased the Company's core deposit base by $100.4 million, mainly the result of increases in money market accounts attracted
through the Bank's online-only ableBanking division.
-
- Launched the Company's SBA National program in November of 2014, and originated $33.6 million in SBA-guaranteed loans through
June 30, 2015.
Results of OperationsContinuing Operations
General
Net income for the year ended June 30, 2015 was $7.1 million, a $4.4 million increase from $2.7 million for
the year ended June 30, 2014
Items
of significance affecting the Company's earnings included:
-
- An increase in net interest and dividend income before provision for loan losses, which grew to $37.4 million compared to
$31.7 million for the year ended June 30, 2014, principally due to an 18.5% increase in loans outstanding and an increase in transactional interest income realized
39
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
Average
Balance |
|
Interest
Income |
|
Yield |
|
Average
Balance |
|
Interest
Income |
|
Yield |
|
|
|
(Dollars in thousands)
|
|
Community Banking Division |
|
$ |
236,128 |
|
$ |
11,747 |
|
|
4.97 |
% |
$ |
246,853 |
|
$ |
12,926 |
|
|
5.24 |
% |
LASG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated |
|
|
76,448 |
|
|
4,924 |
|
|
6.44 |
% |
|
47,494 |
|
|
3,558 |
|
|
7.49 |
% |
Purchased |
|
|
203,822 |
|
|
26,500 |
|
|
13.00 |
% |
|
178,377 |
|
|
20,388 |
|
|
11.43 |
% |
Secured Loans to Broker-Dealers |
|
|
44,942 |
|
|
212 |
|
|
0.47 |
% |
|
22,389 |
|
|
137 |
|
|
0.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total LASG |
|
|
325,212 |
|
|
31,636 |
|
|
9.73 |
% |
|
248,260 |
|
|
24,083 |
|
|
9.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
561,340 |
|
$ |
43,383 |
|
|
7.73 |
% |
$ |
495,113 |
|
$ |
37,009 |
|
|
7.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
yield on purchased loans in each period shown was increased by unscheduled loan payoffs, which resulted in immediate recognition of the prepaid loans' discount in interest income.
The following table
details the "total return" on purchased loans, which includes total transactional income of $9.9 million for the year ended June 30, 2015, an increase of $4.5 million from the
year ended June 30, 2014. The following table summarizes the total return recognized on the purchased loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
Income |
|
Return(1) |
|
Income |
|
Return(1) |
|
|
|
(Dollars in thousands)
|
|
Regularly scheduled interest and accretion |
|
$ |
17,327 |
|
|
8.48 |
% |
$ |
15,682 |
|
|
8.75 |
% |
Transactional income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on loan sales |
|
|
190 |
|
|
0.09 |
% |
|
576 |
|
|
0.32 |
% |
Gain on sale of real estate owned |
|
|
607 |
|
|
0.30 |
% |
|
100 |
|
|
0.06 |
% |
Other noninterest income |
|
|
(69 |
) |
|
0.03 |
% |
|
4 |
|
|
0.00 |
% |
Accelerated accretion and loan fees |
|
|
9,173 |
|
|
4.49 |
% |
|
4,706 |
|
|
2.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transactional income |
|
|
9,901 |
|
|
4.85 |
% |
|
5,386 |
|
|
3.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,228 |
|
|
13.33 |
% |
$ |
21,068 |
|
|
11.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- The
total return represents scheduled interest and accretion, accelerated accretion, net gains on asset sales, and other noninterest income recorded during
the period divided by the average invested balance, on an annualized basis.
-
- An increase of $2.2 million in noninterest income, principally resulting from an increase of $1.8 million in gains
realized on sale of portfolio loans. The year ended June 30, 2015 includes gains realized on sale of SBA loans of $2.6 million.
-
- An increase of $827 thousand in noninterest expense, principally due to an increase in salaries and employee benefits of
$1.0 million, the result of increases in employee head count, benefits costs and stock-based compensation expense. Professional fees also contributed to the overall increase, rising
$373 thousand due primarily to fees for temporary consulting services. Offsetting these increases were decreases in occupancy and equipment expense of $509 thousand, the result of a
reduction in software maintenance and depreciation expense following the conversion of the Bank's core systems platform to an outsourced model in May 2014.
40
Table of Contents
Net Interest Income
The
following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
2013 |
|
|
|
Average
Balance |
|
Interest
Income/
Expense |
|
Average
Yield/
Rate |
|
Average
Balance |
|
Interest
Income/
Expense |
|
Average
Yield/
Rate |
|
Average
Balance |
|
Interest
Income/
Expense |
|
Average
Yield/
Rate |
|
|
|
(Dollars in thousands)
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities(1) |
|
$ |
108,204 |
|
$ |
913 |
|
|
0.84 |
% |
$ |
115,849 |
|
$ |
1,048 |
|
|
0.90 |
% |
$ |
131,199 |
|
$ |
1,138 |
|
|
0.87 |
% |
Loans(2)(3) |
|
|
561,340 |
|
|
43,383 |
|
|
7.73 |
% |
|
495,113 |
|
|
37,009 |
|
|
7.47 |
% |
|
384,310 |
|
|
35,017 |
|
|
9.11 |
% |
Regulatory stock |
|
|
4,102 |
|
|
67 |
|
|
1.63 |
% |
|
5,620 |
|
|
123 |
|
|
2.19 |
% |
|
5,398 |
|
|
75 |
|
|
1.39 |
% |
Short-term investments(4) |
|
|
92,354 |
|
|
225 |
|
|
0.24 |
% |
|
78,838 |
|
|
191 |
|
|
0.24 |
% |
|
127,781 |
|
|
313 |
|
|
0.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
766,000 |
|
|
44,588 |
|
|
5.82 |
% |
|
695,420 |
|
|
38,371 |
|
|
5.52 |
% |
|
648,688 |
|
|
36,543 |
|
|
5.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
2,704 |
|
|
|
|
|
|
|
|
2,876 |
|
|
|
|
|
|
|
|
3,065 |
|
|
|
|
|
|
|
Other non-interest earning assets |
|
|
33,741 |
|
|
|
|
|
|
|
|
33,958 |
|
|
|
|
|
|
|
|
37,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
802,445 |
|
|
|
|
|
|
|
$ |
732,254 |
|
|
|
|
|
|
|
$ |
688,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Stockholders' Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
$ |
63,181 |
|
$ |
162 |
|
|
0.26 |
% |
$ |
61,146 |
|
$ |
162 |
|
|
0.26 |
% |
$ |
55,763 |
|
$ |
153 |
|
|
0.27 |
% |
Money market accounts |
|
|
133,266 |
|
|
1,002 |
|
|
0.75 |
% |
|
85,333 |
|
|
447 |
|
|
0.52 |
% |
|
63,931 |
|
|
337 |
|
|
0.53 |
% |
Savings accounts |
|
|
34,495 |
|
|
46 |
|
|
0.13 |
% |
|
34,391 |
|
|
44 |
|
|
0.13 |
% |
|
31,939 |
|
|
44 |
|
|
0.14 |
% |
Time deposits |
|
|
340,046 |
|
|
3,800 |
|
|
1.12 |
% |
|
314,848 |
|
|
3,470 |
|
|
1.10 |
% |
|
280,059 |
|
|
3,564 |
|
|
1.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
570,988 |
|
|
5,010 |
|
|
0.88 |
% |
|
495,718 |
|
|
4,123 |
|
|
0.83 |
% |
|
431,692 |
|
|
4,098 |
|
|
0.95 |
% |
Short-term borrowings |
|
|
2,578 |
|
|
29 |
|
|
1.12 |
% |
|
2,230 |
|
|
24 |
|
|
1.08 |
% |
|
1,472 |
|
|
19 |
|
|
1.29 |
% |
Borrowed funds |
|
|
45,661 |
|
|
1,463 |
|
|
3.20 |
% |
|
58,468 |
|
|
1,741 |
|
|
2.98 |
% |
|
75,633 |
|
|
1,710 |
|
|
2.26 |
% |
Junior subordinated debentures |
|
|
8,531 |
|
|
718 |
|
|
8.42 |
% |
|
8,352 |
|
|
765 |
|
|
9.16 |
% |
|
8,185 |
|
|
769 |
|
|
9.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
627,758 |
|
|
7,220 |
|
|
1.15 |
% |
|
564,768 |
|
|
6,653 |
|
|
1.18 |
% |
|
516,982 |
|
|
6,596 |
|
|
1.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits and escrow accounts |
|
|
54,940 |
|
|
|
|
|
|
|
|
50,890 |
|
|
|
|
|
|
|
|
49,343 |
|
|
|
|
|
|
|
Other liabilities |
|
|
7,370 |
|
|
|
|
|
|
|
|
3,962 |
|
|
|
|
|
|
|
|
5,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
690,068 |
|
|
|
|
|
|
|
|
619,620 |
|
|
|
|
|
|
|
|
572,307 |
|
|
|
|
|
|
|
Stockholders' equity |
|
|
112,377 |
|
|
|
|
|
|
|
|
112,634 |
|
|
|
|
|
|
|
|
116,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
802,445 |
|
|
|
|
|
|
|
$ |
732,254 |
|
|
|
|
|
|
|
$ |
688,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
37,368 |
|
|
|
|
|
|
|
$ |
31,718 |
|
|
|
|
|
|
|
$ |
29,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
4.67 |
% |
|
|
|
|
|
|
|
4.34 |
% |
|
|
|
|
|
|
|
4.36 |
% |
Net interest margin(5) |
|
|
|
|
|
|
|
|
4.88 |
% |
|
|
|
|
|
|
|
4.56 |
% |
|
|
|
|
|
|
|
4.62 |
% |
- (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)
- Net
interest margin is calculated as net income divided by total interest-earning assets.
41
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2015
Compared to the Year Ended
June 30, 2014 |
|
|
|
Change Due
to Volume |
|
Change Due
to Rate |
|
Total Change |
|
|
|
(Dollars in thousands)
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
$ |
(67 |
) |
$ |
(68 |
) |
$ |
(135 |
) |
Loans |
|
|
5,084 |
|
|
1,290 |
|
|
6,374 |
|
Regulatory stock |
|
|
(29 |
) |
|
(27 |
) |
|
(56 |
) |
Short-term investments |
|
|
33 |
|
|
1 |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest income |
|
|
5,021 |
|
|
1,196 |
|
|
6,217 |
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
612 |
|
|
275 |
|
|
887 |
|
Short-term borrowings |
|
|
4 |
|
|
1 |
|
|
5 |
|
Borrowed funds |
|
|
(403 |
) |
|
125 |
|
|
(278 |
) |
Junior subordinated debentures |
|
|
16 |
|
|
(63 |
) |
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest expense |
|
|
229 |
|
|
338 |
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in net interest and dividend income |
|
$ |
4,792 |
|
$ |
858 |
|
$ |
5,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2014
Compared to the Year Ended
June 30, 2013 |
|
|
|
Change Due
to Volume |
|
Change Due
to Rate |
|
Total Change |
|
|
|
(Dollars in thousands)
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
$ |
(137 |
) |
$ |
47 |
|
$ |
(90 |
) |
Loans |
|
|
8,978 |
|
|
(6,986 |
) |
|
1,992 |
|
Regulatory stock |
|
|
3 |
|
|
45 |
|
|
48 |
|
Short-term investments |
|
|
(119 |
) |
|
(3 |
) |
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest income |
|
|
8,725 |
|
|
(6,897 |
) |
|
1,828 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
540 |
|
|
(515 |
) |
|
25 |
|
Short-term borrowings |
|
|
8 |
|
|
(3 |
) |
|
5 |
|
Borrowed funds |
|
|
(439 |
) |
|
470 |
|
|
31 |
|
Junior subordinated debentures |
|
|
16 |
|
|
(20 |
) |
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total increase in interest expense |
|
|
125 |
|
|
(68 |
) |
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in net interest and dividend income |
|
$ |
8,600 |
|
$ |
(6,829 |
) |
$ |
1,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended June 30, 2015, the $4.8 million volume-related change in net interest income was mainly the result of the increase in loans, which grew by
$66.2 million on average compared to
42
Table of Contents
fiscal
2014. The rate-related change in fiscal 2015 compared to fiscal 2014 was principally due to the purchased loan yield differential, offset in part by a decline in yields on the originated loan
portfolios. For fiscal 2015, the 4.88% net interest margin earned was 32 basis points higher than that earned for the year ended June 30, 2014. The net interest margin increased during fiscal
2015 principally due to the increased loan volume and increase in transactional income on purchased loans.
The
following table summarizes the effects of accretion of fair value adjustments on the net interest margin, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion (Amortization) of Merger Fair Value Adjustments |
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
Average
Balance |
|
Income
(Expense) |
|
Effect on
Yield / Rate |
|
Average
Balance |
|
Income
(Expense) |
|
Effect on
Yield / Rate |
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities |
|
$ |
108,204 |
|
$ |
|
|
|
0.00 |
% |
$ |
115,849 |
|
$ |
|
|
|
0.00 |
% |
Loans |
|
|
561,340 |
|
|
201 |
|
|
0.07 |
% |
|
495,113 |
|
|
174 |
|
|
0.04 |
% |
Other interest-earning assets |
|
|
96,456 |
|
|
|
|
|
0.00 |
% |
|
84,458 |
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
766,000 |
|
$ |
201 |
|
|
0.05 |
% |
$ |
695,420 |
|
$ |
174 |
|
|
0.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
570,988 |
|
|
171 |
|
|
0.06 |
% |
|
495,718 |
|
|
560 |
|
|
0.11 |
% |
Short-term borrowings |
|
|
2,578 |
|
|
|
|
|
0.00 |
% |
|
2,230 |
|
|
|
|
|
0.00 |
% |
Borrowed funds |
|
|
45,661 |
|
|
136 |
|
|
0.59 |
% |
|
58,468 |
|
|
414 |
|
|
0.71 |
% |
Junior subordinated debentures |
|
|
8,531 |
|
|
|
|
|
0.00 |
% |
|
8,352 |
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
627,758 |
|
$ |
307 |
|
|
0.10 |
% |
$ |
564,768 |
|
$ |
974 |
|
|
0.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect of noncash accretion on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
508 |
|
|
|
|
|
|
|
$ |
1,148 |
|
|
|
|
Net interest margin |
|
|
|
|
|
0.07 |
% |
|
|
|
|
|
|
|
0.17 |
% |
|
|
|
The
Company's total cost of funds improved to 1.06% in fiscal 2015, down from 1.08% in fiscal 2014, principally due to a 3 basis point decrease in the cost of interest-bearing
liabilities.
Provision for Loan Losses
Quarterly, the Company determines the amount of its allowance for loan losses adequate to provide for losses inherent in the Company's
loan portfolios, with the provision for loan losses determined by the net periodic change in the allowance for loan losses. For acquired loans accounted for under ASC 310-30, a provision for loan loss
is recorded when estimates of future cash flows decrease due to credit deterioration.
The
provision for loan losses for periods subsequent to the Merger reflects the impact of adjusting loans to their then fair values, as well as the elimination of the allowance for loan
losses in accordance with the acquisition method of accounting. Subsequent to the Merger, the provision for loan losses has been recorded based on estimates of inherent losses in newly originated
loans and for incremental reserves required for pre-merger loans based on estimates of deteriorated credit quality post-merger.
The
provision for loan losses for the fiscal year ended June 30, 2015 was $717 thousand. This compares to a provision for loan losses of $531 thousand for the year
ended June 30, 2014. At June 30, 2015 and 2014, the allowance for loan losses was $1.9 million and $1.4 million, respectively, and the ratio of allowance for loan losses to
total loans was 0.31% and 0.26%, respectively. Net charge-offs for
43
Table of Contents
the
fiscal year ended June 30, 2015 totaled $158 thousand, representing approximately 0.03% of the Company's average portfolio loan balance during the fiscal year. This compares to
$307 thousand, or 0.06%, in fiscal 2014, representing a decrease of $151 thousand in fiscal 2015, the result of improved net charge-off trends in all loan segments.
For
additional information on the allowance for loan losses, see "Asset Quality."
Noninterest Income
Noninterest income for the fiscal year ended June 30, 2015 totaled $7.1 million, an increase of $2.2 million, or
45.6%, from fiscal 2014. When compared to fiscal 2014, the increase was principally due to the following:
-
- An increase of $1.8 million in gains realized on sale of portfolio loans. The year ended June 30, 2015 includes gains
realized on sale of SBA loans of $2.6 million and gains realized on sale of LASG loans of $200 thousand, compared to a $408 thousand gain on sale of SBA loans and
$496 thousand gain on sale of LASG purchased loans in the year ended June 30, 2014;
-
- A $227 thousand increase in gains on residential loans originated for sale, an increase correlated to the volume of loans
originated for portfolio in fiscal 2015; and
-
- A $365 thousand increase in net gains recognized on Real Estate Owned/Other Assets Acquired ("REO/OAA").
Noninterest Expense
Noninterest expense for the fiscal year ended June 30, 2015 totaled $32.6 million, an increase of $827 thousand,
or 2.6%, from fiscal 2014. When compared to fiscal 2014, the changes of significance are:
-
- An increase of $1.0 million in salaries and employee benefits, principally due to increased employee head count, as well as
higher employee benefits and stock-based compensation;
-
- An increase of $373 thousand in professional fees, due primarily to fees for temporary consulting services;
-
- A $250 thousand legal settlement recovery that was recognized in the quarter ended September 30, 2013, with no similar
recovery in the year ended June 30, 2015;
-
- A decrease of $509 thousand in occupancy and equipment expense, the result of a reduction in software maintenance and
depreciation expense following the conversion of the Bank's core systems platform to an outsourced model in May 2014;
-
- A decrease of $157 thousand in intangible asset amortization. The company's core deposit intangible is amortized on an
accelerated basis, therefore, the expense decreases annually; and
-
- A decrease of $183 thousand in other noninterest expense, the reduction mainly due to non-recurring core conversion expenses
incurred in fiscal 2014.
Income Taxes
Income tax expense for the fiscal year ended June 30, 2015 totaled $4.0 million, representing 35.9% of pretax income, as
compared to $1.6 million, or 36.9% of pretax income, in fiscal 2014. The decrease in the Company's effective tax rate was principally due to an increase in the prior year related to changes in
state apportionment.
44
Table of Contents
Results of OperationsDiscontinued Operations
Overview
The Company concluded all investment brokerage activities in the second quarter of fiscal 2014. Accordingly, operations associated with
these activities have been classified as discontinued operations for all periods shown in the accompanying consolidated statements of income. The Company recorded no net loss from discontinued
operations in fiscal 2015, compared to a net loss of $8 thousand in fiscal 2014.
Financial Condition
Overview
The Company's total assets grew to $850.8 million at June 30, 2015, representing an increase of $88.9 million, or
11.7%, compared to $761.9 million at June 30, 2014. Significant changes in the Company's balance sheet components include:
-
- Loans increased by $95.7 million, or 18.5%, compared to June 30, 2014, principally due to net growth of
$99.9 million in commercial loans purchased or originated by the LASG, offset by a $4.2 million decrease in loans originated by the Bank's Community Banking Division;
-
- Deposits increased by $100.4 million from June 30, 2014 and borrowings decreased $13.4 million from
June 30, 2014. Non-maturity deposits increased by $96.7 million, or 41.6%, for the year while time deposits grew by $3.8 million or 1.1%. The increase was mainly the result of
increases in money market accounts attracted through the Bank's online-only ableBanking division. The decrease in borrowings was primarily due a decrease of $12.6 million in FHLB advances
outstanding; and
-
- Stockholders' equity increased by $773 thousand from June 30, 2014, due principally to earnings of $7.1 million,
as well as $705 thousand of scheduled amortization of stock-based compensation, offset by $6.7 million in share repurchases (representing 710,662 shares), a decrease in accumulated other
comprehensive income of $5 thousand and $402 thousand in dividends paid on common stock.
Cash and Cash Equivalents
Cash and cash equivalents increased $7.6 million, or 9.2%, to $89.9 million at June 30, 2015 as compared to
$82.3 million at June 30, 2014. This increase was principally the result of deposit growth of $100.4 million, partially offset by loan growth of $95.7 million.
Investments Securities
The available-for-sale securities portfolio totaled $101.9 million and $113.9 million at June 30, 2015 and 2014,
respectively. Mortgage-backed securities and U.S. Government-sponsored enterprise bonds totaling $12.4 million were pledged for outstanding borrowings at June 30, 2015.
At
June 30, 2015, the Company's investment portfolio was comprised entirely of U.S. Government-sponsored enterprise bonds and mortgage-backed securities guaranteed by government
agencies. Generally, funds retained by the Company as a result of increases in deposits or decreases in loans, to the extent not immediately deployed by the Bank, are invested in securities held in
its investment
45
Table of Contents
portfolio,
which serves as a source of liquidity for the Company. The composition of the Company's securities portfolio at the dates indicated follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
June 30, 2013 |
|
|
|
Amortized
Cost |
|
Fair Value |
|
Amortized
Cost |
|
Fair Value |
|
Amortized
Cost |
|
Fair Value |
|
|
|
(Dollars in thousands)
|
|
U.S. Government agency securities |
|
$ |
48,191 |
|
$ |
48,230 |
|
$ |
48,415 |
|
$ |
48,418 |
|
$ |
45,289 |
|
$ |
45,333 |
|
Agency mortgage-backed securities |
|
|
54,553 |
|
|
53,678 |
|
|
66,744 |
|
|
65,463 |
|
|
78,944 |
|
|
76,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,744 |
|
$ |
101,908 |
|
$ |
115,159 |
|
$ |
113,881 |
|
$ |
124,233 |
|
$ |
121,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
table below sets forth certain information regarding the contractual maturities and weighted average yields of the Company's securities portfolio at June 30, 2015. Actual
maturities of mortgage-backed securities will differ from contractual maturities due both to scheduled amortization and prepayments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
One Year |
|
After
One Year
Through
Five Years |
|
After
Five Years
Through
Ten Years |
|
After
Ten Years |
|
Total |
|
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|
|
(Dollars in thousands)
|
|
U.S. Government agency securities |
|
$ |
36,142 |
|
|
0.42 |
% |
|
12,088 |
|
|
0.54 |
% |
|
|
|
|
0.00 |
% |
|
|
|
|
0.00 |
% |
|
48,230 |
|
|
0.45 |
% |
Agency mortgage-backed securities |
|
|
|
|
|
0.00 |
% |
|
|
|
|
0.00 |
% |
|
26,119 |
|
|
0.93 |
% |
|
27,559 |
|
|
1.47 |
% |
|
53,678 |
|
|
1.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,142 |
|
|
0.42 |
% |
$ |
12,088 |
|
|
0.54 |
% |
$ |
26,119 |
|
|
0.93 |
% |
$ |
27,559 |
|
|
1.47 |
% |
$ |
101,908 |
|
|
0.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
reviews the portfolio of investments on an ongoing basis to determine if there have been any other-than-temporary declines in value. No other-than-temporary impairment expense
was recognized during fiscal 2015 or fiscal 2014.
Loans
Loans, including loans held-for-sale, totaled $621.2 million at June 30, 2015, compared to $528.4 million at
June 30, 2014. The increase of $92.8 million, or 17.6%, at June 30, 2015, was principally due to net increases of $32.6 million in commercial real estate and $81.3 in
commercial business, offset by a net decreases of $16.0 million in residential loans, $2.2 million in consumer loans and $2.9 million in loans held for sale. During fiscal 2015,
the LASG purchased $82.7 million in loans, consisting principally of commercial real estate loans. Additionally, during fiscal 2015, the LASG originated $130.5 million in loans, which
included $48.0 million of secured commercial business loans to broker-dealers.
46
Table of Contents
The
composition of the Company's loan portfolio (excluding loans held-for-sale) at the dates indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
June 30, 2013 |
|
June 30, 2012 |
|
June 30, 2011 |
|
|
|
Amount |
|
Percent
of Total |
|
Amount |
|
Percent
of Total |
|
Amount |
|
Percent
of Total |
|
Amount |
|
Percent
of Total |
|
Amount |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
Residential real estate |
|
$ |
132,669 |
|
|
21.67 |
% |
$ |
148,634 |
|
|
28.79 |
% |
$ |
127,829 |
|
|
29.36 |
% |
$ |
137,571 |
|
|
38.61 |
% |
$ |
145,477 |
|
|
46.94 |
% |
Commercial real estate |
|
|
348,676 |
|
|
56.96 |
% |
|
316,067 |
|
|
61.20 |
% |
|
264,448 |
|
|
60.74 |
% |
|
180,735 |
|
|
50.74 |
% |
|
117,761 |
|
|
38.00 |
% |
Construction |
|
|
|
|
|
0.00 |
% |
|
31 |
|
|
0.01 |
% |
|
42 |
|
|
0.01 |
% |
|
1,187 |
|
|
0.33 |
% |
|
2,015 |
|
|
0.65 |
% |
Commercial business |
|
|
123,133 |
|
|
20.12 |
% |
|
41,800 |
|
|
8.09 |
% |
|
29,720 |
|
|
6.83 |
% |
|
19,612 |
|
|
5.51 |
% |
|
22,225 |
|
|
7.17 |
% |
Consumer and other |
|
|
7,659 |
|
|
1.25 |
% |
|
9,884 |
|
|
1.91 |
% |
|
13,337 |
|
|
3.06 |
% |
|
17,149 |
|
|
4.81 |
% |
|
22,435 |
|
|
7.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
612,137 |
|
|
100.00 |
% |
|
516,416 |
|
|
100.00 |
% |
|
435,376 |
|
|
100.00 |
% |
|
356,254 |
|
|
100.00 |
% |
|
309,913 |
|
|
100.00 |
% |
Less: Allowance for loan losses |
|
|
1,926 |
|
|
|
|
|
1,367 |
|
|
|
|
|
1,143 |
|
|
|
|
|
824 |
|
|
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
610,211 |
|
|
|
|
$ |
515,049 |
|
|
|
|
$ |
434,233 |
|
|
|
|
$ |
355,430 |
|
|
|
|
$ |
309,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's loan portfolio (excluding loans held-for-sale) by lending division follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Community
Banking
Division |
|
LASG |
|
SBA
National |
|
Total |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
Originated loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
106,138 |
|
$ |
137 |
|
$ |
|
|
$ |
106,275 |
|
|
17.36 |
% |
Home equity |
|
|
24,326 |
|
|
|
|
|
|
|
|
24,326 |
|
|
3.97 |
% |
Commercial real estate: non-owner occupied |
|
|
48,933 |
|
|
53,051 |
|
|
3,865 |
|
|
105,849 |
|
|
17.29 |
% |
Commercial real estate: owner occupied |
|
|
21,657 |
|
|
16,507 |
|
|
4,461 |
|
|
42,625 |
|
|
6.96 |
% |
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
Commercial business |
|
|
11,597 |
|
|
108,577 |
|
|
2,637 |
|
|
122,811 |
|
|
20.06 |
% |
Consumer |
|
|
7,659 |
|
|
|
|
|
|
|
|
7,659 |
|
|
1.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
220,310 |
|
|
178,272 |
|
|
10,963 |
|
|
409,545 |
|
|
66.90 |
% |
Purchased loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
2,068 |
|
|
|
|
|
2,068 |
|
|
0.34 |
% |
Commercial business |
|
|
|
|
|
273 |
|
|
|
|
|
273 |
|
|
0.04 |
% |
Commercial real estate: non-owner occupied |
|
|
|
|
|
128,182 |
|
|
|
|
|
128,182 |
|
|
20.94 |
% |
Commercial real estate: owner occupied |
|
|
|
|
|
72,069 |
|
|
|
|
|
72,069 |
|
|
11.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
202,592 |
|
|
|
|
|
202,592 |
|
|
33.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
220,310 |
|
$ |
380,864 |
|
|
10,963 |
|
$ |
612,137 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Community
Banking
Division |
|
LASG |
|
SBA
National |
|
Total |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
Originated loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
116,660 |
|
$ |
312 |
|
$ |
|
|
$ |
116,972 |
|
|
22.66 |
% |
Home equity |
|
|
27,975 |
|
|
|
|
|
|
|
|
27,975 |
|
|
5.42 |
% |
Commercial real estate: non-owner occupied |
|
|
46,191 |
|
|
33,969 |
|
|
|
|
|
80,160 |
|
|
15.52 |
% |
Commercial real estate: owner occupied |
|
|
24,319 |
|
|
11,907 |
|
|
|
|
|
36,426 |
|
|
7.05 |
% |
Construction |
|
|
31 |
|
|
|
|
|
|
|
|
31 |
|
|
0.01 |
% |
Commercial business |
|
|
10,145 |
|
|
31,373 |
|
|
|
|
|
41,518 |
|
|
8.04 |
% |
Consumer |
|
|
9,884 |
|
|
|
|
|
|
|
|
9,884 |
|
|
1.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
235,405 |
|
|
77,561 |
|
|
|
|
|
312,966 |
|
|
60.61 |
% |
Purchased loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
3,687 |
|
|
|
|
|
3,687 |
|
|
0.71 |
% |
Commercial business |
|
|
|
|
|
282 |
|
|
|
|
|
282 |
|
|
0.05 |
% |
Commercial real estate: non-owner occupied |
|
|
|
|
|
133,581 |
|
|
|
|
|
133,581 |
|
|
25.87 |
% |
Commercial real estate: owner occupied |
|
|
|
|
|
65,900 |
|
|
|
|
|
65,900 |
|
|
12.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
203,450 |
|
|
|
|
|
203,450 |
|
|
39.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
235,405 |
|
$ |
281,011 |
|
|
|
|
$ |
516,416 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the scheduled maturity of the Company's loan portfolio at June 30, 2015. Demand loans, loans having no stated repayment schedule, and overdraft
loans are reported as being due in less than one year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled Loan Maturities |
|
|
|
Within
One Year |
|
After
One Year
Through
Five Years |
|
After
Five Years
Through
Ten Years |
|
After
Ten Years |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated |
|
$ |
3,914 |
|
$ |
12,268 |
|
$ |
13,228 |
|
$ |
101,190 |
|
$ |
130,600 |
|
Purchased |
|
|
540 |
|
|
320 |
|
|
|
|
|
1,208 |
|
|
2,068 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated |
|
|
14,349 |
|
|
58,826 |
|
|
27,528 |
|
|
47,722 |
|
|
148,425 |
|
Purchased |
|
|
29,827 |
|
|
59,962 |
|
|
25,588 |
|
|
84,874 |
|
|
200,251 |
|
Non-mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated |
|
|
65,509 |
|
|
43,198 |
|
|
12,762 |
|
|
1,392 |
|
|
122,861 |
|
Purchased |
|
|
8 |
|
|
245 |
|
|
20 |
|
|
|
|
|
273 |
|
Consumer and other |
|
|
257 |
|
|
1,682 |
|
|
3,504 |
|
|
2,216 |
|
|
7,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
114,404 |
|
$ |
176,501 |
|
$ |
82,630 |
|
$ |
238,602 |
|
$ |
612,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Due After One Year, by Interest Rate Type |
|
|
|
Predetermined rate |
|
Floating or Adjustable |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Mortgages: |
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
Originated |
|
$ |
62,794 |
|
$ |
63,892 |
|
$ |
126,686 |
|
Purchased |
|
|
17 |
|
|
1,511 |
|
|
1,528 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
Originated |
|
|
37,901 |
|
|
96,175 |
|
|
134,076 |
|
Purchased |
|
|
74,743 |
|
|
95,680 |
|
|
170,423 |
|
Non-mortgage loans: |
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
Originated |
|
|
28,559 |
|
|
28,793 |
|
|
57,352 |
|
Purchased |
|
|
20 |
|
|
245 |
|
|
265 |
|
Consumer and other |
|
|
7,403 |
|
|
|
|
|
7,403 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
211,437 |
|
$ |
286,296 |
|
$ |
497,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately
54.4% of total portfolio loans at June 30, 2015, were variable rate products, compared to 51.1% at June 30, 2014.
Certain
purchased loans have been identified as having evidence of credit deterioration since their origination, and it is probable that the Company will not collect all contractually
required principal and interest payments. Purchased credit-impaired loans are accounted for using the measurement provisions set forth in ASC 310-30. The nonaccretable difference represents a loan's
contractually required payments receivable in excess of the amount of cash flows expected to be collected. Improvements in expected cash flows result in prospective yield adjustments. The effect of a
decrease in expected cash flows due to further credit deterioration are recorded through the allowance for loan losses.
Other Assets
The cash surrender value of the Company's BOLI assets increased $440 thousand, or 3.0%, to $15.3 million at
June 30, 2015, compared to $14.8 million at June 30, 2014. BOLI assets are invested in the general account of three insurance companies and in separate accounts of a fourth
insurance company. A general account policy's cash surrender value is supported by the general assets of the insurance company. A separate account policy's cash surrender value is supported by assets
segregated from the general assets of the insurance company. Standard and Poor's rated these companies A+ or better at June 30, 2015. Interest earnings, net of mortality costs, increase the
cash surrender value. These interest earnings are based on interest rates that reset each year, and are subject to minimum guaranteed rates. These increases in cash surrender value are recognized in
other income and are not subject to income taxes. Management considers BOLI an illiquid asset. BOLI represented 12.7% of the Company's total risk-based capital at June 30, 2015.
Intangible
assets totaled $2.2 million and $2.8 million at June 30, 2015 and June 30, 2014, respectively. The $589 thousand decrease was the result of
core deposit intangible amortization during fiscal 2015.
Deposits
The Company's principal source of funding is its core deposit accounts. At June 30, 2015, core deposits, which the Company
defines as non-maturity deposits and non-brokered insured time deposits, represented 99.9% of total deposits.
49
Table of Contents
Total deposits increased $100.4 million to $674.8 million as of June 30, 2015 from $574.3 million as of June 30, 2014. The
increase mainly the result of increases in money market accounts attracted through the Bank's online-only ableBanking division.
The
following tables set forth certain information relative to the composition of the Company's average deposit accounts and the weighted average interest rate on each category of
deposits for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2015 |
|
|
|
Average
Balance |
|
Weighted
Average Rate |
|
Percent of Total
Average Deposits |
|
|
|
(Dollars in thousands)
|
|
Non-interest bearing demand deposits and escrow accounts |
|
$ |
54,940 |
|
|
0.00 |
% |
|
8.78 |
% |
Regular savings |
|
|
34,495 |
|
|
0.13 |
% |
|
5.51 |
% |
NOW accounts |
|
|
63,181 |
|
|
0.26 |
% |
|
10.09 |
% |
Money market accounts |
|
|
133,266 |
|
|
0.75 |
% |
|
21.29 |
% |
Time deposits |
|
|
340,046 |
|
|
1.12 |
% |
|
54.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total average deposits |
|
$ |
625,928 |
|
|
0.79 |
% |
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2014 |
|
Year Ended June 30, 2013 |
|
|
|
Average
Balance |
|
Weighted
Average Rate |
|
Percent of Total
Average Deposits |
|
Average
Balance |
|
Weighted
Average Rate |
|
Percent of Total
Average Deposits |
|
|
|
(Dollars in thousands)
|
|
Non-interest bearing demand deposits and escrow accounts |
|
$ |
50,890 |
|
|
0.00 |
% |
|
9.31 |
% |
$ |
49,343 |
|
|
0.00 |
% |
|
10.26 |
% |
Regular savings |
|
|
34,391 |
|
|
0.14 |
% |
|
6.29 |
% |
|
31,939 |
|
|
0.14 |
% |
|
6.64 |
% |
NOW accounts |
|
|
61,146 |
|
|
0.26 |
% |
|
11.19 |
% |
|
55,763 |
|
|
0.27 |
% |
|
11.59 |
% |
Money market accounts |
|
|
85,333 |
|
|
0.52 |
% |
|
15.61 |
% |
|
63,931 |
|
|
0.53 |
% |
|
13.29 |
% |
Time deposits |
|
|
314,848 |
|
|
1.10 |
% |
|
57.60 |
% |
|
280,059 |
|
|
1.27 |
% |
|
58.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average deposits |
|
$ |
546,608 |
|
|
0.75 |
% |
|
100.00 |
% |
$ |
481,035 |
|
|
0.85 |
% |
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2015, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100 thousand was approximately $262.7 million.
The scheduled maturity of these deposits is set forth below:
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
(Dollars in thousands)
|
|
3 months or less |
|
$ |
54,637 |
|
Over 3 through 6 months |
|
|
32,191 |
|
Over 6 through 12 months |
|
|
19,365 |
|
Over 12 months |
|
|
156,549 |
|
|
|
|
|
|
Total time certificates $100 thousand and over |
|
$ |
262,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
Short-term borrowings, FHLB advances, Federal Reserve Discount Window Borrower-in-custody advances, wholesale repurchase agreements and
junior subordinated debentures have been the Company's sources of funding other than deposits. In fiscal 2015, total borrowings decreased by $13.2 million, or 20.6%, to $51.2 million.
50
Table of Contents
Advances
from the FHLB were $30.2 million and $42.8 million at June 30, 2015 and June 30, 2014, respectively, a decrease of $12.6 million, or 29.5%.
The decrease is due to payoffs of maturing FHLB advances during the year. At June 30, 2015, the Company had pledged investment securities having a fair value of $9.4 million for
outstanding FHLB borrowings. In addition, pledges of residential real estate loans, certain commercial real estate loans and certain FHLB deposits free of liens or pledges are required to secure
outstanding advances and available additional borrowing capacity from the FHLB. Wholesale repurchase agreements were $10.0 million and $10.2 million at June 30, 2015 and 2014,
respectively. At June 30, 2015, the Company had pledged investment securities having a fair value of $3.0 million for outstanding wholesale repurchase agreements.
Short-term
borrowings, consisting of sweep accounts and repurchase agreements, were $2.3 million and $3.0 million at June 30, 2015 and 2014, respectively. At
June 30, 2015, sweep accounts were secured by a $2.7 million of letter of credit issued by the FHLB and an investment security with a fair value of $3.0 million.
The
table below sets forth certain information about the Company's short-term borrowings for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2015 |
|
|
|
Amount |
|
Weighted
Average Rate |
|
|
|
(Dollars in thousands)
|
|
Balance at period end |
|
$ |
2,349 |
|
|
1.91 |
% |
Average outstanding during period |
|
|
2,578 |
|
|
1.91 |
% |
Maximum outstanding at any period |
|
|
4,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2014 |
|
Year Ended June 30, 2013 |
|
|
|
Amount |
|
Weighted
Average Rate |
|
Amount |
|
Weighted
Average Rate |
|
|
|
(Dollars in thousands)
|
|
Balance at period end |
|
$ |
2,984 |
|
|
1.35 |
% |
$ |
625 |
|
|
0.00 |
% |
Average outstanding during period |
|
|
2,230 |
|
|
1.08 |
% |
|
1,472 |
|
|
1.29 |
% |
Maximum outstanding at any period |
|
|
3,383 |
|
|
|
|
|
2,707 |
|
|
|
|
There
were no balances outstanding at June 30, 2015 and 2014, respectively, for advances under the Federal Reserve Discount Window Borrower-in-custody program. The available
credit under the program was $2.2 million and $3.1 million at June 30, 2015 and June 30, 2014, respectively, with the decrease in fiscal 2015 attributable to payoffs of
consumer loans pledged as collateral.
The
Company had junior subordinated debentures issued to affiliated trusts totaling $8.6 million and $8.4 million at June 30, 2015 and 2014, respectively. See
"Capital" below for more information on our junior subordinated debentures and affiliated trusts.
Asset Quality
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management considers adequate to provide for probable loan losses based
upon evaluation of known and inherent risks in the loan portfolio. The allowance is increased by providing for loan losses through a charge to expense and by recoveries of loans previously charged-off
and is reduced by loans being charged-off.
The
allowance 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
51
Table of Contents
been
recorded based on estimates of inherent losses in newly originated loans and for incremental reserves required for legacy loans based on estimates of deteriorated credit quality post-Merger.
As
of June 30, 2015, the allowance for loan losses totaled $1.9 million, or 0.31% of total loans, as compared to $1.4 million, or 0.26% of total loans, at
June 30, 2014. The year over year increase in the Company's allowance for losses was principally the result of loan growth. The following table sets forth activity in Company's allowance for
loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
Company |
|
|
|
Successor Company |
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2015 |
|
Year Ended
June 30, 2014 |
|
Year Ended
June 30, 2013 |
|
Year Ended
June 30, 2012 |
|
184 Days Ended
June 30, 2011 |
|
|
|
181 Days Ended
Dec. 28, 2010 |
|
|
|
(Dollars in thousands)
|
|
Allowance at beginning of period |
|
$ |
1,367 |
|
$ |
1,143 |
|
$ |
824 |
|
$ |
437 |
|
$ |
|
|
|
|
$ |
5,806 |
|
Loans charged-off during the period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
207 |
|
|
267 |
|
|
369 |
|
|
248 |
|
|
42 |
|
|
|
|
61 |
|
Commercial real estate |
|
|
|
|
|
26 |
|
|
135 |
|
|
26 |
|
|
27 |
|
|
|
|
281 |
|
Commercial business |
|
|
3 |
|
|
43 |
|
|
203 |
|
|
17 |
|
|
21 |
|
|
|
|
145 |
|
Consumer and other |
|
|
28 |
|
|
69 |
|
|
148 |
|
|
352 |
|
|
216 |
|
|
|
|
372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged-off |
|
|
238 |
|
|
405 |
|
|
855 |
|
|
643 |
|
|
306 |
|
|
|
|
859 |
|
Recoveries on loans previously charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
24 |
|
|
63 |
|
|
6 |
|
|
3 |
|
|
|
|
|
|
|
53 |
|
Commercial real estate |
|
|
1 |
|
|
2 |
|
|
10 |
|
|
|
|
|
8 |
|
|
|
|
4 |
|
Commercial business |
|
|
34 |
|
|
8 |
|
|
7 |
|
|
44 |
|
|
2 |
|
|
|
|
26 |
|
Consumer and other |
|
|
21 |
|
|
25 |
|
|
29 |
|
|
37 |
|
|
26 |
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
80 |
|
|
98 |
|
|
52 |
|
|
84 |
|
|
36 |
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off during the period |
|
|
158 |
|
|
307 |
|
|
803 |
|
|
559 |
|
|
270 |
|
|
|
|
751 |
|
Provision for loan losses |
|
|
717 |
|
|
531 |
|
|
1,122 |
|
|
946 |
|
|
707 |
|
|
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period |
|
$ |
1,926 |
|
$ |
1,367 |
|
$ |
1,143 |
|
$ |
824 |
|
$ |
437 |
|
|
|
$ |
5,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of period(1) |
|
$ |
612,137 |
|
$ |
516,416 |
|
$ |
435,376 |
|
$ |
356,254 |
|
$ |
309,913 |
|
|
|
$ |
367,284 |
|
Average loans outstanding during the period(1) |
|
|
555,073 |
|
|
488,172 |
|
|
376,660 |
|
|
333,053 |
|
|
332,684 |
|
|
|
|
375,878 |
|
Allowance as a percentage of total loans |
|
|
0.31 |
% |
|
0.26 |
% |
|
0.26 |
% |
|
0.23 |
% |
|
0.14 |
% |
|
|
|
1.62 |
% |
Ratio of net charge-offs to average loans outstanding |
|
|
0.03 |
% |
|
0.06 |
% |
|
0.21 |
% |
|
0.17 |
% |
|
0.08 |
% |
|
|
|
0.20 |
% |
Allowance as a percentage of non-performing loans |
|
|
18.41 |
% |
|
18.66 |
% |
|
23.54 |
% |
|
13.48 |
% |
|
5.49 |
% |
|
|
|
67.49 |
% |
- (1)
- Amounts
and resulting ratios exclude loans held for sale
The
following table allocates the allowance for loan losses by loan category and the percent of loans in each category to total loans at the dates indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
June 30, 2013 |
|
June 30, 2012 |
|
June 30, 2011 |
|
|
|
Amount |
|
Percent of
Loans to
Total Loans |
|
Amount |
|
Percent of
Loans to
Total Loans |
|
Amount |
|
Percent of
Loans to
Total Loans |
|
Amount |
|
Percent of
Loans to
Total Loans |
|
Amount |
|
Percent of
Loans to
Total Loans |
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate |
|
$ |
741 |
|
|
21.67 |
% |
$ |
580 |
|
|
28.79 |
% |
$ |
594 |
|
|
29.36 |
% |
$ |
214 |
|
|
38.61 |
% |
$ |
34 |
|
|
46.94 |
% |
Commercial real estate |
|
|
977 |
|
|
56.96 |
% |
|
625 |
|
|
61.21 |
% |
|
249 |
|
|
60.75 |
% |
|
93 |
|
|
51.07 |
% |
|
147 |
|
|
38.65 |
% |
Commercial business |
|
|
118 |
|
|
20.12 |
% |
|
48 |
|
|
8.09 |
% |
|
70 |
|
|
6.83 |
% |
|
292 |
|
|
5.51 |
% |
|
238 |
|
|
7.17 |
% |
Consumer and other |
|
|
35 |
|
|
1.25 |
% |
|
79 |
|
|
1.91 |
% |
|
189 |
|
|
3.06 |
% |
|
225 |
|
|
4.81 |
% |
|
18 |
|
|
7.24 |
% |
Unallocated |
|
|
55 |
|
|
0.00 |
% |
|
35 |
|
|
0.00 |
% |
|
41 |
|
|
0.00 |
% |
|
|
|
|
0.00 |
% |
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,926 |
|
|
100.00 |
% |
$ |
1,367 |
|
|
100.00 |
% |
$ |
1,143 |
|
|
100.00 |
% |
$ |
824 |
|
|
100.00 |
% |
$ |
437 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table reflects the annual trend of total loans 30 days or more past due, as a percentage of total loans at June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
Past due loans to total loans |
|
|
1.08 |
% |
|
1.14 |
% |
|
1.68 |
% |
|
1.95 |
% |
|
2.41 |
% |
52
Table of Contents
Non-performing Assets
The table below sets forth the amounts and categories of the Company's non-performing assets at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
June 30, 2013 |
|
June 30, 2012 |
|
June 30, 2011 |
|
|
|
(Dollars in thousands)
|
|
Nonperforming loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
3,021 |
|
$ |
1,743 |
|
$ |
2,346 |
|
$ |
3,090 |
|
$ |
2,195 |
|
Commercial real estate |
|
|
994 |
|
|
1,162 |
|
|
473 |
|
|
417 |
|
|
3,601 |
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
Home equity |
|
|
11 |
|
|
160 |
|
|
334 |
|
|
220 |
|
|
205 |
|
Commercial business |
|
|
2 |
|
|
5 |
|
|
110 |
|
|
1,008 |
|
|
559 |
|
Consumer |
|
|
190 |
|
|
139 |
|
|
136 |
|
|
324 |
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originated portfolio |
|
|
4,218 |
|
|
3,209 |
|
|
3,399 |
|
|
5,059 |
|
|
7,208 |
|
Purchased portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
6,532 |
|
|
4,116 |
|
|
1,457 |
|
|
1,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchased portfolio |
|
|
6,532 |
|
|
4,116 |
|
|
1,457 |
|
|
1,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
10,750 |
|
|
7,325 |
|
|
4,856 |
|
|
6,114 |
|
|
7,208 |
|
Real estate owned and other repossessed collateral |
|
|
1,651 |
|
|
1,991 |
|
|
2,134 |
|
|
834 |
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
12,401 |
|
$ |
9,316 |
|
$ |
6,990 |
|
$ |
6,948 |
|
$ |
7,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans that are current |
|
$ |
5,357 |
|
$ |
651 |
|
$ |
887 |
|
$ |
377 |
|
$ |
3,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
1.76 |
% |
|
1.42 |
% |
|
1.12 |
% |
|
1.72 |
% |
|
2.33 |
% |
Non-performing assets to total assets |
|
|
1.46 |
% |
|
1.22 |
% |
|
1.04 |
% |
|
1.04 |
% |
|
1.32 |
% |
At
June 30, 2015, the Company had $12.4 million of nonperforming assets, or 1.5% of total assets, compared to $9.3 million, or 1.2% of total assets, as of
June 30, 2014. The increase in nonperforming assets in fiscal 2015 was principally associated with nonaccrual purchased commercial real estate loans.
TDRs
represent loans for which concessions (such as extension of repayment terms or reductions of interest rates to below market rates) are granted due to a borrower's financial
condition. Such concessions may include reductions of interest rates to below-market terms and/or extension of repayment terms. The balances and payment status of TDRs follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2015 |
|
June 30,
2014 |
|
June 30,
2013 |
|
|
|
(Dollars in thousands)
|
|
Nonaccrual |
|
$ |
2,131 |
|
$ |
2,117 |
|
$ |
1,110 |
|
Accrual |
|
|
6,365 |
|
|
4,057 |
|
|
2,632 |
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs |
|
$ |
8,496 |
|
$ |
6,174 |
|
$ |
3,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2015, the Company had real estate owned and other repossessed collateral amounting to $1.7 million, compared to $2.0 million at June 30, 2014, a
decrease of $340 thousand. The real estate and personal property collateral for commercial and consumer loans are written down to fair value upon transfer to acquired assets. Revenues and
expenses are recognized in the period when received or incurred on other real estate and in substance foreclosures. Gains and losses on disposition are recognized in noninterest income.
We
continue to focus on asset quality and allocate significant resources to credit policy, loan review, asset management, collection, and workout functions. Despite this ongoing effort,
there can be no assurance that adverse changes in the real estate markets and economic conditions will not result in higher non-performing assets levels in the future and negatively impact our results
of operations through higher provision for loan losses, net loan charge-offs, decreased accrual of income and increased noninterest expenses.
53
Table of Contents
Potential Problem Loans
Commercial real estate and commercial loans are periodically evaluated under a ten-point rating system. These ratings are guidelines in
assessing the risk of a particular loan. The Company had $8.9 million and $7.4 million of loans rated substandard or worse at June 30, 2015 and June 30, 2014, respectively,
an increase attributable to purchased loans. The following tables present the Company's loans by risk rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Originated Portfolio |
|
|
|
|
|
|
|
Commercial
Real Estate |
|
Commercial
Business |
|
Residential(1) |
|
Purchased
Portfolio |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Pass (1 - 6) |
|
$ |
133,465 |
|
$ |
122,521 |
|
$ |
8,049 |
|
$ |
190,193 |
|
$ |
454,228 |
|
Special mention (7) |
|
|
4,417 |
|
|
31 |
|
|
634 |
|
|
5,628 |
|
|
10,710 |
|
Substandard (8) |
|
|
1,687 |
|
|
|
|
|
429 |
|
|
6,771 |
|
|
8,887 |
|
Doubtful (9) |
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
23 |
|
Loss (10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
139,569 |
|
$ |
122,552 |
|
$ |
9,135 |
|
$ |
202,592 |
|
$ |
473,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Originated Portfolio |
|
|
|
|
|
|
|
Commercial
Real Estate |
|
Commercial
Business |
|
Residential(1) |
|
Purchased
Portfolio |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Pass (1 - 6) |
|
$ |
110,044 |
|
$ |
41,271 |
|
$ |
11,941 |
|
$ |
189,986 |
|
$ |
353,242 |
|
Special mention (7) |
|
|
4,880 |
|
|
46 |
|
|
940 |
|
|
8,619 |
|
|
14,485 |
|
Substandard (8) |
|
|
1,693 |
|
|
201 |
|
|
670 |
|
|
4,845 |
|
|
7,409 |
|
Doubtful (9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
116,617 |
|
$ |
41,518 |
|
$ |
13,551 |
|
$ |
203,450 |
|
$ |
375,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Certain
of the Company's loans made for commercial purposes, but secured by residential collateral, are rated under the Company's risk-rating system.
Risk Management
Management and the Board of Directors of the Company recognize that taking and managing risk is fundamental to the business of banking.
Through the development, implementation and monitoring of its policies with respect to risk management, the Company strives to measure, evaluate and control the risks it faces. The Board and
management understand that an
effective risk management system is critical to the Company's safety and soundness. Chief among the risks faced by us are credit risk, market risk (including interest rate risk), liquidity risk, and
operational (transaction) risk.
Credit Risk
The Company considers credit risk to be the most significant risk that it faces, in that it has the greatest potential to affect the
financial condition and operating results of the Company. Credit risk is managed through a combination of policies and limits established by the Board, the monitoring of compliance with these policies
and limits, and the periodic evaluation of loans in the portfolio, including those with problem characteristics. The Company also utilizes the services of independent
54
Table of Contents
third-parties
to provide loan review services, which consist of a variety of monitoring techniques after a loan is purchased or originated.
In
general, Northeast's policies establish limits on the maximum amount of credit that may be granted to a single borrower (including affiliates), the aggregate amount of loans
outstanding by type in relation to total assets and capital, and concentrations of loans by size, property type, and geography. Underwriting criteria, such as collateral and debt service coverage
ratios and approval limits are also specified in loan policies. The Company's policies also address the performance of periodic credit reviews, the risk rating of loans, when loans should be placed on
non-performing status and factors that should be considered in establishing the Bank's allowance for loan losses. For additional information, refer to "Asset Quality" above and Item 1,
"BusinessLending Activities."
Market Risk
Market risk is the risk of loss due to adverse changes in market prices and rates, and typically encompasses exposures such as
sensitivity to changes in market interest rates, foreign currency exchange rates, and commodity prices. The Company has no exposure to foreign
currency exchange or commodity price movements. Because net interest income is our primary source of revenue, interest rate risk is a significant market risk to which the Company is exposed.
Interest
rate risk can be defined as the exposure of future net interest income to adverse movements in interest rates. Net interest income is affected by changes in interest rates as
well as by fluctuations in the level, mix and duration of the Company's assets and liabilities. Over and above the influence that interest rates have on net interest income, changes in rates also
affect the volume of lending activity, the ability of borrowers to repay loans, the volume of loan prepayments, the flow and mix of deposits, and the market value of the Company's assets and
liabilities.
The
Company's management has established an Asset Liability Management Committee ("ALCO"), which is responsible for managing the Company's interest rate risk in accordance with policies
and limits approved by the Board of Directors. With regard to management of market risk, the ALCO is charged with managing the Company's mix of assets and funding sources to produce results that are
consistent with the Company's liquidity, capital adequacy, growth, and profitability goals.
Exposure
to interest rate risk is managed by Northeast through periodic evaluations of the current interest rate risk inherent in its rate-sensitive assets and liabilities, coupled with
determinations of the level of risk considered appropriate given the Company's capital and liquidity requirements, business strategy, and performance objectives. Through such management, Northeast
seeks to mitigate the potential volatility in its net interest income due to changes in interest rates in a manner consistent with the risk appetite established by the board of directors.
The
ALCO's primary tool for measuring, evaluating, and managing interest rate risk is income simulation analysis. Income simulation analysis measures the interest rate risk inherent in
the Company's balance sheet at a given point in time by showing the effect of interest rate shifts on net interest income over defined time horizons. These simulations take into account the specific
repricing, maturity, prepayment and call options of financial instruments that vary under different interest rate scenarios. The ALCO reviews simulation results to determine whether the exposure to a
decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. The Company considers a variety
of specified rate scenarios, including instantaneous rate shocks, against static (or flat) rates when measuring interest rate risk, and evaluates results over two consecutive twelve-month periods. All
changes are measured in comparison to the projected net interest income that would result from an "unchanged" scenario, where interest rates remain stable over the measured time horizon(s). As of
June 30, 2015, the income simulation analysis (as noted in the table below) for the first twelve-month period indicated that exposure to changing interest rates fell within the Company's policy
levels of tolerance.
55
Table of Contents
While
the ALCO reviews simulation assumptions to ensure they are reasonable, and back-tests simulation results on a periodic basis as a monitoring tool, income simulation analysis may
not always prove to be an accurate indicator of the Company's interest rate risk or future earnings. There are inherent shortcomings in income simulation, given the number and variety of assumptions
that must be made to perform it. For example, the projected level of future market interest rates and the shape of future interest rate yield curves have a major impact on income simulation results.
Many assumptions concerning the repricing of financial instruments, the degree to which non-maturity deposits react to changes in market rates, and the expected prepayment rates on loans,
mortgage-backed securities, and callable debt securities are also inherently uncertain. In addition, as income simulation analysis assumes that the Company's balance sheet will remain static over the
simulation horizon, the results do not reflect the Company's expectations for future balance sheet growth, nor changes in business strategy that the Company could implement in response to rate shifts
to mitigate its loss exposures. As such, although the analysis described above provides an indication of the Company's sensitivity to interest rate changes at a point in time, these estimates are not
intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company's net interest income and will differ from actual results.
Assuming
a 200 basis point increase and 100 basis point decrease in interest rates starting on June 30, 2015, we estimate that our net interest income in the following
12 months would increase by 1.3% if rates increased by 200 basis points and decrease by 0.2% if rates declined by 100 basis points. These results indicate a modest level of asset sensitivity in
our balance sheet. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would
generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a
negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates.
|
|
|
|
|
|
|
|
|
|
Up 200 Basis Points |
|
Down 100 Basis Points |
|
June 30, 2015 |
|
|
1.3 |
% |
|
0.2 |
% |
June 30, 2014 |
|
|
0.4 |
% |
|
1.1 |
% |
June 30, 2013 |
|
|
0.9 |
% |
|
0.8 |
% |
Liquidity Risk
Liquidity risk is defined as the risk associated with an organization's ability to meet current and future financial obligations of a
short-term nature. Northeast uses its liquidity on a regular basis to fund existing and future loan commitments, to pay interest on deposits and on borrowings, to fund maturing certificates of deposit
and borrowings, to fund other deposit withdrawals, to invest in other interest-earning assets, to make dividend payments to shareholders, and to meet operating expenses. The Company's primary sources
of liquidity consist of deposit inflows, borrowed funds, and the amortization, prepayment and maturities of loans and securities. While scheduled payments from the amortization and maturities of loans
and investment securities are relatively predictable sources of funds, deposit flows and loan and investment prepayments can be greatly influenced by general interest rates, economic conditions and
competition. In addition to these regular sources of funds, the Company may choose to sell portfolio loans and investment securities to meet liquidity demands.
We
monitor and forecast our liquidity position. There are several interdependent methods used by us for this purpose, including daily review of Federal Funds positions, monthly review of
balance sheet changes, monthly review of liquidity ratios, quarterly review of liquidity forecasts and periodic review of contingent funding plans. Using these methods, the Company actively manages
its liquidity position under the direction of the ALCO, which meets weekly.
56
Table of Contents
The
following is a summary of the unused borrowing capacity of the Company at June 30, 2015 available to meet our short-term funding needs (dollars in thousands):
|
|
|
|
|
|
Brokered time deposits |
|
$ |
212,708 |
|
Subject to policy limitation of 25% of total assets |
Federal Home Loan Bank of Boston |
|
|
45,691 |
|
Unused advance capacity subject to eligible and qualified collateral |
Federal Discount Window Borrower-in-Custody |
|
|
2,200 |
|
Unused credit line subject to the pledge of loans |
Other available lines |
|
|
17,500 |
|
|
|
|
|
|
|
|
Total unused borrowing capacity |
|
|
278,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
deposits and other core deposit sources including deposit listing services are used by the Bank to manage its overall liquidity position. While we currently do not seek wholesale
funding such as FHLB advances and brokered deposits, the ability to raise them remains an important part of our liquidity contingency planning. While we closely monitor and forecast our liquidity
position, it is affected by asset growth, deposit withdrawals and meeting other contractual obligations and commitments. The accuracy of our forecast assumptions may increase or decrease our overall
available liquidity. To utilize the FHLB advance capacity, the purchase of additional capital stock in the Federal Home Loan Bank of Boston may be required. At June 30, 2015, the Bank had
$350.0 million of immediately accessible liquidity, defined as cash that the Bank reasonably believes could be raised within 7 days through collateralized borrowings, brokered deposits
or security sales. This position represented 41.1% of total assets. Further, at June 30, 2015, the Company had $89.9 million of cash and cash equivalents. This level of balance sheet
liquidity is intended, in part, for future purchases of commercial real estate loans.
On
a parent company only basis, commitments and debt service requirements at June 30, 2015 consisted of junior subordinated debentures issued to NBN Capital Trust II, NBN Capital
Trust III and NBN Capital Trust IV with a principal balance of $16.5 million. See Note 18 of the Notes to the Consolidated Financial Statements for carrying values, maturity dates and
the use of purchased interest rate caps and swaps to hedge the interest expense in periods of rising interest rates. Based on the interest rates at June 30, 2015, the annual aggregate payments
to meet the debt service of the junior subordinated debentures is approximately $412 thousand. Including the impact of the interest rate swap associated with NBN Capital Trust IV subordinated
debentures, annual payments are expected to total $595 thousand.
The
principal sources of funds for the Company to meet parent-only obligations are dividends from the Bank, which are subject to regulatory limitations, and borrowings from public and
private sources. For information on the restrictions on the payment of dividends by Northeast Bank, see Note 10 of the Notes to the Company's Consolidated Financial Statements in this Annual
Report.
Operational Risk
Operational risk, which we define as the risk of loss from failed internal processes, people and systems, and external events, is
inherent in all of our business activities. The principal ways in which we manage operational risk include the establishment of departmental and business-specific policies and procedures, internal
controls and monitoring requirements. Some specific
examples include our information security program, business continuity planning and testing, our vendor management program, reconciliation processes, our enterprise risk assessment process, and new
product and/or system introduction processes. Periodic internal audits provide an important independent check on adherence to policies, procedures and controls designed to mitigate risk exposure.
57
Table of Contents
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements
of credit and interest-rate risk in excess of the amounts recognized in the condensed consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the
Company's involvement in particular classes of financial instruments.
The
Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, unused lines of credit and standby
letters of credit is represented by the contractual amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. To control the credit risk associated with entering into commitments and issuing letters of
credit, the Company uses the same credit quality, collateral policies, and monitoring controls in making commitments and letters of credit as it does with its lending activities.
Standby
letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
Unused
lines of credit and commitments to extend credit typically result in loans with a market interest rate.
A
summary of the amounts of the Company's contractual obligations, and other commitments with off-balance sheet risk, both at June 30, 2015, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due-By Period |
|
|
|
Total |
|
Less Than
1 Year |
|
1 - 3
Years |
|
3 - 5
Years |
|
More than
5 Years |
|
|
|
(Dollars in thousands)
|
|
Contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
30,000 |
|
$ |
15,000 |
|
$ |
15,000 |
|
$ |
|
|
$ |
|
|
Wholesale repurchase agreements |
|
|
10,000 |
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures |
|
|
16,496 |
|
|
|
|
|
|
|
|
|
|
|
16,496 |
|
Capital lease obligation |
|
|
1,553 |
|
|
175 |
|
|
459 |
|
|
612 |
|
|
307 |
|
Short-term borrowings |
|
|
1,368 |
|
|
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt obligations |
|
|
59,417 |
|
|
26,543 |
|
|
15,459 |
|
|
612 |
|
|
16,803 |
|
Operating lease obligations |
|
|
9,338 |
|
|
1,303 |
|
|
2,175 |
|
|
2,208 |
|
|
3,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
68,755 |
|
$ |
27,846 |
|
$ |
17,634 |
|
$ |
2,820 |
|
$ |
20,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiring-By Period |
|
|
|
Total |
|
Less Than
1 Year |
|
1 - 3
Years |
|
3 - 5
Years |
|
More than
5 Years |
|
|
|
(Dollars in thousands)
|
|
Commitments with off-balance sheet risk: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to grant loans |
|
$ |
24,966 |
|
$ |
24,966 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Unused commitments under lines of credit |
|
|
39,414 |
|
|
14,890 |
|
|
9,608 |
|
|
9,482 |
|
|
5,434 |
|
Standby letters of credit |
|
|
60 |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
$ |
64,440 |
|
$ |
39,916 |
|
$ |
9,608 |
|
$ |
9,482 |
|
$ |
5,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Stockholders' equity was $112.8 million at June 30, 2015, an increase of $773 thousand from June 30, 2014.
The increase due principally to earnings of $7.1 million, as well as $705 thousand of scheduled amortization of stock-based compensation, offset by $6.7 million in share
repurchases (representing 710,662 shares), a decrease in accumulated other comprehensive income of $5 thousand and $402 thousand in dividends paid on common stock.
See
Note 10 of the Notes to the Consolidated Financial Statements for information on the Company's capital ratios. Regulatory capital ratios for the Company and the Bank currently
exceed all applicable requirements, including the commitments made to the Federal Reserve and the Bureau in connection with the Merger to maintain minimum Tier 1 leverage and total risk-based
capital ratios of 10% and 15%, respectively.
Impact of Inflation
The consolidated financial statements and related notes have been presented in terms of historic dollars without considering changes in
the relative purchasing power of money over time due to inflation. Unlike industrial companies, nearly all of the assets and virtually all of the liabilities of the Company are monetary in nature. As
a result, interest rates have a more significant impact on the Company's performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as inflation.
Impact of New Accounting Standards
Note 1 of the Notes to the Consolidated Financial Statement includes the FASB and the SEC issued statements and interpretations
affecting the Company.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and that could potentially
result in materially different results under different assumptions and conditions. Northeast considers the following to be its critical accounting policies:
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. For residential and consumer loans, a charge-off is recorded no later than 180 days past due if the loan balance exceeds the fair value of the collateral, less costs to sell. For
commercial loans, a charge-off is recorded on a case-by-case basis when all or a portion of the loan is deemed to be uncollectible. Subsequent recoveries, if any, are credited to the allowance.
59
Table of Contents
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.
Consumer: Loans
in this segment are generally secured, and repayment is dependent on the credit quality of the individual borrower. Repayment of consumer loans is generally based on the
earnings of individual borrowers, which may be adversely impacted by regional labor market conditions.
Purchased: Loans
in this segment are typically secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the 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.
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
60
Table of Contents
-
- National and local economic trends and conditions.
-
- Effects of changes or trends in internal risk ratings
-
- Other effects resulting from trends in the valuation of underlying collateral
There
were no significant changes in the Company's policies or methodology pertaining to the general component of the allowance for loan losses during the years ended June 30,
2015 or 2014.
The
allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial business and
commercial real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral
dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. Large groups of smaller-balance
homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment based on the group's historical loss experience adjusted for qualitative factors.
Accordingly, the Company does not separately identify individual consumer and residential loans for individual impairment and disclosure. However, all TDRs are individually reviewed for impairment.
For
all portfolio segments, except loans accounted for under ASC 310-30, a loan is considered impaired when, based on current information and events, it is probable that the Company will
be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to
the principal and interest owed. For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to realize
cash flows as estimated at acquisition. For loans accounted for under ASC 310-30 for which cash flows can reasonably be estimated, loan impairment is measured based on the decrease in expected cash
flows from those estimated at acquisition, excluding changes due to changes in interest rate indices and other non-credit related factors, discounted at the loan's effective rate assumed at
acquisition. Factors considered by management in determining impairment include payment status, collateral value, and the probability of the collecting scheduled principal and interest payments when
due.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk Management"
and accompanying table set
forth therein for quantitative and qualitative disclosures about market risk.
Item 8. Financial Statements and Supplementary Data
61
Table of Contents
Report of Independent Registered Public Accounting Firm
The
Board of Directors and
Shareholders of Northeast Bancorp
We
have audited the accompanying consolidated balance sheets of Northeast Bancorp and subsidiary as of June 30, 2015 and 2014, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northeast Bancorp and subsidiary at
June 30, 2015 and 2014, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Boston,
Massachusetts
September 28, 2015
62
Table of Contents
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2015 |
|
2014 |
|
Assets |
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
2,789 |
|
$ |
3,372 |
|
Short-term investments |
|
|
87,061 |
|
|
78,887 |
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
89,850 |
|
|
82,259 |
|
Available-for-sale securities, at fair value |
|
|
101,908 |
|
|
113,881 |
|
Loans held for sale |
|
|
9,035 |
|
|
11,945 |
|
Loans |
|
|
612,137 |
|
|
516,416 |
|
Less: Allowance for loan losses |
|
|
1,926 |
|
|
1,367 |
|
|
|
|
|
|
|
|
|
Loans, net |
|
|
610,211 |
|
|
515,049 |
|
Premises and equipment, net |
|
|
8,253 |
|
|
9,135 |
|
Real estate owned and other repossessed collateral, net |
|
|
1,651 |
|
|
1,991 |
|
Federal Home Loan Bank stock, at cost |
|
|
4,102 |
|
|
4,102 |
|
Intangible assets, net |
|
|
2,209 |
|
|
2,798 |
|
Bank owned life insurance |
|
|
15,276 |
|
|
14,836 |
|
Other assets |
|
|
8,335 |
|
|
5,935 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
850,830 |
|
$ |
761,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
Demand |
|
$ |
60,383 |
|
$ |
50,140 |
|
Savings and interest checking |
|
|
100,134 |
|
|
98,340 |
|
Money market |
|
|
168,527 |
|
|
83,901 |
|
Time |
|
|
345,715 |
|
|
341,948 |
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
674,759 |
|
|
574,329 |
|
Federal Home Loan Bank advances |
|
|
30,188 |
|
|
42,824 |
|
Wholesale repurchase agreements |
|
|
10,037 |
|
|
10,199 |
|
Short-term borrowings |
|
|
2,349 |
|
|
2,984 |
|
Junior subordinated debentures issued to affiliated trusts |
|
|
8,626 |
|
|
8,440 |
|
Capital lease obligation |
|
|
1,368 |
|
|
1,558 |
|
Other liabilities |
|
|
10,664 |
|
|
9,531 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
737,991 |
|
|
649,865 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at June 30, 2015 and June 30, 2014 |
|
|
|
|
|
|
|
Voting common stock, $1.00 par value, 25,000,000 authorized; 8,575,144 and 9,260,331 issued and outstanding at June 30, 2015 and 2014,
respectively |
|
|
8,575 |
|
|
9,260 |
|
Non-voting common stock, $1.00 par value, 3,000,000 authorized; 1,012,739 and 880,963 shares issued and outstanding at June 30, 2015 and June 30,
2014, respectively |
|
|
1,013 |
|
|
881 |
|
Additional paid-in capital |
|
|
85,506 |
|
|
90,914 |
|
Retained earnings |
|
|
19,033 |
|
|
12,294 |
|
Accumulated other comprehensive loss |
|
|
(1,288 |
) |
|
(1,283 |
) |
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
112,839 |
|
|
112,066 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
850,830 |
|
$ |
761,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
63
Table of Contents
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
Interest and dividend income: |
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
43,383 |
|
$ |
37,009 |
|
Interest on available-for-sale securities |
|
|
913 |
|
|
1,048 |
|
Other interest and dividend income |
|
|
292 |
|
|
314 |
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
44,588 |
|
|
38,371 |
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
Deposits |
|
|
5,010 |
|
|
4,123 |
|
Federal Home Loan Bank advances |
|
|
1,101 |
|
|
1,301 |
|
Wholesale repurchase agreements |
|
|
288 |
|
|
357 |
|
Short-term borrowings |
|
|
29 |
|
|
24 |
|
Junior subordinated debentures issued to affiliated trusts |
|
|
718 |
|
|
765 |
|
Obligation under capital lease agreement |
|
|
74 |
|
|
83 |
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
7,220 |
|
|
6,653 |
|
|
|
|
|
|
|
|
|
Net interest and dividend income before provision for loan losses |
|
|
37,368 |
|
|
31,718 |
|
Provision for loan losses |
|
|
717 |
|
|
531 |
|
|
|
|
|
|
|
|
|
Net interest and dividend income after provision for loan losses |
|
|
36,651 |
|
|
31,187 |
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
Fees for other services to customers |
|
|
1,494 |
|
|
1,644 |
|
Gain on sales of loans held for sale |
|
|
1,877 |
|
|
1,650 |
|
Gain on sales of portfolio loans |
|
|
2,821 |
|
|
1,006 |
|
Gain recognized on real estate owned and other repossessed collateral, net |
|
|
428 |
|
|
63 |
|
Bank-owned life insurance income |
|
|
440 |
|
|
451 |
|
Other noninterest income |
|
|
29 |
|
|
55 |
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
7,089 |
|
|
4,869 |
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
18,817 |
|
|
17,786 |
|
Occupancy and equipment expense |
|
|
4,939 |
|
|
5,448 |
|
Professional fees |
|
|
1,658 |
|
|
1,285 |
|
Data processing fees |
|
|
1,355 |
|
|
1,209 |
|
Marketing expense |
|
|
244 |
|
|
311 |
|
Loan acquisition and collection expense |
|
|
1,458 |
|
|
1,539 |
|
FDIC insurance premiums |
|
|
504 |
|
|
480 |
|
Intangible asset amortization |
|
|
589 |
|
|
746 |
|
Legal settlement recovery |
|
|
|
|
|
(250 |
) |
Other noninterest expense |
|
|
3,040 |
|
|
3,223 |
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
32,604 |
|
|
31,777 |
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax expense |
|
|
11,136 |
|
|
4,279 |
|
Income tax expense |
|
|
3,995 |
|
|
1,579 |
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
7,141 |
|
$ |
2,700 |
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
|
|
$ |
(12 |
) |
Income tax benefit |
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,141 |
|
$ |
2,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
Basic |
|
|
9,980,733 |
|
|
10,404,784 |
|
Diluted |
|
|
9,980,733 |
|
|
10,404,784 |
|
Earnings per common share: |
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.72 |
|
$ |
0.26 |
|
Income from discontinued operations |
|
|
0.00 |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.72 |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.72 |
|
$ |
0.26 |
|
Income from discontinued operations |
|
|
0.00 |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.72 |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share: |
|
$ |
0.04 |
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
64
Table of Contents
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, |
|
|
|
2015 |
|
2014 |
|
Net income |
|
$ |
7,141 |
|
$ |
2,692 |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
Change in net unrealized gain or loss on available-for-sale securities |
|
|
442 |
|
|
1,358 |
|
Reclassification adjustment for net gains included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
442 |
|
|
1,358 |
|
Derivatives and hedging activities: |
|
|
|
|
|
|
|
Change in accumulated loss on effective cash flow hedges |
|
|
(529 |
) |
|
(325 |
) |
Reclassification adjustments for net gains included in net income |
|
|
(49 |
) |
|
(76 |
) |
|
|
|
|
|
|
|
|
Total derivatives and hedging activities |
|
|
(578 |
) |
|
(401 |
) |
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), before tax |
|
|
(136 |
) |
|
957 |
|
Income tax expense (benefit) related to other comprehensive income (loss) |
|
|
(131 |
) |
|
326 |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
|
|
(5 |
) |
|
631 |
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
7,136 |
|
$ |
3,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
65
Table of Contents
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voting
Common Stock |
|
Non-voting
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
|
|
|
|
Additional
Paid-in Capital |
|
Retained
Earnings |
|
Total
Stockholders'
Equity |
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Balance at June 30, 2013 |
|
|
|
|
$ |
|
|
|
9,565,680 |
|
$ |
9,566 |
|
|
880,963 |
|
$ |
881 |
|
$ |
92,745 |
|
$ |
12,524 |
|
$ |
(1,914 |
) |
$ |
113,802 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,692 |
|
|
|
|
|
2,692 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
631 |
|
|
631 |
|
Common stock repurchased |
|
|
|
|
|
|
|
|
(291,200 |
) |
|
(292 |
) |
|
|
|
|
|
|
|
(2,531 |
) |
|
|
|
|
|
|
|
(2,823 |
) |
Dividends on common stock at $0.28 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,922 |
) |
|
|
|
|
(2,922 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
686 |
|
|
|
|
|
|
|
|
686 |
|
Forfeiture of restricted common stock |
|
|
|
|
|
|
|
|
(14,149 |
) |
|
(14 |
) |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014 |
|
|
|
|
$ |
|
|
|
9,260,331 |
|
$ |
9,260 |
|
|
880,963 |
|
$ |
881 |
|
$ |
90,914 |
|
$ |
12,294 |
|
$ |
(1,283 |
) |
$ |
112,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,141 |
|
|
|
|
|
7,141 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
(5 |
) |
Common stock repurchased |
|
|
|
|
|
|
|
|
(710,662 |
) |
|
(711 |
) |
|
|
|
|
|
|
|
(5,955 |
) |
|
|
|
|
|
|
|
(6,666 |
) |
Conversion of voting common stock to non-voting common stock |
|
|
|
|
|
|
|
|
(131,776 |
) |
|
(132 |
) |
|
131,776 |
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common stock at $0.04 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(402 |
) |
|
|
|
|
(402 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
705 |
|
|
|
|
|
|
|
|
705 |
|
Issuance of restricted common stock |
|
|
|
|
|
|
|
|
174,000 |
|
|
174 |
|
|
|
|
|
|
|
|
(174 |
) |
|
|
|
|
|
|
|
|
|
Forfeiture of restricted common stock |
|
|
|
|
|
|
|
|
(16,749 |
) |
|
(16 |
) |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2015 |
|
|
|
|
$ |
|
|
|
8,575,144 |
|
|
8,575 |
|
|
1,012,739 |
|
$ |
1,013 |
|
$ |
85,506 |
|
$ |
19,033 |
|
$ |
(1,288 |
) |
$ |
112,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
66
Table of Contents
NORTHEAST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, |
|
|
|
2015 |
|
2014 |
|
Operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
7,141 |
|
$ |
2,692 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
Provision for loan losses |
|
|
717 |
|
|
531 |
|
Gain recognized on real estate owned and other repossessed collateral, net |
|
|
(428 |
) |
|
(63 |
) |
Accretion of fair value adjustments on loans, net |
|
|
(11,899 |
) |
|
(7,120 |
) |
Accretion of fair value adjustments on deposits, net |
|
|
(171 |
) |
|
(560 |
) |
Accretion of fair value adjustments on borrowings, net |
|
|
(112 |
) |
|
(242 |
) |
Originations of loans held for sale |
|
|
(98,383 |
) |
|
(91,366 |
) |
Net proceeds from sales of loans held for sale |
|
|
103,170 |
|
|
89,665 |
|
Gain on sales of loans held for sale, net |
|
|
(1,877 |
) |
|
(1,650 |
) |
Gain on sales of portfolio loans, net |
|
|
(2,821 |
) |
|
(1,006 |
) |
Amortization of intangible assets |
|
|
589 |
|
|
746 |
|
Bank-owned life insurance income, net |
|
|
(440 |
) |
|
(451 |
) |
Depreciation of premises and equipment |
|
|
1,666 |
|
|
1,999 |
|
Loss on sale of premises and equipment |
|
|
91 |
|
|
16 |
|
Deferred income tax benefit |
|
|
(1,185 |
) |
|
(2,672 |
) |
Stock-based compensation |
|
|
705 |
|
|
686 |
|
Amortization of securities, net |
|
|
1,001 |
|
|
1,237 |
|
Changes in other assets and liabilities: |
|
|
|
|
|
|
|
Other assets |
|
|
(60 |
) |
|
576 |
|
Other liabilities |
|
|
556 |
|
|
1,443 |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,740 |
) |
|
(5,539 |
) |
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
|
|
|
(48,481 |
) |
Proceeds from maturities and principal payments on available-for-sale securities |
|
|
11,414 |
|
|
56,318 |
|
Loan purchases |
|
|
(82,654 |
) |
|
(79,823 |
) |
Proceeds from sales of portfolio loans |
|
|
23,260 |
|
|
9,305 |
|
Loan originations, principal collections, and purchased loan paydowns, net |
|
|
(24,585 |
) |
|
(4,372 |
) |
Purchases of premises and equipment |
|
|
(1,244 |
) |
|
(1,086 |
) |
Proceeds from sales of premises and equipment |
|
|
369 |
|
|
11 |
|
Proceeds from sales of real estate owned and other repossessed collateral |
|
|
2,563 |
|
|
1,674 |
|
Redemption of regulatory stock, net |
|
|
|
|
|
1,619 |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(70,877 |
) |
|
(64,835 |
) |
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Net increase in deposits |
|
|
100,601 |
|
|
90,266 |
|
Net (decrease) increase in short-term borrowings |
|
|
(635 |
) |
|
2,359 |
|
Dividends paid on common stock |
|
|
(402 |
) |
|
(2,922 |
) |
Repurchase of common stock |
|
|
(6,666 |
) |
|
(2,823 |
) |
Repayment of FHLB borrowings and wholesale repurchase agreements |
|
|
(12,500 |
) |
|
(15,000 |
) |
Proceeds from FHLB borrowings |
|
|
|
|
|
15,000 |
|
Repayment of capital lease obligation |
|
|
(190 |
) |
|
(181 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
80,208 |
|
|
86,699 |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
7,591 |
|
|
16,325 |
|
Cash and cash equivalents, beginning of year |
|
|
82,259 |
|
|
65,934 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
89,850 |
|
$ |
82,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information: |
|
|
|
|
|
|
|
Interest paid |
|
$ |
7,487 |
|
$ |
7,496 |
|
Income taxes paid, net of refunds received |
|
|
5,664 |
|
|
3,500 |
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
Transfers from loans to real estate owned and other repossessed collateral, net |
|
$ |
1,764 |
|
$ |
1,531 |
|
The accompanying notes are an integral part of these consolidated financial statements.
67
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Northeast Bancorp and Subsidiary ("Company" or "Northeast") conform to accounting principles generally accepted in the United States of America
("GAAP") and conform to practices within the financial services industry.
Business
The Company is a Maine corporation and a bank holding company registered with the Federal Reserve Bank of Boston ("FRB") under the Bank
Holding Company Act of 1956. As a bank holding company, the Company is subject to the regulation and supervision of the FRB. The Company provides a full range of banking services to individual and
corporate customers throughout south-central and western Maine and conducts loan purchasing and origination activities nationwide through its wholly-owned subsidiary, Northeast Bank (the "Bank"), a
Maine state-chartered universal bank. The Bank is subject to supervision and regulation by applicable state and federal banking agencies, including the State of Maine Bureau of Financial Institutions,
the Federal Deposit Insurance Corporation ("FDIC"), and the FRB. The Bank faces competition from banks and other financial institutions.
Business Combination Accounting
On December 29, 2010, the Company merged with FHB Formation LLC (the "Merger"). The Company applied the acquisition
method of accounting to this business combination, which represented an acquisition by FHB Formation LLC ("FHB") of Northeast, with
Northeast as the surviving company. Under the acquisition method, the acquiring entity in a business combination recognizes the assets acquired and liabilities assumed at their acquisition date fair
values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to
assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. In the Merger, amounts allocated to assets acquired and liabilities assumed were greater
than the purchase price, which resulted in the recognition of a bargain purchase gain. Acquisition-related costs were expensed as incurred.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Northeast Bancorp, and its wholly-owned subsidiary,
Northeast Bank (including the Bank's wholly-owned subsidiaries). All significant intercompany transactions and balances have been eliminated in consolidation.
NBN
Capital Trust II, NBN Capital Trust III and NBN Capital Trust IV are considered affiliates and are deconsolidated pursuant to criteria established by Accounting Standards
Codification ("ASC") 810, Consolidation ("ASC 810"). The investments in these affiliates were $496 thousand in aggregate and are included
in other assets.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current year's presentation.
Use of Estimates
The financial statements have been prepared in conformity with GAAP. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
amounts
of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the statement of financial condition and income and expenses for the period. Actual results
could differ significantly from those estimates.
Material
estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the determination of fair values in conjunction
with the application of acquisition accounting, and the on-going evaluation of assets for potential impairment.
Concentrations of Credit Risk
Most of the Community Bank's business activity is with customers located within the State of Maine. However, the LASG purchase and
origination, as well as the SBA National origination activities are diversified across the country. In all regions, the Company has emphasized the origination and purchase of commercial real estate
loans. Repayment of loans is expected to come from cash flows of the borrower. Losses on secured loans are limited by the value of the collateral upon default of the borrowers. The Company does not
have any significant concentrations to any one industry or customer.
Cash and Cash Equivalents
For purposes of presentation in the consolidated statements of cash flows, cash and cash equivalents consist of cash and due from banks
and short-term investments. The Company is required to maintain a certain reserve balance in the form of cash or deposits with other financial institutions. At June 30, 2015 and 2014, such
reserve balances totaled $4.4 million and $2.4 million, respectively.
Investment Securities
Securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and carried
at amortized cost. Those securities held for indefinite periods of time but not necessarily to maturity are classified as available for sale. Securities held for indefinite periods of time include
securities that management intends to use as part of its asset/liability, liquidity, or capital management strategies and may be sold in response to changes in interest rates, maturities,
asset/liability mix, liquidity needs, regulatory capital needs or other business factors. Securities available for sale are carried at estimated fair value with unrealized gains and losses reported on
an after-tax basis in stockholders' equity as accumulated other comprehensive income or loss.
Interest
and dividends on securities are recorded on the accrual method. Premiums and discounts on securities are amortized or accreted into interest income by the level-yield method
over the remaining period to contractual maturity, adjusted for the effect of actual prepayments in the case of mortgage-backed securities. These estimates of prepayment assumptions are made based
upon the actual performance of the underlying security, current interest rates, the general market consensus regarding changes in mortgage interest rates, the contractual repayment terms of the
underlying loans, the priority rights of the investors to the cash flows from the mortgage securities and other economic conditions. When differences arise between anticipated prepayments and actual
prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Unamortized premium or discount is adjusted to the amount that would have existed
had the new effective yield been applied since purchase, with a corresponding charge or credit to interest income.
Security
transactions are recorded on the trade date. Realized gains and losses are determined using the specific identification method and are recorded in non-interest income.
69
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Management
evaluates securities for other-than-temporary impairment on a periodic basis. Factors considered in determining whether an impairment is other-than-temporary include:
(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and
ability of the Company to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. If the Company intends to sell an impaired security, the Company
records an other-than-temporary loss in an amount equal to the entire difference between the fair value and amortized cost. If a security is determined to be other-than-temporarily impaired but the
Company does not intend to sell the security, only the
credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
Federal Home Loan Bank Stock
During the periods presented, the Company has owned investments in the stock of the Federal Home Loan Bank of Boston ("FHLBB"). No
ready market exists for these stocks, and they have no quoted market values. The Bank, as a member of the FHLBB, is required to maintain investments in the capital stock of the FHLBB equal to their
membership base investments plus an activity-based investment determined according to the Bank's level of outstanding FHLBB advances. The Company reviews its investments in FHLB stock periodically to
determine if other-than-temporary impairment exists. The Company reviews recent public filings, rating agency analysis and other factors, when making the determination.
Loans Held for Sale and Loan Servicing
Residential real estate mortgage loans are designated as held for sale based on intent, which is determined when loans are
underwritten. Loans originated and held for sale in the secondary market are carried at the lower of cost or fair value. The SBA National loans are designated as held for sale based on intent to sell,
which is determined on a monthly basis. The guaranteed portions of the loans are transferred to held for sale and are carried at the lower of cost or fair value. Realized gains and losses on sales of
loans are determined using the specific identification method. Direct loan originations costs and fees related to loans held for sale are deferred upon origination and are recognized on the date of
sale.
In
its mortgage banking activities, the Company sells loans both on a servicing released and servicing retained basis. The Company recognizes as separate assets the rights to service
mortgage loans for others, which is included in other assets on the consolidated balance sheet. The Company capitalizes mortgage servicing rights at their allocated cost (based on the relative fair
values of the rights and the related loans) upon the sale of the related loans. The Company uses the amortization method to subsequently measure servicing assets. Mortgage servicing rights are
amortized over the estimated weighted average life of the loans. The Company's assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted quarterly and
as necessary to reflect current circumstances. The Company evaluates the estimated life and fair value of its servicing portfolio based on data that is disaggregated to reflect note rate, type, and
term on the underlying loans. The Company performs an assessment of capitalized mortgage servicing rights for impairment based on the current fair value of those rights. Fair value of the mortgage
servicing rights is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds and default rates and losses.
70
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Impairment
is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount. If the Company later determines that all or a portion of the impairment no
longer exists, a reduction of the allowance may be recorded as an increase to income.
In
its SBA national activity, the Company recognizes the SBA servicing rights as separate assets, which is included in other assets on the consolidated balance sheet. The Company
capitalizes SBA servicing rights at the net present value of the fee income and fee cost spread upon the sale of the related loans. The Company uses the amortization method to subsequently measure
servicing assets. The SBA servicing rights are amortized over the estimated weighted average life of the loans. The Company's assumptions with respect to prepayments, which affect the estimated
average life of the loans, are adjusted quarterly and as necessary to reflect current circumstances. The Company evaluates the estimated life and fair value of its servicing portfolio based on data
that is disaggregated to reflect note rate, type, and term on the underlying loans. The Company performs an assessment of capitalized SBA servicing rights for impairment based on the current fair
value of those rights. Fair value of the mortgage servicing rights is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds and default rates and losses.
Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount. If the Company later determines that all or a portion of the impairment no
longer exists, a reduction of the allowance may be recorded as an increase to income.
In
connection with the mortgage loans to be held for sale, the Company often offers interest rate lock commitments to prospective borrowers. The Company manages this interest rate risk
by entering into offsetting forward sale agreements with third party investors for certain funded loans and loan commitments. The Company uses "best efforts" forward loan sale commitments to mitigate
the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. The net effect of the derivative loan commitments and forward sale
agreements is nominal at each date presented.
Loans
Loans are carried at the principal amounts outstanding, or amortized acquired fair value in the case of acquired loans, adjusted by
partial charge-offs and net of deferred loan costs or fees. Loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the
level-yield method. When a loan is paid off, the unamortized portion is recognized in interest income. Interest income is accrued based upon the daily principal amount outstanding except for loans on
nonaccrual status.
Loans
purchased by the Company are accounted for under ASC 310-30, ReceivablesLoans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). At
acquisition, the effective interest rate is determined based on the discount rate that equates the present value of the Company's estimate of cash flows with the purchase price of the loan.
Prepayments are not assumed in determining a purchased loan's effective interest rate and income accretion. The application of ASC 310-30 limits the yield that may be accreted on the purchased
loan, or the "accretable yield," to the excess of the Company's estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company's initial investment
in the loan. The excess of contractually required payments receivable over the cash flows expected to be collected on the loan represents the
71
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
purchased
loan's "nonaccretable difference." Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase to the loan's effective yield
through a reclassification of some, or all, of the nonaccretable difference to accretable yield. The effect of subsequent credit-related declines in expected cash flows of purchased loans are recorded
through a specific allocation in the allowance for loan losses.
Loans
are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when in management's judgment the collectability of interest
or principal of the loan has been significantly impaired. Loans accounted for under ASC 310-30 are placed on nonaccrual when it is not possible to reach a reasonable expectation of the timing and
amount of cash flows to be collected on the loan. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. Interest on
nonaccrual loans is accounted for on a cash-basis or using the cost-recovery method when collectability is doubtful. A loan is returned to accrual status when collectability of principal is reasonably
assured and the loan has performed for a reasonable period of time.
In
cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt
restructuring ("TDR"), and therefore by definition is an impaired loan. Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to
minimize economic loss and avoid foreclosure or repossession of collateral. For loans accounted for under ASC 310-30, the Company evaluates whether it has granted a concession by comparing the
restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition. As a result, if an ASC
310-30 loan is modified to be consistent with, or better than, the Company's expectations at acquisition, the loan would not qualify as a TDR. Nonaccrual loans that are restructured generally remain
on nonaccrual status for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. If the restructured loan is on accrual status prior to being modified, it is
reviewed to determine if the modified loan should remain on accrual status. If the borrower's ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a
nonaccrual loan. With limited exceptions, loans classified as TDRs remain classified as such until the loan is paid off.
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. For residential and consumer loans, a charge-off is recorded no later than 180 days past due if the loan balance exceeds the fair value of the collateral, less costs to sell. For
commercial loans, a charge-off is recorded on a case-by-case basis when all or a portion of the loan is deemed to be uncollectible. Subsequent recoveries, if any, are credited to the allowance.
The
allowance for loan losses consists of general, specific, and unallocated reserves and reflects management's estimate of probable loan losses inherent in the loan portfolio at the
balance sheet date. Management uses a consistent and systematic process and methodology to evaluate the 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,
72
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
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.
Consumer:
Loans in this segment are generally secured, and repayment is dependent on the credit quality of the individual borrower. Repayment of consumer loans is generally based on the
earnings of individual borrowers, which may be adversely impacted by regional labor market conditions.
Purchased:
Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the 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.
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
73
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
-
- National and local economic trends and conditions.
-
- Effects of changes or trends in internal risk ratings
-
- Other effects resulting from trends in the valuation of underlying collateral
There
were no significant changes in the Company's policies or methodology pertaining to the general component of the allowance for loan losses during the years ended June 30,
2015 or 2014.
The
allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial business and
commercial real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral
dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. Large groups of smaller-balance
homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment based on the group's historical loss experience adjusted for qualitative factors.
Accordingly, the Company does not separately identify individual consumer and residential loans for individual impairment and disclosure. However, all TDRs are individually reviewed for impairment.
For
all portfolio segments, except loans accounted for under ASC 310-30, a loan is considered impaired when, based on current information and events, it is probable that the Company will
be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to
the principal and interest owed. For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to realize
cash flows as estimated at acquisition. For loans accounted for under ASC 310-30 for which cash flows can reasonably be estimated, loan impairment is measured based on the decrease in expected cash
flows from those estimated at acquisition, excluding changes due to changes in interest rate indices and other non-credit related factors, discounted at the loan's effective rate assumed at
acquisition. Factors considered by management in determining impairment include payment status, collateral value, and the probability of the collecting scheduled principal and interest payments when
due.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the
estimated useful lives of the assets. Premises and equipment under capital leases are amortized over the estimated useful lives of the assets or the respective lease terms, whichever is shorter.
Maintenance and repairs are charged to expense as incurred and the cost of major renewals and betterments are capitalized.
Intangible Assets
Identifiable intangible assets subject to amortization are amortized over the estimated lives of the intangibles using a method that
approximates the amount of economic benefits that are realized by the Company. Identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable.
74
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Real Estate Owned and Other Repossessed Collateral
Assets in control of the Company or acquired through foreclosure or repossession are held for sale and are initially recorded at fair
value less cost to sell at the date control is established, resulting in a new cost basis. The amount by which the recorded investment in the loan exceeds the fair value (net of estimated cost to
sell) of the foreclosed asset is charged to the allowance for loan losses. Subsequent declines in the fair value of the foreclosed asset below the new cost basis are recorded through the use of a
valuation allowance or through a direct write-off. Subsequent increases in the fair value may only be recorded to the extent of any previously recognized valuation allowance. Rental revenue received
and gains and losses recognized on foreclosed assets is included in other noninterest income, whereas operating expenses and changes in the valuation allowance relating to foreclosed assets are
included in other noninterest expense.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including premises and equipment, for impairment whenever events or changes in business
circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. The Company performs undiscounted cash flow
analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based
on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Bank Owned Life Insurance
Increases in the cash surrender value of life insurance policies, as well as death benefits received net of any cash surrender value,
are recorded in other noninterest income, and are not subject to income taxes. The cash surrender value of the policies not previously endorsed to participants are recorded as assets of the Company.
Any amounts owed to participants relating to these policies are recorded as liabilities of the Company. The Company reviews the financial strength of the insurance carriers prior to the purchase of
life insurance policies and no less than annually thereafter.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date. The Company's policy is to recognize interest and penalties assessed on uncertain tax positions in income tax expense.
Stock-Based Compensation
The Company's stock-based compensation plans provide for awards of stock options, restricted stock and other stock-based compensation
to directors, officers and employees. The cost of employee services received in exchange for awards of equity instruments is based on the grant-date fair value of those awards. Compensation cost is
recognized over the requisite service period as a component of compensation expense. For awards with graded-vesting, compensation cost is recognized on a
75
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
straight-line
basis over the requisite service period for the entire award. The Company uses the Black-Scholes model to estimate the fair value of stock options, while the market price of the
Company's common stock at the date of grant is used for restricted stock awards.
Discontinued Operations
During the first quarter of fiscal 2014, the Company ceased all investment brokerage operations. The results of such operations are
classified as discontinued operations in the statements of income for each period presented. The Company has eliminated all intercompany transactions related to discontinued operations for each period
presented.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, unrealized losses related to factors other than credit on debt securities, unrealized gains and losses on cash flow hedges and deferred gains on hedge
accounting transactions.
Earnings Per Share
Basic earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula under which
earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings
distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain
non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures. Basic earnings per share is calculated
by dividing net income available to common shareholders by the
weighted average number of common shares outstanding (inclusive of participating securities). Diluted earnings per share have been calculated in a manner similar to that of basic earnings per share
except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common
shares (such as those resulting from the exercise of stock options or the attainment of performance measures) were issued during the period, computed using the treasury stock method.
Derivatives
Derivative instruments are carried at fair value in the Company's financial statements. The accounting for changes in the fair value of
a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship, and further, by the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, the Company designates the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow
hedge. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income, net of related tax, and reclassified into earnings in
the same period or periods during which the hedged transactions affect earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present
76
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
value
of future cash flows of the hedged item (i.e., the ineffective portion), if any, is recognized in current earnings during the period. For derivative instruments designated and qualifying
as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or liability or an identified portion thereof that is attributable to the hedged risk), the gain or
loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current earnings during the period of the change in fair
values. At the inception of a hedge, the Company documents certain items, including but not limited to the following: the relationship between hedging instruments and hedged items, Company risk
management objectives, hedging strategies, and the evaluation of hedge transaction effectiveness. Documentation includes linking all derivatives designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific forecasted transactions.
Hedge
accounting is discontinued prospectively when (1) a derivative is no longer highly effective in offsetting changes in the fair value or cash flow of a hedged item,
(2) a derivative expires or is sold, (3) a derivative is de-designated as a hedge, because it is unlikely that a forecasted transaction will occur, or (4) it is determined that
designation of a derivative as a hedge is no longer appropriate. For derivative
instruments not designated as hedging instruments, the gain or loss on the derivative is recognized in current earnings during the period of change.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets. There are no agreements to repurchase
before their maturity.
The
Company sells financial assets in the normal course of business, the majority of which are related to the SBA-guaranteed portion of loans, as well as residential mortgage loan sales
through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset
transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. With the exception of servicing and
certain performance-based guarantees, the Company's continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses.
When
the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or loss on sale depends on the previous carrying amount
of the transferred financial assets and the consideration received and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held by
the Company are carried at the lower of cost or fair value.
Segment Reporting
All of the Company's operations are considered by management to be aggregated in one reportable operating segment.
77
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU No. 2014-01, InvestmentsEquity Method and Joint
Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects ("ASU 2014-01"). The amendments in ASU 2014-01 provide guidance on accounting for
investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments
permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain
conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes
the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for fiscal years, and interim periods within those years, beginning
after December 31, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company does not expect ASU 2014-01 to have material impact on the
consolidated financial statements.
In
May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU
2014-09"). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To
achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract,
(iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity
satisfies a performance obligation. ASU 2014-09 is effective January 1, 2017 and is not expected to have a significant impact on the Company's financial statements. Additionally, in August 2015
the FAB issued ASU 2015-14, which effectively deferred the adoption of ASU 2014-09 by one year, to annual reporting periods beginning after December 15, 2017, including interim reporting
periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that
reporting period.
In
June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and
Disclosures ("ASU 2014-11"). ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for
other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for
repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose
certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral,
remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 became effective
January 1, 2015 and did not have an impact on the Company's financial statements.
In
August 2014, the FASB issued ASU 2014-14, ReceivablesTroubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain
Government-Guaranteed Mortgage Loans upon Foreclosure ("ASU 2014-14"). ASU 2014-14 affects creditors that hold
government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration (FHA) of the U.S.
78
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Department
of Housing and Urban Development (HUD), and the U.S. Department of Veterans Affairs (VA). The update requires that, upon foreclosure, a guaranteed mortgage loan be derecognized and a
separate other receivable be recognized when specific criteria are met. ASU 2014-14 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2014. The adoption of this guidance is not expected to have a significant impact on the Company's financial statements.
2. Securities Available-for-Sale
The following presents a summary of the amortized cost, gross unrealized holding gains and losses, and fair value of securities available for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Amortized
Cost |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
|
|
(Dollars in thousands)
|
|
U.S. Government agency securities |
|
$ |
48,191 |
|
$ |
40 |
|
$ |
(1 |
) |
$ |
48,230 |
|
Agency mortgage-backed securities |
|
|
54,553 |
|
|
2 |
|
|
(877 |
) |
|
53,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
102,744 |
|
$ |
42 |
|
$ |
(878 |
) |
$ |
101,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Amortized
Cost |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
|
|
(Dollars in thousands)
|
|
U.S. Government agency securities |
|
$ |
48,415 |
|
$ |
31 |
|
$ |
(28 |
) |
$ |
48,418 |
|
Agency mortgage-backed securities |
|
|
66,744 |
|
|
3 |
|
|
(1,284 |
) |
|
65,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
115,159 |
|
$ |
34 |
|
$ |
(1,312 |
) |
$ |
113,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2015, the Company held no securities of any single issuer (excluding the U. S. Government and federal agencies) with a book value that exceeded 10 percent of
stockholders' equity.
When
securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale. There were no securities sold during fiscal 2015 or fiscal 2014. At
June 30, 2015, investment securities with a fair value of approximately $12.4 million were pledged as collateral to secure outstanding wholesale repurchase agreements and FHLB advances.
79
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Securities Available-for-Sale (Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Less than
12 Months |
|
More than
12 Months |
|
Total |
|
|
|
Fair
Value |
|
Unrealized
Losses |
|
Fair
Value |
|
Unrealized
Losses |
|
Fair
Value |
|
Unrealized
Losses |
|
|
|
(Dollars in thousands)
|
|
U.S. Government agency securities |
|
$ |
2,999 |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
2,999 |
|
$ |
(1 |
) |
Agency mortgage-backed securities |
|
|
10,295 |
|
|
(106 |
) |
|
41,349 |
|
|
(771 |
) |
|
51,644 |
|
|
(877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,294 |
|
$ |
(107 |
) |
$ |
41,349 |
|
$ |
(771 |
) |
$ |
54,643 |
|
$ |
(878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Less than
12 Months |
|
More than
12 Months |
|
Total |
|
|
|
Fair
Value |
|
Unrealized
Losses |
|
Fair
Value |
|
Unrealized
Losses |
|
Fair
Value |
|
Unrealized
Losses |
|
|
|
(Dollars in thousands)
|
|
U.S. Government agency securities |
|
$ |
24,141 |
|
$ |
(28 |
) |
$ |
|
|
$ |
|
|
$ |
24,141 |
|
$ |
(28 |
) |
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
62,734 |
|
|
(1,284 |
) |
|
62,734 |
|
|
(1,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,141 |
|
$ |
(28 |
) |
$ |
62,734 |
|
$ |
(1,284 |
) |
$ |
86,875 |
|
$ |
(1,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no other-than-temporary impairment losses on securities during the years ended June 30, 2015 and 2014.
At
June 30, 2015, the Company had 16 securities in a continuous loss position for greater than twelve months. At June 30, 2015, all of the Company's available-for-sale
securities were issued or guaranteed by either government agencies or government-sponsored enterprises. In management's estimation, the decline in fair value of the Company's available-for-sale
securities at June 30, 2015 is attributable to changes in interest rates.
Management
of the Company, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company's investment
portfolio, also considers the Company's ability and intent to hold such securities to maturity or recovery of cost. At June 30, 2015, it is more likely than not that the Company will not sell
or be required to sell the investment securities before recovery of its amortized cost. As such, management does not believe any of the Company's available-for-sale securities are
other-than-temporarily impaired at June 30, 2015.
80
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Securities Available-for-Sale (Continued)
The
amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of June 30, 2015. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
Amortized
Cost |
|
Fair
Value |
|
|
|
(Dollars in thousands)
|
|
Due within one year |
|
$ |
36,117 |
|
$ |
36,142 |
|
Due after one year through five years |
|
|
12,074 |
|
|
12,088 |
|
Due after five years through ten years |
|
|
26,425 |
|
|
26,119 |
|
Due after ten years |
|
|
28,128 |
|
|
27,559 |
|
|
|
|
|
|
|
|
|
|
|
$ |
102,744 |
|
$ |
101,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Loans, Allowance for Loan Losses and Credit Quality
The composition of the Company's loan portfolio is as follows on the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
|
|
Originated |
|
Purchased |
|
Total |
|
Originated |
|
Purchased |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Residential real estate |
|
$ |
106,275 |
|
$ |
2,068 |
|
$ |
108,343 |
|
$ |
116,972 |
|
$ |
3,687 |
|
$ |
120,659 |
|
Home equity |
|
|
24,326 |
|
|
|
|
|
24,326 |
|
|
27,975 |
|
|
|
|
|
27,975 |
|
Commercial real estate |
|
|
148,425 |
|
|
200,251 |
|
|
348,676 |
|
|
116,617 |
|
|
199,481 |
|
|
316,098 |
|
Commercial business |
|
|
122,860 |
|
|
273 |
|
|
123,133 |
|
|
41,518 |
|
|
282 |
|
|
41,800 |
|
Consumer |
|
|
7,659 |
|
|
|
|
|
7,659 |
|
|
9,884 |
|
|
|
|
|
9,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
409,545 |
|
$ |
202,592 |
|
$ |
612,137 |
|
$ |
312,966 |
|
$ |
203,450 |
|
$ |
516,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the originated loan portfolio is $11.0 million of loans originated through SBA National, which includes $8.3 million of commercial real estate and
$2.7 million of commercial business.
Loans
pledged as collateral with the FHLB for outstanding borrowings and additional borrowing capacity totaled $131.3 million and $187.6 million at June 30, 2015 and
2014, respectively.
81
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
Past Due and Nonaccrual Loans
The following is a summary of past due and non-accrual loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
30 - 59
Days |
|
60 - 89
Days |
|
Past Due
90 Days or
More-Still
Accruing |
|
Past Due
90 Days or
More-
Nonaccrual |
|
Total
Past
Due |
|
Total
Current |
|
Total
Loans |
|
Non-
Accrual
Loans |
|
|
|
(Dollars in thousands)
|
|
Originated portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
239 |
|
$ |
973 |
|
$ |
|
|
$ |
1,393 |
|
$ |
2,605 |
|
$ |
103,670 |
|
$ |
106,275 |
|
$ |
3,021 |
|
Home equity |
|
|
9 |
|
|
|
|
|
|
|
|
11 |
|
|
20 |
|
|
24,306 |
|
|
24,326 |
|
|
11 |
|
Commercial real estate |
|
|
300 |
|
|
|
|
|
|
|
|
704 |
|
|
1,004 |
|
|
147,421 |
|
|
148,425 |
|
|
994 |
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
2 |
|
|
122,858 |
|
|
122,860 |
|
|
2 |
|
Consumer |
|
|
105 |
|
|
29 |
|
|
|
|
|
56 |
|
|
190 |
|
|
7,469 |
|
|
7,659 |
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originated portfolio |
|
|
653 |
|
|
1,002 |
|
|
|
|
|
2,166 |
|
|
3,821 |
|
|
405,724 |
|
|
409,545 |
|
|
4,218 |
|
Purchased portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,068 |
|
|
2,068 |
|
|
|
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273 |
|
|
273 |
|
|
|
|
Commercial real estate |
|
|
86 |
|
|
299 |
|
|
|
|
|
2,410 |
|
|
2,795 |
|
|
197,456 |
|
|
200,251 |
|
|
6,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchased portfolio |
|
|
86 |
|
|
299 |
|
|
|
|
|
2,410 |
|
|
2,795 |
|
|
199,797 |
|
|
202,592 |
|
|
6,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
739 |
|
$ |
1,301 |
|
$ |
|
|
$ |
4,576 |
|
$ |
6,616 |
|
$ |
605,521 |
|
$ |
612,137 |
|
$ |
10,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
30 - 59
Days |
|
60 - 89
Days |
|
Past Due
90 Days or
More-Still
Accruing |
|
Past Due
90 Days or
More-
Nonaccrual |
|
Total
Past
Due |
|
Total
Current |
|
Total
Loans |
|
Non-
Accrual
Loans |
|
|
|
(Dollars in thousands)
|
|
Originated portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
222 |
|
$ |
728 |
|
$ |
|
|
$ |
1,573 |
|
$ |
2,523 |
|
$ |
114,449 |
|
$ |
116,972 |
|
$ |
1,743 |
|
Home equity |
|
|
109 |
|
|
7 |
|
|
|
|
|
120 |
|
|
236 |
|
|
27,739 |
|
|
27,975 |
|
|
160 |
|
Commercial real estate |
|
|
126 |
|
|
136 |
|
|
|
|
|
629 |
|
|
891 |
|
|
115,726 |
|
|
116,617 |
|
|
1,162 |
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,518 |
|
|
41,518 |
|
|
5 |
|
Consumer |
|
|
188 |
|
|
24 |
|
|
|
|
|
49 |
|
|
261 |
|
|
9,623 |
|
|
9,884 |
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originated portfolio |
|
|
645 |
|
|
895 |
|
|
|
|
|
2,371 |
|
|
3,911 |
|
|
309,055 |
|
|
312,966 |
|
|
3,209 |
|
Purchased portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,687 |
|
|
3,687 |
|
|
|
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282 |
|
|
282 |
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
1,995 |
|
|
1,995 |
|
|
197,486 |
|
|
199,481 |
|
|
4,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchased portfolio |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1,995 |
|
$ |
1,995 |
|
$ |
201,455 |
|
$ |
203,450 |
|
$ |
4,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
645 |
|
$ |
895 |
|
$ |
|
|
$ |
4,366 |
|
$ |
5,906 |
|
$ |
510,510 |
|
$ |
516,416 |
|
$ |
7,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
Allowance for Loan Losses and Impaired Loans
Activity in the allowance for loan losses follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2015 |
|
|
|
Residential
Real Estate |
|
Commercial
Real Estate |
|
Commercial
Business |
|
Consumer |
|
Purchased |
|
Unallocated |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Beginning balance |
|
$ |
580 |
|
$ |
358 |
|
$ |
48 |
|
$ |
79 |
|
$ |
268 |
|
$ |
34 |
|
$ |
1,367 |
|
Provision |
|
|
344 |
|
|
335 |
|
|
38 |
|
|
(37 |
) |
|
15 |
|
|
22 |
|
|
717 |
|
Recoveries |
|
|
24 |
|
|
1 |
|
|
34 |
|
|
21 |
|
|
|
|
|
|
|
|
80 |
|
Charge-offs |
|
|
(207 |
) |
|
|
|
|
(3 |
) |
|
(28 |
) |
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
741 |
|
$ |
694 |
|
$ |
117 |
|
$ |
35 |
|
$ |
283 |
|
$ |
56 |
|
$ |
1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2014 |
|
|
|
Residential
Real Estate |
|
Commercial
Real Estate |
|
Commercial
Business |
|
Consumer |
|
Purchased |
|
Unallocated |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Beginning balance |
|
$ |
594 |
|
$ |
173 |
|
$ |
70 |
|
$ |
189 |
|
$ |
76 |
|
$ |
41 |
|
$ |
1,143 |
|
Provision |
|
|
190 |
|
|
211 |
|
|
13 |
|
|
(66 |
) |
|
190 |
|
|
(7 |
) |
|
531 |
|
Recoveries |
|
|
63 |
|
|
|
|
|
8 |
|
|
25 |
|
|
2 |
|
|
|
|
|
98 |
|
Charge-offs |
|
|
(267 |
) |
|
(26 |
) |
|
(43 |
) |
|
(69 |
) |
|
|
|
|
|
|
|
(405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
580 |
|
$ |
358 |
|
$ |
48 |
|
$ |
79 |
|
$ |
268 |
|
$ |
34 |
|
$ |
1,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth information regarding the allowance for loan losses by portfolio segment and impairment methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Residential
Real Estate |
|
Commercial
Real Estate |
|
Commercial
Business |
|
Consumer |
|
Purchased |
|
Unallocated |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated |
|
$ |
435 |
|
$ |
21 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
456 |
|
Collectively evaluated |
|
|
306 |
|
|
673 |
|
|
117 |
|
|
35 |
|
|
|
|
|
56 |
|
|
1,187 |
|
ASC 310-30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283 |
|
|
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
741 |
|
$ |
694 |
|
$ |
117 |
|
$ |
35 |
|
$ |
283 |
|
$ |
56 |
|
$ |
1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated |
|
$ |
4,095 |
|
$ |
2,381 |
|
$ |
2 |
|
$ |
253 |
|
$ |
|
|
$ |
|
|
$ |
6,731 |
|
Collectively evaluated |
|
|
126,506 |
|
|
146,044 |
|
|
122,858 |
|
|
7,406 |
|
|
|
|
|
|
|
|
402,814 |
|
ASC 310-30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,592 |
|
|
|
|
|
202,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
130,601 |
|
$ |
148,425 |
|
$ |
122,860 |
|
$ |
7,659 |
|
$ |
202,592 |
|
$ |
|
|
$ |
612,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Residential
Real Estate |
|
Commercial
Real Estate |
|
Commercial
Business |
|
Consumer |
|
Purchased |
|
Unallocated |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated |
|
$ |
190 |
|
$ |
84 |
|
$ |
|
|
$ |
6 |
|
$ |
|
|
$ |
|
|
$ |
280 |
|
Collectively evaluated |
|
|
390 |
|
|
274 |
|
|
48 |
|
|
73 |
|
|
|
|
|
34 |
|
|
820 |
|
ASC 310-30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268 |
|
|
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
580 |
|
$ |
358 |
|
$ |
48 |
|
$ |
79 |
|
$ |
268 |
|
$ |
34 |
|
$ |
1,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated |
|
$ |
2,314 |
|
$ |
2,549 |
|
$ |
|
|
$ |
240 |
|
$ |
|
|
$ |
|
|
$ |
5,103 |
|
Collectively evaluated |
|
|
142,633 |
|
|
114,068 |
|
|
41,518 |
|
|
9,644 |
|
|
|
|
|
|
|
|
307,863 |
|
ASC 310-30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,450 |
|
|
|
|
|
203,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,947 |
|
$ |
116,617 |
|
$ |
41,518 |
|
$ |
9,884 |
|
$ |
203,450 |
|
$ |
|
|
$ |
516,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in the loans collectively evaluated for the allowance for loan losses for the year ending June 30, 2015 are the SBA National and SBA community bank loans, which are
assigned a loss rate on the unguaranteed portion of the loan. Included is an allowance of $282 thousand on a loan portfolio of $17.4 million, which includes the unguaranteed portion of
the SBA National loans, as well as the SBA community bank loans.
The
following table sets forth information regarding impaired loans. 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 June 30, 2015 |
|
For the Year Ended
June 30, 2015 |
|
|
|
Recorded
Investment |
|
Unpaid
Principal
Balance |
|
Related
Allowance |
|
Average
Recorded
Investment |
|
Interest
Income
Recognized |
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
Impaired loans without a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
1,975 |
|
$ |
2,076 |
|
$ |
|
|
$ |
1,490 |
|
$ |
92 |
|
Consumer |
|
|
253 |
|
|
262 |
|
|
|
|
|
226 |
|
|
80 |
|
Commercial real estate |
|
|
1,505 |
|
|
1,510 |
|
|
|
|
|
1,436 |
|
|
71 |
|
Commercial business |
|
|
2 |
|
|
2 |
|
|
|
|
|
1 |
|
|
1 |
|
Purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
7,673 |
|
|
9,606 |
|
|
|
|
|
5,265 |
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,408 |
|
|
13,456 |
|
|
|
|
|
8,418 |
|
|
493 |
|
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
2,120 |
|
|
2,060 |
|
|
435 |
|
|
1,715 |
|
|
87 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
17 |
|
Commercial real estate |
|
|
876 |
|
|
870 |
|
|
21 |
|
|
1,029 |
|
|
59 |
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
1,208 |
|
|
1,644 |
|
|
260 |
|
|
1,549 |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,204 |
|
|
4,574 |
|
|
716 |
|
|
4,313 |
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
15,612 |
|
$ |
18,030 |
|
$ |
716 |
|
$ |
12,731 |
|
$ |
697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014 |
|
For the Year Ended
June 30, 2014 |
|
|
|
Recorded
Investment |
|
Unpaid
Principal
Balance |
|
Related
Allowance |
|
Average
Recorded
Investment |
|
Interest
Income
Recognized |
|
|
|
(Dollars in thousands)
|
|
(Dollars in thousands)
|
|
Impaired loans without a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
1,005 |
|
$ |
1,081 |
|
$ |
|
|
$ |
1,038 |
|
$ |
41 |
|
Consumer |
|
|
200 |
|
|
205 |
|
|
|
|
|
132 |
|
|
8 |
|
Commercial real estate |
|
|
1,368 |
|
|
1,371 |
|
|
|
|
|
782 |
|
|
40 |
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
8 |
|
Purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
2,857 |
|
|
4,148 |
|
|
|
|
|
2,639 |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,430 |
|
|
6,805 |
|
|
|
|
|
4,642 |
|
|
186 |
|
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
1,309 |
|
|
1,278 |
|
|
190 |
|
|
1,323 |
|
|
65 |
|
Consumer |
|
|
40 |
|
|
47 |
|
|
6 |
|
|
75 |
|
|
5 |
|
Commercial real estate |
|
|
1,181 |
|
|
1,187 |
|
|
84 |
|
|
1,131 |
|
|
78 |
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
1 |
|
Purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
1,890 |
|
|
2,215 |
|
|
166 |
|
|
1,228 |
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,420 |
|
|
4,727 |
|
|
446 |
|
|
3,787 |
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
9,850 |
|
$ |
11,532 |
|
$ |
446 |
|
$ |
8,429 |
|
$ |
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality
The Company utilizes a ten-point internal loan rating system for commercial real estate, construction, commercial business, and certain
residential 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 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.
85
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
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 loans subject to risk ratings. 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 loans by risk rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Originated Portfolio |
|
|
|
|
|
|
|
Commercial
Real Estate |
|
Commercial
Business |
|
Residential(1) |
|
Purchased
Portfolio |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Loans rated 1 - 6 |
|
$ |
142,321 |
|
$ |
122,829 |
|
$ |
8,049 |
|
$ |
190,193 |
|
$ |
463,392 |
|
Loans rated 7 |
|
|
4,417 |
|
|
31 |
|
|
634 |
|
|
5,628 |
|
|
10,710 |
|
Loans rated 8 |
|
|
1,687 |
|
|
|
|
|
429 |
|
|
6,771 |
|
|
8,887 |
|
Loans rated 9 |
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
23 |
|
Loans rated 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148,425 |
|
$ |
122,860 |
|
$ |
9,135 |
|
$ |
202,592 |
|
$ |
483,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Originated Portfolio |
|
|
|
|
|
|
|
Commercial
Real Estate |
|
Commercial
Business |
|
Residential(1) |
|
Purchased
Portfolio |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Loans rated 1 - 6 |
|
$ |
110,044 |
|
$ |
41,271 |
|
$ |
11,941 |
|
$ |
189,986 |
|
$ |
353,242 |
|
Loans rated 7 |
|
|
4,880 |
|
|
46 |
|
|
940 |
|
|
8,619 |
|
|
14,485 |
|
Loans rated 8 |
|
|
1,693 |
|
|
201 |
|
|
670 |
|
|
4,845 |
|
|
7,409 |
|
Loans rated 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans rated 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
116,617 |
|
$ |
41,518 |
|
$ |
13,551 |
|
$ |
203,450 |
|
$ |
375,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Certain
of the Company's loans made for commercial purposes, but secured by residential collateral, are rated under the Company's risk-rating system.
86
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
Troubled Debt Restructurings
The following table shows the Company's post-modification balance of TDRs by type of modification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
Number of
Contracts |
|
Recorded
Investment |
|
Number of
Contracts |
|
Recorded
Investment |
|
|
|
(Dollars in thousands)
|
|
Extended maturity |
|
|
7 |
|
$ |
1,934 |
|
|
5 |
|
$ |
2,082 |
|
Adjusted interest rate |
|
|
9 |
|
|
430 |
|
|
2 |
|
|
118 |
|
Rate and maturity |
|
|
6 |
|
|
211 |
|
|
6 |
|
|
306 |
|
Principal deferment |
|
|
1 |
|
|
443 |
|
|
2 |
|
|
341 |
|
Court ordered concession |
|
|
4 |
|
|
84 |
|
|
2 |
|
|
50 |
|
Other |
|
|
|
|
|
|
|
|
2 |
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
$ |
3,102 |
|
|
19 |
|
$ |
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table shows loans modified in a TDR and the change in the recorded investment subsequent to the modifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
Number of
Contracts |
|
Recorded
Investment
Pre-Modification |
|
Recorded
Investment
Post-Modification |
|
Number of
Contracts |
|
Recorded
Investment
Pre-Modification |
|
Recorded
Investment
Post-Modification |
|
|
|
(Dollars in thousands)
|
|
Originated portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
17 |
|
$ |
1,223 |
|
$ |
1,223 |
|
|
4 |
|
$ |
164 |
|
$ |
164 |
|
Home equity |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
22 |
|
|
22 |
|
Commercial real estate |
|
|
1 |
|
|
200 |
|
|
200 |
|
|
5 |
|
|
691 |
|
|
691 |
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
18 |
|
|
18 |
|
Consumer |
|
|
6 |
|
|
51 |
|
|
51 |
|
|
4 |
|
|
144 |
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originated portfolio |
|
|
24 |
|
|
1,474 |
|
|
1,474 |
|
|
16 |
|
|
1,039 |
|
|
1,039 |
|
Purchased portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
3 |
|
|
1,628 |
|
|
1,628 |
|
|
3 |
|
|
1,990 |
|
|
2,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchased portfolio |
|
|
3 |
|
|
1,628 |
|
|
1,628 |
|
|
3 |
|
|
1,990 |
|
|
2,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
27 |
|
$ |
3,102 |
|
$ |
3,102 |
|
|
19 |
|
$ |
3,029 |
|
$ |
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2015, there were no further commitments to lend associated with loans modified in a TDR.
87
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
The
following table shows the loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated. The Company considers a loan to
have defaulted when it reaches 90 days past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
Number of
Contracts |
|
Recorded
Investment |
|
Number of
Contracts |
|
Recorded
Investment |
|
|
|
(Dollars in thousands)
|
|
Residential |
|
|
3 |
|
$ |
100 |
|
|
3 |
|
$ |
163 |
|
Consumer |
|
|
|
|
|
|
|
|
1 |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
$ |
100 |
|
|
4 |
|
$ |
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 310-30 Loans
The following table presents a summary of loans accounted for under ASC 310-30 that were acquired by the Company during the year ended
June 30, 2015.
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
|
|
(Dollars in thousands)
|
|
Contractually required payments receivable |
|
$ |
128,452 |
|
$ |
116,786 |
|
Nonaccretable difference |
|
|
(2,042 |
) |
|
(1,564 |
) |
|
|
|
|
|
|
|
|
Cash flows expected to be collected |
|
|
126,410 |
|
|
115,222 |
|
Accretable yield |
|
|
(43,756 |
) |
|
(35,399 |
) |
|
|
|
|
|
|
|
|
Fair value of loans acquired |
|
$ |
82,654 |
|
$ |
79,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
of the loans accounted for under ASC 310-30 that were acquired by the Company are not accounted for using the income recognition model because the Company cannot reasonably
estimate cash flows expected to be collected. The carrying amounts of such loans are as follows:
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
(Dollars
in thousands)
|
|
Loans acquired during the period |
|
$ |
357 |
|
Loans at end of period |
|
|
6,127 |
|
For
the year ended June 30, 2014, no loans acquired by the Company were not accounted for using the income recognition model.
88
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Loans, Allowance for Loan Losses and Credit Quality (Continued)
The
following table summarizes the activity in the accretable yield for loans accounted for under ASC 310-30.
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
|
|
(Dollars in thousands)
|
|
Beginning balance |
|
$ |
109,040 |
|
$ |
108,251 |
|
Acquisitions |
|
|
43,756 |
|
|
35,399 |
|
Accretion |
|
|
(16,886 |
) |
|
(15,433 |
) |
Reclassifications from nonaccretable difference, net |
|
|
157 |
|
|
791 |
|
Disposals and other changes |
|
|
(24,618 |
) |
|
(19,968 |
) |
|
|
|
|
|
|
|
|
End balance |
|
$ |
111,449 |
|
$ |
109,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table provides information related to the unpaid principal balance and carrying amounts of ASC 310-30 loans.
|
|
|
|
|
|
|
|
|
|
June 30,
2015 |
|
June 30,
2014 |
|
|
|
(Dollars in thousands)
|
|
Unpaid principal balance |
|
$ |
235,716 |
|
$ |
239,376 |
|
Carrying amount |
|
|
199,113 |
|
|
201,171 |
|
4. Premises and Equipment
Premises and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2015 |
|
June 30,
2014 |
|
Estimated Useful Life |
|
|
(Dollars in thousands)
|
|
(In years)
|
Land |
|
$ |
804 |
|
$ |
940 |
|
n/a |
Buildings |
|
|
1,760 |
|
|
2,119 |
|
39 |
Assets recorded under capital lease |
|
|
1,850 |
|
|
1,850 |
|
Term of lease |
Leasehold and building improvements |
|
|
3,051 |
|
|
2,330 |
|
5 - 39 (or term of lease, if shorter) |
Furniture, fixtures and equipment |
|
|
7,745 |
|
|
7,286 |
|
3 - 7 |
|
|
|
|
|
|
|
|
|
|
|
|
15,210 |
|
|
14,525 |
|
|
Less accumulated depreciation |
|
|
6,957 |
|
|
5,390 |
|
|
|
|
|
|
|
|
|
|
|
Net premises and equipment |
|
$ |
8,253 |
|
$ |
9,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of premises and equipment included in occupancy and equipment expense was $1.7 million for the year ended June 30, 2015 and
$2.0 million for the year ended June 30, 2014.
5. Intangible Assets
At June 30, 2015 and 2014, intangible assets consisted of a core deposit intangible. The Company's core deposit intangible is being amortized on an accelerated basis over
9.5 years.
89
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Intangible Assets (Continued)
The
changes in the carrying amount of the core deposit intangible follow:
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
(Dollars
in thousands)
|
|
Balance, June 30, 2013 |
|
$ |
3,544 |
|
Amortization |
|
|
(746 |
) |
|
|
|
|
|
Balance, June 30, 2014 |
|
|
2,798 |
|
Amortization |
|
|
(589 |
) |
|
|
|
|
|
Balance, June 30, 2015 |
|
$ |
2,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
components of core deposit intangible follow:
|
|
|
|
|
|
|
|
|
|
June 30,
2015 |
|
June 30,
2014 |
|
|
|
(Dollars in thousands)
|
|
Core Deposit Intangible: |
|
|
|
|
|
|
|
Gross carrying amount |
|
$ |
6,348 |
|
$ |
6,348 |
|
Accumulated amortization |
|
|
(4,139 |
) |
|
(3,550 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
2,209 |
|
$ |
2,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
annual amortization expense associated with the core deposit intangible follows for the fiscal years ending June 30:
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
(Dollars
in thousands)
|
|
2016 |
|
$ |
477 |
|
2017 |
|
|
432 |
|
2018 |
|
|
433 |
|
2019 |
|
|
433 |
|
2020 |
|
|
434 |
|
|
|
|
|
|
|
|
$ |
2,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Transfers and Servicing of Financial Assets
The Company sells loans in the secondary market and retains the servicing responsibility for the sold loans. Consideration for the sale includes the cash received as well as the related
servicing rights asset. The Company receives fees for the services provided. Mortgage loans sold in the year ended June 30, 2015 totaled $101.3 million, compared to $88.0 million
in the year ended June 30, 2014. Mortgage serviced for others totaled $108.4 million and $82.0 million at June 30, 2015 and 2014, respectively. SBA loans sold during the
year ended June 30, 2015 totaled $22.2 million, compared to $3.6 million in the year ended June 30, 2014. SBA serviced for others totaled $53.5 million and
$37.8 million at June 30, 2015 and 2014, respectively.
Mortgage
loans and SBA loans serviced for others are accounted for as sales and therefore are not included in the accompanying consolidated balance sheets. The risks inherent in mortgage
servicing
90
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Transfers and Servicing of Financial Assets (Continued)
assets
and SBA servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.
Contractually
specified servicing fees were $471 thousand and $521 thousand for the year ended June 30, 2015 and 2014, respectively, and included as a component of
loan related fees within non-interest income.
The
significant assumptions used in the valuation for mortgage servicing rights as of June 30, 2015 included a weighted average discount rate of 7.5% and a weighted average
prepayment speed
assumption of 13.14%. For the SBA servicing rights, the significant assumptions used in the valuation included pre-payment speed assumptions ranging from 6.08% to 7.25%.
Mortgage
servicing rights activity was as follows:
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
(Dollars
in thousands)
|
|
Balance, June 30, 2013 |
|
$ |
68 |
|
Additions |
|
|
|
|
Disposals |
|
|
|
|
Amortization |
|
|
(24 |
) |
Allowance Adjustment |
|
|
20 |
|
|
|
|
|
|
Balance, June 30, 2014 |
|
|
64 |
|
Additions |
|
|
|
|
Disposals |
|
|
|
|
Amortization |
|
|
(28 |
) |
Allowance Adjustment |
|
|
1 |
|
|
|
|
|
|
Balance, June 30, 2015 |
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
servicing rights activity was as follows:
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
(Dollars
in thousands)
|
|
Balance, June 30, 2013 |
|
$ |
116 |
|
Additions |
|
|
138 |
|
Disposals |
|
|
|
|
Amortization |
|
|
(18 |
) |
Allowance Adjustment |
|
|
|
|
|
|
|
|
|
Balance, June 30, 2014 |
|
|
236 |
|
Additions |
|
|
940 |
|
Disposals |
|
|
|
|
Amortization |
|
|
(80 |
) |
Allowance Adjustment |
|
|
(19 |
) |
|
|
|
|
|
Balance, June 30, 2015 |
|
$ |
1,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Deposits
The composition of deposits is as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
|
|
(Dollars in thousands)
|
|
Demand |
|
$ |
60,383 |
|
$ |
50,140 |
|
NOW |
|
|
64,289 |
|
|
63,648 |
|
Money market |
|
|
168,527 |
|
|
83,901 |
|
Regular savings |
|
|
35,845 |
|
|
34,692 |
|
Time certificates of less than $100 thousand |
|
|
82,973 |
|
|
90,644 |
|
Other time certificates |
|
|
262,742 |
|
|
251,304 |
|
|
|
|
|
|
|
|
|
|
|
$ |
674.759 |
|
$ |
574,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate amount of time deposits in denominations of $250 thousand or more as of June 30, 2015 and 2014 was $569 thousand and $2.3 million, respectively.
At
June 30, 2015 scheduled maturities of time certificates by fiscal year are as follows:
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
(Dollars in thousands)
|
|
2016 |
|
$ |
149,656 |
|
2017 |
|
|
101,195 |
|
2018 |
|
|
51,976 |
|
2019 |
|
|
28,249 |
|
2020 |
|
|
14,306 |
|
Thereafter |
|
|
333 |
|
|
|
|
|
|
|
|
$ |
345,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Borrowings
Federal Home Loan Bank Advances
A summary of advances from the Federal Home Loan Bank of Boston as of June 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal Balance |
|
Carrying Amount(1) |
|
Weighted
Average
Interest Rate |
|
Maturity By Fiscal Year
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
2016 |
|
|
15,000 |
|
|
|
|
|
15,000 |
|
|
|
|
|
0.38 |
% |
|
|
|
2017 |
|
|
10,000 |
|
|
10,000 |
|
|
10,123 |
|
|
10,210 |
|
|
2.84 |
% |
|
4.26 |
% |
2018 |
|
|
5,000 |
|
|
5,000 |
|
|
5,065 |
|
|
5,091 |
|
|
1.43 |
% |
|
4.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
$ |
15,000 |
|
$ |
30,188 |
|
$ |
15,301 |
|
|
2.34 |
% |
|
2.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- The
difference between the carrying amount and the unpaid principal balance is the result of purchase accounting. The premium or discount is being amortized
or accreted as interest expense over the instrument's contractual life.
92
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Borrowings (Continued)
At
June 30, 2015, FHLB advances with unpaid principal of $10.0 million were subject to call provisions and may be called prior to the stated maturity.
Certain
mortgage loans, free of liens, pledges and encumbrances and certain investment securities maintained at the FHLB not otherwise pledged have been pledged under a blanket agreement
to secure these advances. The Company is required to own stock in the Federal Home Loan Bank of Boston in order to borrow from the FHLB.
As
of June 30, 2015, the Company had approximately $45.7 million of additional capacity to borrow from the FHLB.
Wholesale Repurchase Agreements
A summary of wholesale repurchase agreements as of June 30 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
Balance |
|
Carrying Amount(1) |
|
Weighted
Average
Interest Rate |
|
Maturity By Fiscal Year
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
2016 |
|
|
10,000 |
|
|
10,000 |
|
|
10,037 |
|
|
10,199 |
|
|
4.44 |
% |
|
4.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,000 |
|
$ |
10,000 |
|
$ |
10,037 |
|
$ |
10,199 |
|
|
4.44 |
% |
|
4.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- The
difference between the carrying amount and the unpaid principal balance is the result of purchase accounting. The premium or discount is being amortized
or accreted as interest expense over the instrument's contractual life.
At
June 30, 2015, $10.0 million of wholesale repurchase agreements maturing in fiscal 2016 are callable on a quarterly basis.
The
Company is subject to margin calls on each transaction to maintain the necessary collateral in the form of cash or other mortgage-backed securities during the borrowing term.
Capital Lease Obligation
In fiscal 2006, the Company recognized a capital lease obligation for its Lewiston, Maine, headquarters. The present value of the lease
payments over fifteen years exceeded 90% of the fair value of the property.
93
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Borrowings (Continued)
The
outstanding capital lease obligations are as follows for years ending June 30, 2015:
|
|
|
|
|
|
|
Capital Lease Obligation |
|
|
|
(Dollars in thousands)
|
|
2016 |
|
$ |
303 |
|
2017 |
|
|
306 |
|
2018 |
|
|
306 |
|
2019 |
|
|
306 |
|
2020 |
|
|
306 |
|
2021 and thereafter |
|
|
25 |
|
|
|
|
|
|
|
|
|
1,552 |
|
Imputed interest |
|
|
(184 |
) |
|
|
|
|
|
Capital lease obligation |
|
$ |
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Borrowings
Short-term borrowings are sweep accounts, which are a demand account product that moves balances in excess of an agreed upon target
amount from a demand deposit account into an interest-bearing account overnight. The sweep account is collateralized with a letter of credit issued by the FHLBB. The weighted average interest rate on
short-term borrowings was 1.91% and 1.35% at June 30, 2015 and 2014, respectively.
9. Junior Subordinated Debentures Issued to Affiliated Trusts
NBN Capital Trust II and NBN Capital Trust III were created in December 2003. NBN Capital Trust IV was created in December 2004. Each such trust is a Delaware statutory trust (together,
the "Private Trusts"). The exclusive purpose of the Private Trusts was (i) issuing and selling common securities and preferred securities in a private placement offering (the "Private Trust
Securities"), (ii) using the proceeds of the sale of the Private Trust Securities to acquire Junior Subordinated Deferrable Interest Notes ("Junior Subordinated Debentures"); and
(iii) engaging only in those other activities necessary, convenient or incidental thereto. Accordingly, the Junior Subordinated Debentures are the sole assets of each of the Private Trusts.
The
following table summarizes the Junior Subordinated Debentures issued by the Company to each affiliated trust and the Private Trust Securities issued by each affiliated trust as of
June 30, 2015. Amounts include the junior subordinated debentures acquired by the affiliated trusts from the Company with the capital contributed by the Company in exchange for the common
securities of such trust, which were $93 thousand each for NBN Capital Trust II and III and $310 thousand for NBN Capital Trust IV. The trust preferred securities (the "Preferred
Securities") were sold in two separate private placement offerings. The Company has the right to redeem the Junior Subordinated Debentures, in whole or in part, on or after March 30, 2009, for
NBN Capital Trust II and III, and on
94
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Junior Subordinated Debentures Issued to Affiliated Trusts (Continued)
or
after February 23, 2010, for NBN Capital Trust IV, at the redemption price specified in the associated Indenture, plus accrued but unpaid interest to the redemption date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
Balance |
|
|
|
|
|
|
|
|
|
Carrying Amount(1) |
|
|
|
Maturity
Date |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
|
|
(Dollars in thousands)
|
|
NBN Capital Trust II |
|
March 30, 2034 |
|
$ |
3,093 |
|
$ |
3,093 |
|
$ |
1,835 |
|
$ |
1,804 |
|
NBN Capital Trust III |
|
March 30, 2034 |
|
|
3,093 |
|
|
3,093 |
|
|
1,835 |
|
|
1,804 |
|
NBN Capital Trust IV |
|
February 23, 2035 |
|
|
10,310 |
|
|
10,310 |
|
|
4,956 |
|
|
4,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,496 |
|
$ |
16,496 |
|
$ |
8,626 |
|
$ |
8,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- The
difference between the carrying amount and the unpaid principal balance is the result of purchase accounting. The premium or discount is being amortized
or accreted as interest expense over the instrument's contractual life.
NBN
Capital Trust II and III pay a variable rate based on three month LIBOR plus 2.80%, and NBN Capital Trust IV pays a variable rate based on three month LIBOR plus 1.89%. Accordingly,
the Preferred Securities of the Private Trusts currently pay quarterly distributions at an annual rate of 3.26% for the stated liquidation amount of $1,000 per Preferred Security for NBN Capital Trust
II and III and an annual rate of 2.36% for the stated liquidation amount of $1,000 per Preferred Security for NBN Capital Trust IV. The Company has fully and unconditionally guaranteed all of the
obligations of each trust. The guaranty covers the quarterly distributions and payments on liquidation or redemption of the Private Trust Securities, but only to the extent of funds held by the
trusts.
The
Junior Subordinated Debentures each have variable rates indexed to three-month LIBOR. During the fiscal year ended June 30, 2010, the Company purchased two interest rate caps
and an interest rate swap to hedge the interest rate risk on notional amounts of $6 million and $10 million, respectively, of the Company's Junior Subordinated Debentures. Each was a
cash flow hedge to manage the risk to net interest income in a period of rising rates. During the fiscal year ended June 30, 2015, both the $6 million cap and the $10 million
interest rate swap expired, and two interest rate caps in the amounts of $6 million and $10 million were purchased in October 2014 and March 2015, respectively.
The
interest rate caps hedge the junior subordinated debt resulting from the issuance of trust preferred securities by our affiliates NBN Capital Trust II, NBN Capital Trust III and NBN
Capital Trust IV. The notional amount of $6 million and $10 million for each interest rate cap represents the outstanding junior subordinated debt from each trust. The strike rate is
2.50%. The Company will recognize higher interest expense on the junior subordinated debt for the first 200 basis points increase in three-month LIBOR. Once the three-month LIBOR rate exceeds 2.50% on
a quarterly reset date, there will be a payment by the counterparty to the Company at the following quarter end. The effective date of the purchased interest rate caps were October 2014 and March
2015, respectively, and mature five years after.
10. Capital and Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a
95
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Capital and Regulatory Matters (Continued)
direct
material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The
prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized."
As
of June 30, 2015 and 2014, the most recent notification from the Company's and the Bank's regulator categorized the Company and the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Company and the Bank must maintain minimum Common equity tier 1 risk-based, total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the
institution's regulatory designation as "well-capitalized" under the regulatory framework for prompt corrective action.
Quantitative
measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios as set forth in the table below. At
June 30, 2015 and 2014, the Company's and the Bank's ratios exceeded the regulatory requirements. Management believes that the Company and the Bank met all capital adequacy requirements to
which
96
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Capital and Regulatory Matters (Continued)
they
were subject as of June 30, 2015 and 2014. The Company's and the Bank's regulatory capital ratios are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Minimum Capital
Requirements |
|
Minimum To Be
Well Capitalized
Under Prompt
Correction Action
Provisions |
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
(Dollars in thousands)
|
|
June 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
120,461 |
|
|
19.72 |
% |
$ |
27,489 |
|
|
³4.5 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
107,589 |
|
|
17.57 |
% |
|
27,556 |
|
|
³4.5 |
% |
|
39,802 |
|
|
³6.5 |
% |
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
122,424 |
|
|
20.04 |
% |
|
48,872 |
|
|
³8.0 |
% |
|
N/A |
|
|
N/A |
|
Bank |
|
|
111,340 |
|
|
18.18 |
% |
|
48,994 |
|
|
³8.0 |
% |
|
61,243 |
|
|
³10.0 |
% |
Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
120,461 |
|
|
19.72 |
% |
|
24,434 |
|
|
³4.0 |
% |
|
N/A |
|
|
N/A |
|
Bank |
|
|
107,589 |
|
|
17.57 |
% |
|
24,494 |
|
|
³4.0 |
% |
|
36,741 |
|
|
³6.0 |
% |
Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
120,461 |
|
|
14.42 |
% |
|
33,415 |
|
|
³4.0 |
% |
|
N/A |
|
|
N/A |
|
Bank |
|
|
107,589 |
|
|
12.87 |
% |
|
33,439 |
|
|
³4.0 |
% |
|
41,798 |
|
|
³5.0 |
% |
June 30, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
120,818 |
|
|
23.69 |
% |
$ |
40,808 |
|
|
³8.0 |
% |
$ |
N/A |
|
|
N/A |
|
Bank |
|
|
103,160 |
|
|
20.12 |
% |
|
41,027 |
|
|
³8.0 |
% |
|
51,284 |
|
|
³10.0 |
% |
Tier 1 capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
119,421 |
|
|
23.41 |
% |
|
20,404 |
|
|
³4.0 |
% |
|
N/A |
|
|
N/A |
|
Bank |
|
|
99,256 |
|
|
19.35 |
% |
|
20,514 |
|
|
³4.0 |
% |
|
30,771 |
|
|
³6.0 |
% |
Tier 1 capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
119,421 |
|
|
15.90 |
% |
|
30,049 |
|
|
³4.0 |
% |
|
N/A |
|
|
N/A |
|
Bank |
|
|
99,256 |
|
|
13.22 |
% |
|
30,028 |
|
|
³4.0 |
% |
|
37,536 |
|
|
³5.0 |
% |
The
Bank may not declare or pay a cash dividend on, or repurchase, any of its capital stock from the Parent if the effect thereof would cause the capital of the Bank to be reduced below
the capital requirements imposed by the regulatory authorities or if such amount exceeds the otherwise allowable amount under FRB rules.
In
connection with the Merger, as part of the regulatory approval process, the Company and the Bank made certain commitments to the Federal Reserve, 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 non-owner occupied
commercial real estate loans to within 300% of total risk-based capital. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve.
97
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Earnings Per Common Share
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:
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands, except
share and per share data)
|
|
Net income from continuing operations |
|
$ |
7,141 |
|
$ |
2,692 |
|
Preferred stock dividends and accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations available to common shareholders |
|
$ |
7,141 |
|
$ |
2,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of basic earnings per share |
|
|
9,980,733 |
|
|
10,404,784 |
|
Incremental shares from assumed exercise of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculation of diluted earnings per share |
|
|
9,980,733 |
|
|
10,404,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.72 |
|
$ |
0.26 |
|
Income from discontinued operations |
|
|
0.00 |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
Earnings per common share |
|
$ |
0.72 |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.72 |
|
$ |
0.26 |
|
Income from discontinued operations |
|
|
0.00 |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.72 |
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the years ended June 30, 2015 and 2014, the following stock options and warrants were excluded from the calculation of diluted EPS due to the exercise price of these options
exceeding the average market price of the Company's common stock for the period. These options, which were not dilutive at that date, may potentially dilute EPS in the future.
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
|
2015 |
|
2014 |
|
Stock options |
|
|
1,059,721 |
|
|
1,149,131 |
|
Warrants |
|
|
|
|
|
|
|
98
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes
The current and deferred components of income tax expense from continuing operations follows:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Current provision |
|
|
|
|
|
|
|
Federal |
|
$ |
4,282 |
|
$ |
3,518 |
|
State |
|
|
898 |
|
|
733 |
|
|
|
|
|
|
|
|
|
Total current provision |
|
|
5,180 |
|
|
4,251 |
|
Deferred benefit |
|
|
|
|
|
|
|
Federal |
|
|
(901 |
) |
|
(2,482 |
) |
State |
|
|
(284 |
) |
|
(190 |
) |
|
|
|
|
|
|
|
|
Total deferred benefit |
|
|
(1,185 |
) |
|
(2,672 |
) |
|
|
|
|
|
|
|
|
Total tax provision |
|
$ |
3,995 |
|
$ |
1,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
reconciliation between the statutory federal income tax rate of 34% and the effective tax rate on income from continuing operations follows:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Expected income tax expense at federal tax rate |
|
$ |
3,786 |
|
$ |
1,450 |
|
State tax, net of federal tax benefit |
|
|
379 |
|
|
359 |
|
Non-taxable BOLI income |
|
|
(150 |
) |
|
(153 |
) |
Low-income housing tax credit |
|
|
(118 |
) |
|
(118 |
) |
Other |
|
|
98 |
|
|
41 |
|
|
|
|
|
|
|
|
|
Total tax provision |
|
$ |
3,995 |
|
$ |
1,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes (Continued)
The
tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30 follows:
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets |
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
722 |
|
$ |
501 |
|
Loan basis differential |
|
|
3,781 |
|
|
3,198 |
|
Time deposit basis differential |
|
|
4 |
|
|
68 |
|
Derivative basis differential |
|
|
|
|
|
30 |
|
Capital lease |
|
|
521 |
|
|
585 |
|
Compensation and benefits |
|
|
809 |
|
|
460 |
|
Stock-based compensation |
|
|
1,167 |
|
|
897 |
|
Unrealized loss on derivatives |
|
|
472 |
|
|
225 |
|
Unrealized loss on available for sale securities |
|
|
318 |
|
|
434 |
|
Interest on nonperforming loans |
|
|
289 |
|
|
312 |
|
Limited partnerships |
|
|
124 |
|
|
100 |
|
Other |
|
|
777 |
|
|
733 |
|
|
|
|
|
|
|
|
|
Gross deferred tax asset |
|
|
8,984 |
|
|
7,543 |
|
Less: valuation allowance |
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
8,935 |
|
|
7,543 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
Intangible assets |
|
|
842 |
|
|
1,050 |
|
Prepaid expenses |
|
|
368 |
|
|
238 |
|
Premises and equipment |
|
|
1,231 |
|
|
1,443 |
|
Borrowings basis differential |
|
|
2,869 |
|
|
2,811 |
|
Other |
|
|
424 |
|
|
113 |
|
|
|
|
|
|
|
|
|
Total deferred tax liability |
|
|
5,734 |
|
|
5,655 |
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
3,201 |
|
$ |
1,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
net deferred tax asset was included in other assets in the accompanying balance sheet as of June 30, 2015 and June 30, 2014.
In
accordance with ASC 740, deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The realization of the tax benefit depends upon the existence of sufficient taxable income within the carry-back and future periods.
The
Company believes that it is more likely than not that the net deferred tax asset as of June 30, 2015, excluding the net deferred tax asset on capital losses, will be realized,
based upon the ability to generate future taxable income as well as the availability of current and historical taxable income. The Company believes it is more likely than not that the net deferred tax
asset related to capital losses will not be realized and has recorded a valuation allowance of $49 thousand at June 30, 2015, attributable to this net deferred tax asset.
100
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Income Taxes (Continued)
For
federal tax purposes, the Company has a $2.0 million reserve for loan losses which remains subject to recapture. If any portion of the reserve is used for purposes other than
to absorb the losses for which it was established, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the
Company intends to use the reserve only to absorb loan losses, no provision has been made for potential liability that would result if 100% of the reserve were recaptured.
From
time to time, the Internal Revenue Service (the "IRS") and state tax authorities may review or challenge specific tax positions taken by the Company in its ordinary course of
business. The Company accounts for uncertainties in income taxes by reserving for tax positions that may not be upheld under examination. Increases to the Company's unrealized tax positions occur as a
result of accruing for the unrecognized tax benefit as well the accrual of interest and penalties related to prior year positions. Decreases in the Company's unrealized tax positions occur as a result
of the statute of limitation lapsing on prior year positions or settlements relating to outstanding positions. The Company reserves for uncertain tax positions, as well as related interest and
penalties, as a component of income tax expense therefore affecting the effective tax rate. The following is a reconciliation of the beginning and ending amounts of the Company's uncertain tax
positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Position |
|
Interest and
Penalties |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, June 30, 2013 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Reduction of tax positions for prior years |
|
|
|
|
|
|
|
|
|
|
Increase for prior year tax position |
|
|
101 |
|
|
12 |
|
|
113 |
|
Increase for current year tax position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2014 |
|
$ |
101 |
|
$ |
12 |
|
$ |
113 |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of tax positions for prior years |
|
|
|
|
|
|
|
|
|
|
Increase for prior year tax position |
|
|
8 |
|
|
6 |
|
|
14 |
|
Increase for current year tax position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2015 |
|
$ |
109 |
|
$ |
18 |
|
$ |
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company is currently open to audit under the statute of limitations by the IRS and state taxing authorities for the fiscal 2012 tax return and forward.
13. Employee Benefit Plans
401(k) Plan
The Company offers a contributory 401(k) plan that is available to all full-time salaried and hourly-paid employees who have attained
age 18, and completed 90 days of employment. Employees may contribute up to 100% of their base compensation, subject to IRS limitations. The Company will match 50% of each employee's
contribution up to the first 6% contributed. For the years ended June 30, 2015 and 2014, the Company contributed $315 thousand and $341 thousand, respectively.
Deferred Compensation
The Company has individual deferred compensation agreements with five former senior officers. The Company recognized deferred
compensation expense of $30 thousand and $80 thousand for the
101
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee Benefit Plans (Continued)
years
ended June 30, 2015 and 2014, respectively. At June 30, 2015 and 2014, the Company's deferred compensation liability was $512 thousand and $485 thousand,
respectively.
14. Stock-Based Compensation
At the 2012 annual meeting of shareholders, 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.
A
summary of stock option activity for the year ended June 30, 2015 follows:
|
|
|
|
|
|
|
|
|
|
Shares |
|
Weighted
Average
Exercise Price |
|
Outstanding at beginning of year |
|
|
1,143,195 |
|
$ |
12.44 |
|
Granted |
|
|
20,000 |
|
|
9.19 |
|
Exercised |
|
|
|
|
|
|
|
Forfeited |
|
|
(103,474 |
) |
|
10.77 |
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
1,059,721 |
|
|
12.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
305,595 |
|
|
13.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Weighted
Average
Grant Date
Fair Value |
|
Exercisable, beginning of year |
|
|
223,706 |
|
$ |
3.74 |
|
Vested |
|
|
95,570 |
|
|
3.15 |
|
Exercised |
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(13,681 |
) |
|
3.85 |
|
|
|
|
|
|
|
|
|
Exercisable, end of year |
|
|
305,595 |
|
|
3.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Stock-Based Compensation (Continued)
The
fair values of options granted have been estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions.
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
Assumptions: |
|
|
|
|
|
|
|
Dividend yield |
|
|
0.43 |
% |
|
3.85 |
% |
Expected life |
|
|
7.0 years |
|
|
7.0 years |
|
Expected volatility |
|
|
30.30 |
% |
|
30.38 |
% |
Risk-free interest rate |
|
|
2.03 |
% |
|
2.14 |
% |
Weighted average fair value per option |
|
$ |
3.11 |
|
$ |
1.95 |
|
The
expected volatility is based on historical volatility. The risk-free interest rate is for periods within the expected life of the awards, and is based on the U.S. Treasury yield
curve in effect at the time of the grant. The expected life is based on expected exercise experience.
During
the year ended June 30, 2013, certain provisions of outstanding stock options with market-based conditions were modified. The options, consisting of 237,616 shares, were
granted to three executives of the Company in December of 2010 and were to vest in three equal tranches upon the Company's common stock reaching applicable hurdle prices over specified time periods.
The applicable hurdle price varies depending on the number of years that have elapsed since the date of grant. With respect to the first tranche, the applicable hurdle price was $27.86 for the period
from December 29, 2010 through December 29, 2015; $31.34 for the period from December 29, 2015 through December 29, 2016; and $34.83 for the period from December 29,
2016 through December 29, 2017. With respect to the second tranche, the hurdle price was $31.34 for the period from December 29, 2010 through December 29, 2016; and $34.83 for the
period from December 29, 2016 through December 29, 2017. With respect to the third tranche, the hurdle price was $34.83 for the period from December 29, 2010 through
December 29, 2017.
The
Company's Compensation Committee approved amending the hurdle prices as follows:
With
respect to the first tranche, the applicable hurdle price is $16.43 for the period from December 29, 2010 through December 28, 2015; $18.58 for the period from
December 29, 2015 through December 28, 2016; and $20.77 for the period from December 29, 2016 through December 28, 2017. With respect to the second tranche, the hurdle
price is $18.58 for the period from December 29, 2010 through December 28, 2016; and $20.77 for the period from December 29, 2016 through December 28, 2017. With respect to
the third tranche, the hurdle price is $20.77 for the period from December 29, 2010 through December 28, 2017.
Except
as modified by this amendment, all other terms and conditions of each of the outstanding performance-based stock options, including the option exercise price of $13.93 per share,
remain in full force and effect.
103
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Stock-Based Compensation (Continued)
The
incremental expense resulting from the modification was calculated as the difference between the stock option's fair value immediately before and after the modification using the
Hull-White option pricing model and the following weighted-average assumptions:
|
|
|
Assumptions: |
|
|
Dividend yield |
|
3.72% |
Expected life |
|
7.8 years |
Expected volatility |
|
28.45% - 32.84% |
Risk-free interest rate |
|
0.07% - 1.54% |
Incremental weighted average fair value per option |
|
$0.52 |
The
following table summarizes information about stock options outstanding at June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
Weighted
Average
Exercise Price
|
|
Number |
|
Weighted
Average
Remaining Life |
|
Aggregate
Intrinsic
Value |
|
Weighted
Average
Exercise Price |
|
Number |
|
Weighted
Average
Remaining Life |
|
Aggregate
Intrinsic
Value |
|
|
|
|
9.30 |
|
|
20,000 |
|
|
8.64 years |
|
|
13 |
|
|
9.30 |
|
|
|
|
|
8.64 years |
|
|
|
|
|
|
|
9.38 |
|
|
295,176 |
|
|
7.59 |
|
|
168 |
|
|
9.38 |
|
|
13,224 |
|
|
7.59 |
|
|
8 |
|
|
|
|
9.39 |
|
|
10,000 |
|
|
9.08 |
|
|
6 |
|
|
9.39 |
|
|
|
|
|
9.08 |
|
|
|
|
|
|
|
12.63 |
|
|
32,500 |
|
|
6.58 |
|
|
|
|
|
12.63 |
|
|
10,833 |
|
|
6.58 |
|
|
|
|
|
|
|
13.93 |
|
|
540,035 |
|
|
5.50 |
|
|
|
|
|
13.93 |
|
|
216,734 |
|
|
5.50 |
|
|
|
|
|
|
|
14.52 |
|
|
162,010 |
|
|
5.50 |
|
|
|
|
|
14.52 |
|
|
64,804 |
|
|
5.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.58 |
|
|
1,059,721 |
|
|
6.21 |
|
|
187 |
|
|
13.81 |
|
|
305,595 |
|
|
6.21 |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of restricted stock activity for the year ended June 30, 2015 follows:
|
|
|
|
|
|
|
|
|
|
Shares |
|
Weighted
Average
Grant Date
Fair Value |
|
Unvested at beginning of period |
|
|
55,814 |
|
$ |
9.33 |
|
Granted |
|
|
174,000 |
|
|
9.35 |
|
Vested |
|
|
(1,055 |
) |
|
9.33 |
|
Forfeited |
|
|
(16,749 |
) |
|
9.39 |
|
|
|
|
|
|
|
|
|
Unvested at end of period |
|
|
212,010 |
|
|
9.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2015 and 2014, 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.
Stock-based
compensation totaled $705 thousand for the year ended June 30, 2015 and $686 thousand for the year ended June 30, 2014. The tax benefit related to
stock-based compensation expensed totaled $253 thousand for the year ended June 30, 2015 and $258 thousand for the year
104
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Stock-Based Compensation (Continued)
ended
June 30, 2014. The estimated amount and timing of future pre-tax stock-based compensation expense to be recognized are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending June 30, |
|
|
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
2020 |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Stock options |
|
$ |
331 |
|
$ |
185 |
|
$ |
76 |
|
$ |
12 |
|
$ |
1 |
|
$ |
605 |
|
Restricted stock |
|
|
400 |
|
|
400 |
|
|
363 |
|
|
312 |
|
|
84 |
|
|
1,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
731 |
|
$ |
585 |
|
$ |
439 |
|
$ |
324 |
|
$ |
85 |
|
$ |
2,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks
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:
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Commitments to grant loans |
|
$ |
24,966 |
|
$ |
14,282 |
|
Unfunded commitments under lines of credit |
|
|
39,414 |
|
|
34,657 |
|
Standby letters of credit |
|
|
60 |
|
|
166 |
|
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 aparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties. The Company has recorded an allowance for possible losses on commitments and unfunded loans totaling $37 thousand and $30 thousand recorded in
other liabilities at June 30, 2015 and 2014, respectively.
Standby
letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are issued to support private
borrowing
105
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks (Continued)
arrangements.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of June 30, 2015 and 2014, the maximum
potential amount of the Company's obligation was $60 thousand and $166 thousand, respectively, for financial and standby
letters of credit. The Company's outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer's
underlying line of credit. If the customer's line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.
Lease Obligations
The Company leases certain properties used in operations under terms of operating leases that include renewal options. The leases
contain renewal options and escalation clauses which provide for increased rental expense as these leases expire. Rental expense under leases totaled $1.2 million for the year ended
June 30, 2015 and $1.3 million for the year ended June 30, 2014.
Approximate
future minimum lease payments over the remaining terms of the Company's leases at June 30, 2015 are as follows:
|
|
|
|
|
|
|
Minimum lease
payments |
|
|
|
(Dollars in
thousands)
|
|
2016 |
|
$ |
1,303 |
|
2017 |
|
|
1,094 |
|
2018 |
|
|
1,081 |
|
2019 |
|
|
1,095 |
|
2020 |
|
|
1,113 |
|
Thereafter |
|
|
3,651 |
|
|
|
|
|
|
Total |
|
$ |
9,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Proceedings
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.
106
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Other Comprehensive Income
The components of other comprehensive income follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
Pre-tax
Amount |
|
Tax
Expense
(Benefit) |
|
After-tax
Amount |
|
Pre-tax
Amount |
|
Tax
Expense
(Benefit) |
|
After-tax
Amount |
|
|
|
(Dollars in thousands)
|
|
Change in net unrealized gain or loss on available-for-sale securities |
|
$ |
442 |
|
$ |
116 |
|
$ |
326 |
|
$ |
1,358 |
|
$ |
462 |
|
$ |
896 |
|
Reclassification adjustment for net gains included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
|
442 |
|
|
116 |
|
|
326 |
|
|
1,358 |
|
|
462 |
|
|
896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated loss on effective cash flow hedges |
|
|
(529 |
) |
|
(228 |
) |
|
(301 |
) |
|
(325 |
) |
|
(110 |
) |
|
(215 |
) |
Reclassification adjustment for net gains included in net income |
|
|
(49 |
) |
|
(19 |
) |
|
(30 |
) |
|
(76 |
) |
|
(26 |
) |
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives and hedging activities |
|
|
(578 |
) |
|
(247 |
) |
|
(331 |
) |
|
(401 |
) |
|
(136 |
) |
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
$ |
(136 |
) |
$ |
(131 |
) |
$ |
(5 |
) |
$ |
957 |
|
$ |
326 |
|
$ |
631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
|
|
(Dollars in thousands)
|
|
Unrealized loss on available-for-sale securities |
|
$ |
(836 |
) |
$ |
(1,278 |
) |
Tax effect |
|
|
318 |
|
|
434 |
|
|
|
|
|
|
|
|
|
Net-of-tax amount |
|
|
(518 |
) |
|
(844 |
) |
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges |
|
|
(1,242 |
) |
|
(664 |
) |
Tax effect |
|
|
472 |
|
|
225 |
|
|
|
|
|
|
|
|
|
Net-of-tax amount |
|
|
(770 |
) |
|
(439 |
) |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(1,288 |
) |
$ |
(1,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Derivatives
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 swap agreements that derive their 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 arises in the event of nonperformance by the
counterparties to these agreements, and 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 reflected on the Company's balance sheet as derivative assets and derivative liabilities. 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 to meet their obligations.
107
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Derivatives (Continued)
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 June 30, 2015, the Company had posted cash collateral totaling $1.6 million with dealer banks related to derivative instruments in a net liability position.
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 PoliciesDerivative 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 ManagementCash Flow Hedging Instruments
The Company uses 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.
Information
pertaining to outstanding interest rate caps and swap agreements used to hedge junior subordinated debt and FHLB advances is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
Notional
Amount
|
|
Inception
Date |
|
Termination
Date |
|
Index |
|
Receive
Rate |
|
Pay
Rate |
|
Strike
Rate |
|
Unrealized
Loss |
|
Fair
Value |
|
Balance Sheet
Location |
(Dollars in thousands)
|
|
Interest rate swaps: |
$ |
5,000 |
|
July 2013 |
|
July 2033 |
|
3 Mo. LIBOR |
|
|
0.28 |
% |
|
3.38 |
% |
|
n/a |
|
|
(472 |
) |
|
(472 |
) |
Other Liabilities |
|
5,000 |
|
July 2013 |
|
July 2028 |
|
3 Mo. LIBOR |
|
|
0.28 |
% |
|
3.23 |
% |
|
n/a |
|
|
(368 |
) |
|
(368 |
) |
Other Liabilities |
|
5,000 |
|
July 2013 |
|
July 2023 |
|
3 Mo. LIBOR |
|
|
0.28 |
% |
|
2.77 |
% |
|
n/a |
|
|
(208 |
) |
|
(208 |
) |
Other Liabilities |
|
Interest rate caps: |
|
6,000 |
|
October 2014 |
|
September 2019 |
|
3 Mo. LIBOR |
|
|
n/a |
|
|
n/a |
|
|
2.50 |
% |
|
(114 |
) |
|
63 |
|
Other Assets |
|
10,000 |
|
March 2015 |
|
February 2020 |
|
3 Mo. LIBOR |
|
|
n/a |
|
|
n/a |
|
|
2.50 |
% |
|
(80 |
) |
|
136 |
|
Other Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,242 |
) |
$ |
(849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
Notional
Amount
|
|
Inception
Date |
|
Termination
Date |
|
Index |
|
Receive
Rate |
|
Pay
Rate |
|
Strike
Rate |
|
Unrealized
Loss |
|
Fair
Value |
|
Balance Sheet
Location |
(Dollars in thousands)
|
|
Interest rate swaps: |
$ |
10,000 |
|
February 2010 |
|
February 2015 |
|
3 Mo. LIBOR |
|
|
2.12 |
% |
|
4.69 |
% |
|
n/a |
|
$ |
(99 |
) |
$ |
(165 |
) |
Other Liabilities |
|
5,000 |
|
July 2013 |
|
July 2033 |
|
3 Mo. LIBOR |
|
|
0.23 |
% |
|
3.38 |
% |
|
n/a |
|
|
(216 |
) |
|
(216 |
) |
Other Liabilities |
|
5,000 |
|
July 2013 |
|
July 2028 |
|
3 Mo. LIBOR |
|
|
0.23 |
% |
|
3.23 |
% |
|
n/a |
|
|
(200 |
) |
|
(200 |
) |
Other Liabilities |
|
5,000 |
|
July 2013 |
|
July 2023 |
|
3 Mo. LIBOR |
|
|
0.23 |
% |
|
2.77 |
% |
|
n/a |
|
|
(133 |
) |
|
(133 |
) |
Other Liabilities |
|
Interest rate caps: |
|
6,000 |
|
September 2009 |
|
September 2014 |
|
3 Mo. LIBOR |
|
|
n/a |
|
|
n/a |
|
|
2.51 |
% |
|
(16 |
) |
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(664 |
) |
$ |
(714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Derivatives (Continued)
During
the years ended June 30, 2015 and 2014, 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 variable rate 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 debt affects earnings. Risk management results for the years ended June 30, 2105 and 2014 related
to the balance sheet hedging of variable rate debt indicates that the hedges were effective.
During
the periods presented, amounts recognized in income related to hedge ineffectiveness resulted from amortization of the non-zero fair value associated with the Company's single
interest rate swap held at the time of the merger with FHB Formation LLC in December 2010. During the periods presented, amounts recognized in income related to amounts excluded from
effectiveness testing resulted from amortization of the acquisition price of interest rate caps. The table below presents amounts recognized in income related to both hedge ineffectiveness and amounts
excluded from effectiveness testing.
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in
thousands)
|
|
Interest income (expense): |
|
|
|
|
|
|
|
Interest rate caps |
|
$ |
(15 |
) |
$ |
(24 |
) |
Interest rate swap |
|
|
64 |
|
|
100 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49 |
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company does not expect to record interest income or interest expense related to interest rate swap or interest rate cap ineffectiveness in the next twelve months.
18. Fair Value Measurements
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. 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.
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
109
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Fair Value Measurements (Continued)
priority
to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:
Level 1Inputs
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 2Valuations
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 3Prices
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 techniquesThere have been no changes in the valuation techniques used during the current period.
TransfersThere were no transfers of assets and liabilities measured at fair value on a recurring or nonrecurring basis 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.
110
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Fair Value Measurements (Continued)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:
Collaterally dependent 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.
Real estate owned and other repossessed collateral The fair values of 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 may be categorized as Level 3 within the fair
value hierarchy. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified as
Level 3 within the fair value hierarchy.
Loan servicing rights The fair value of the SBA and mortgage servicing rights is based on a valuation model that calculates the present value of
estimated future net
servicing income. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Certain inputs are not observable, and
therefore loan servicing rights are generally categorized as Level 3 within the fair value hierarchy.
Fair Value of other Financial Instruments:
Cash and cash equivalents The fair value of cash, due from banks, interest bearing deposits and FHLB overnight deposits approximates their relative
book values, as these
financial instruments have short maturities.
FHLB stock The carrying value of FHLB stock approximates fair value based on redemption provisions of the FHLB.
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.
Accrued 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 90 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
111
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Fair Value Measurements (Continued)
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 re-pricing
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, wholesale 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
(Dollars in thousands)
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities |
|
$ |
48,230 |
|
$ |
|
|
$ |
48,230 |
|
$ |
|
|
Agency mortgage-backed securities |
|
|
53,678 |
|
|
|
|
|
53,678 |
|
|
|
|
Other assetsinterest rate caps |
|
|
199 |
|
|
|
|
|
199 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilitiesinterest rate swaps |
|
$ |
1,048 |
|
$ |
|
|
$ |
1,048 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
(Dollars in thousands)
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities |
|
$ |
48,418 |
|
$ |
|
|
$ |
48,418 |
|
$ |
|
|
Agency mortgage-backed securities |
|
|
65,463 |
|
|
|
|
|
65,463 |
|
|
|
|
Other assetsinterest rate caps |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilitiesinterest rate swaps |
|
$ |
714 |
|
$ |
|
|
$ |
714 |
|
$ |
|
|
Assets
measured at fair value on a nonrecurring basis are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
(Dollars in thousands)
|
|
Collateral dependent impaired loans |
|
$ |
932 |
|
$ |
|
|
$ |
|
|
$ |
932 |
|
Real estate owned and other repossessed collateral |
|
|
1,651 |
|
|
|
|
|
|
|
|
1,651 |
|
Loan servicing rights |
|
|
1,123 |
|
|
|
|
|
|
|
|
1,123 |
|
112
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Fair Value Measurements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
(Dollars in thousands)
|
|
Collateral dependent impaired loans |
|
$ |
1,467 |
|
$ |
|
|
$ |
|
|
$ |
1,467 |
|
Real estate owned and other repossessed collateral |
|
|
1,991 |
|
|
|
|
|
|
|
|
1,991 |
|
Loan servicing rights |
|
|
300 |
|
|
|
|
|
|
|
|
300 |
|
The
table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a nonrecurring basis at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
June 30,
2015 |
|
June 30,
2014 |
|
Valuation Technique |
|
|
(Dollars in
thousands)
|
|
|
Collateral dependent impaired loans |
|
$ |
932 |
|
$ |
1,467 |
|
Appraisal of collateral(1) |
Real estate owned and other repossessed collateral |
|
|
1,651 |
|
|
1,991 |
|
Appraisal of collateral(1) |
Loan servicing rights |
|
|
1,123 |
|
|
300 |
|
Discounted cash flow(2) |
- (1)
- Fair
value is generally determined through independent appraisals of the underlying collateral. The Company may also use another available source of
collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated
liquidation expenses. The range of these possible adjustments may vary.
- (2)
- Fair
value is determined using a discounted cash flow model. The unobservable inputs include anticipated rate of loan prepayments and discount rates. The
range of prepayment assumptions used was 6.08% to 13.14%. For discount rates, the range was 7.25% to 7.50%.
113
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Fair Value Measurements (Continued)
The
following table presents the estimated fair value of the Company's financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2015 |
|
|
|
Carrying
Amount |
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
(Dollars in thousands)
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
89,850 |
|
$ |
89,850 |
|
$ |
89,850 |
|
$ |
|
|
$ |
|
|
Available-for-sale securities |
|
|
101,908 |
|
|
101,908 |
|
|
|
|
|
101,908 |
|
|
|
|
Federal Home Loan Bank stock |
|
|
4,102 |
|
|
4,102 |
|
|
|
|
|
4,102 |
|
|
|
|
Loans held for sale |
|
|
9,035 |
|
|
9,035 |
|
|
|
|
|
9,035 |
|
|
|
|
Loans, net |
|
|
610,211 |
|
|
613,896 |
|
|
|
|
|
|
|
|
613,896 |
|
Accrued interest receivable |
|
|
1,335 |
|
|
1,335 |
|
|
|
|
|
1,335 |
|
|
|
|
Interest rate caps |
|
|
199 |
|
|
199 |
|
|
|
|
|
199 |
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
674,759 |
|
|
675,285 |
|
|
|
|
|
675,285 |
|
|
|
|
FHLB advances |
|
|
30,188 |
|
|
30,867 |
|
|
|
|
|
30,867 |
|
|
|
|
Wholesale repurchase agreements |
|
|
10,037 |
|
|
10,098 |
|
|
|
|
|
10,098 |
|
|
|
|
Short-term borrowings |
|
|
2,349 |
|
|
2,349 |
|
|
|
|
|
2,349 |
|
|
|
|
Capital lease obligation |
|
|
1,368 |
|
|
1,448 |
|
|
|
|
|
1,448 |
|
|
|
|
Subordinated debentures |
|
|
8,626 |
|
|
8,471 |
|
|
|
|
|
|
|
|
8,471 |
|
Interest rate swaps |
|
|
1,048 |
|
|
1,048 |
|
|
|
|
|
1,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2014 |
|
|
|
Carrying
Amount |
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
(Dollars in thousands)
|
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
82,259 |
|
$ |
82,259 |
|
$ |
82,259 |
|
$ |
|
|
$ |
|
|
Available-for-sale securities |
|
|
113,881 |
|
|
113,881 |
|
|
|
|
|
113,881 |
|
|
|
|
Federal Home Loan Bank stock |
|
|
4,102 |
|
|
4,102 |
|
|
|
|
|
4,102 |
|
|
|
|
Loans held for sale |
|
|
11,945 |
|
|
11,945 |
|
|
|
|
|
11,945 |
|
|
|
|
Loans, net |
|
|
515,049 |
|
|
522,154 |
|
|
|
|
|
|
|
|
522,154 |
|
Accrued interest receivable |
|
|
1,216 |
|
|
1,216 |
|
|
|
|
|
1,216 |
|
|
|
|
Interest rate caps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
574,329 |
|
|
574,868 |
|
|
|
|
|
574,868 |
|
|
|
|
FHLB advances |
|
|
42,824 |
|
|
43,843 |
|
|
|
|
|
43,843 |
|
|
|
|
Wholesale repurchase agreements |
|
|
10,199 |
|
|
10,484 |
|
|
|
|
|
10,484 |
|
|
|
|
Short-term borrowings |
|
|
2,984 |
|
|
2,984 |
|
|
|
|
|
2,984 |
|
|
|
|
Capital lease obligation |
|
|
1,558 |
|
|
1,701 |
|
|
|
|
|
1,701 |
|
|
|
|
Subordinated debentures |
|
|
8,440 |
|
|
7,858 |
|
|
|
|
|
|
|
|
7,858 |
|
Interest rate swaps |
|
|
714 |
|
|
714 |
|
|
|
|
|
714 |
|
|
|
|
114
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Condensed Financial Statements of Parent Company
Condensed financial statements pertaining to Northeast Bancorp are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
June 30, 2014 |
|
|
|
(Dollars in thousands)
|
|
Balance Sheets |
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
Cash |
|
$ |
13,251 |
|
$ |
19,547 |
|
Investment in subsidiary |
|
|
109,275 |
|
|
100,949 |
|
Investment in common securities of affiliated trusts |
|
|
496 |
|
|
496 |
|
Other assets |
|
|
434 |
|
|
1,843 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
123,456 |
|
$ |
122,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity: |
|
|
|
|
|
|
|
Junior subordinated debentures issued to affiliated trusts |
|
$ |
8,626 |
|
$ |
8,440 |
|
Other liabilities |
|
|
1,991 |
|
|
2,329 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
10,617 |
|
|
10,769 |
|
Stockholders' equity |
|
|
112,839 |
|
|
112,066 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
123,456 |
|
$ |
122,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in
thousands)
|
|
Statements of Income |
|
|
|
|
|
|
|
Income: |
|
|
|
|
|
|
|
Dividends from banking subsidiary |
|
$ |
|
|
$ |
|
|
Other income |
|
|
14 |
|
|
13 |
|
|
|
|
|
|
|
|
|
Total income |
|
|
14 |
|
|
13 |
|
Expenses: |
|
|
|
|
|
|
|
Interest expense |
|
|
718 |
|
|
764 |
|
General and administrative expenses |
|
|
1,128 |
|
|
1,068 |
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,846 |
|
|
1,832 |
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in undistributed earnings of subsidiary |
|
|
(1,832 |
) |
|
(1,819 |
) |
Income tax benefit |
|
|
(684 |
) |
|
(390 |
) |
|
|
|
|
|
|
|
|
(Loss) income before equity in undistributed earnings of subsidiary |
|
|
(1,148 |
) |
|
(1,429 |
) |
Equity in undistributed earnings of subsidiary |
|
|
8,289 |
|
|
4,121 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,141 |
|
$ |
2,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Condensed Financial Statements of Parent Company (Continued)
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in
thousands)
|
|
Statements of Cash Flows |
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
7,141 |
|
$ |
2,692 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
Amortization of fair value adjustment for borrowings |
|
|
186 |
|
|
172 |
|
Stock-based compensation |
|
|
705 |
|
|
686 |
|
Equity in undistributed earnings of subsidiary |
|
|
(8,289 |
) |
|
(4,121 |
) |
Increase in other assets and liabilities |
|
|
1,029 |
|
|
(503 |
) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
772 |
|
|
(1,074 |
) |
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
Increase in investment of bank subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
(6,666 |
) |
|
(2,823 |
) |
Dividends paid to stockholders |
|
|
(402 |
) |
|
(2,922 |
) |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(7,068 |
) |
|
(5,745 |
) |
|
|
|
|
|
|
|
|
Net decrease in cash |
|
|
(6,296 |
) |
|
(6,819 |
) |
Cash, beginning of year |
|
|
19,547 |
|
|
26,366 |
|
|
|
|
|
|
|
|
|
Cash, end of year |
|
$ |
13,251 |
|
$ |
19,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20. Discontinued Operations
The Company concluded all investment brokerage activities in the second quarter of fiscal 2014. Accordingly, operations associated with these activities have been classified as
discontinued operations
116
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Discontinued Operations (Continued)
in
the accompanying consolidated statements of income. The following summarizes the operations of the Company's investment brokerage division.
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in
thousands)
|
|
Noninterest income: |
|
|
|
|
|
|
|
Investment commissions |
|
$ |
|
|
$ |
971 |
|
Other noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
|
|
|
971 |
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
|
|
|
793 |
|
Occupancy and equipment expense |
|
|
|
|
|
60 |
|
Data processing fees |
|
|
|
|
|
82 |
|
Marketing expense |
|
|
|
|
|
8 |
|
Other noninterest expense |
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
|
|
|
983 |
|
|
|
|
|
|
|
|
|
(Loss) income before tax |
|
|
|
|
|
(12 |
) |
Income tax (benefit) expense |
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
|
|
$ |
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based
upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2015, the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's rules and forms. In addition, no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of our fiscal year ended June 30, 2015 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
An
evaluation was performed under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our internal controls and procedures over financial reporting (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered
by this annual report.
Management
is responsible for establishing and maintaining adequate internal controls over financial reporting. The standard measures adopted by management in making its evaluation are
the measures in Interest ControlIntegrated Framework (1992) published by the Committee of Sponsoring Organizations of the Treadway
Commission. We do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system's objective will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors, and
instances of fraud, if any, within the Company have been or will be detected. The inherent limitations include, among other things, the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake. Controls and procedures also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management or employee override of the controls and procedures. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls and procedures may become inadequate because of changes
in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitation in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
Based
on their evaluation of disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded, subject to the limitations described above, that our
internal controls and procedures over financial reporting as of the end of the period covered by this report were effective and that there were no material weaknesses.
There
have been no significant changes in our internal controls, or in other factors that could significantly affect our internal controls, subsequent to the date the Chief Executive
Officer and Chief
118
Table of Contents
Financial
Officer completed their evaluation, including any corrective actions with regard to significant deficiencies or material weaknesses.
This
annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal controls over financial reporting.
Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the Securities Exchange Commission that permit the Company to
provide only management's report in this annual report.
Item 9B. Other Information.
On September 25, 2015, Adam J. Shapiro informed the Board of his resignation from the Board effective September 25, 2015.
The decision by Mr. Shapiro to resign from the Board is not as a result of any disagreement with the Company or the Board.
119
Table of Contents
PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
The information required by Item 10 will be included in the Proxy Statement relating to our 2015 Annual Meeting of Shareholders
and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be included in the Proxy Statement relating to our 2015 Annual Meeting of Shareholders
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholders
The information required by Item 12 is included in the Proxy Statement relating to our 2015 Annual Meeting of Shareholders and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 will be included in the Proxy Statement relating to our 2015 Annual Meeting of Shareholders
and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 will be included in the Proxy Statement relating to our 2015 Annual Meeting of Shareholders
and is incorporated herein by reference.
120
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules
- (a)
- Financial
Statements and Financial Statement Schedules
- (b)
- Exhibits
|
|
|
|
|
2.1 |
|
Agreement and Plan of Merger, dated as of March 30, 2010, by and between Northeast Bancorp and FHB Formation LLC (incorporated by reference to Exhibit 2.1 of Northeast Bancorp's Form 8-K filed with
Securities and Exchange Commission on March 31, 2010). |
|
|
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation of Northeast Bancorp (incorporated by reference to Exhibit 3.1 of Northeast Bancorp's Current Report on Form 8-K filed on January 5, 2011). |
|
|
|
|
|
3.2 |
|
Articles of Amendment to the Amended and Restated Articles of Incorporation of Northeast Bancorp (incorporated by reference to Exhibit 3.1 of Northeast Bancorp's Current Report on Form 8-K filed on March 22,
2011). |
|
|
|
|
|
3.3 |
|
Articles of Amendment to the Amended and Restated Articles of Incorporation of Northeast Bancorp (incorporated by reference to Exhibit 3.1 of Northeast Bancorp's Current Report on Form 8-K filed on
November 29, 2012). |
|
|
|
|
|
3.4 |
|
Amended and Restated Bylaws of Northeast Bancorp (incorporated by reference to Exhibit 3.2 of Northeast Bancorp's Current Report on Form 8-K filed on January 5, 2011). |
|
|
|
|
|
4.1 |
|
Registration Rights Schedule to the Agreement and Plan of Merger, dated as of March 30, 2010, by and between Northeast Bancorp and FHB Formation LLC (incorporated by reference to Amendment No. 1 on
Form 10-K/A of Northeast Bancorp filed on March 19, 2012). |
|
|
|
|
|
10.1 |
+ |
Form of Indemnification Agreement, dated as of December 29, 2010, by and between Northeast Bancorp and each of the members of the Board (incorporated by reference to Exhibit 10.1 of Northeast Bancorp's Current
Report on Form 8-K filed on January 5, 2011). |
|
|
|
|
|
10.2 |
+ |
Employment Agreement, dated December 30, 2010, by and between Northeast Bancorp and Richard Wayne (incorporated by reference to Exhibit 10.2 of Northeast Bancorp's Current Report on Form 8-K filed on
January 5, 2011). |
|
|
|
|
|
10.3 |
+ |
Employment Agreement, dated December 30, 2010, by and between Northeast Bancorp and Claire Bean (incorporated by reference to Exhibit 10.3 of Northeast Bancorp's Current Report on Form 8-K filed on
January 5, 2011). |
|
|
|
|
121
Table of Contents
|
|
|
|
|
10.4 |
+ |
Non-Qualified Time-Based Stock Option Agreement, dated December 29, 2010, by and between Northeast Bancorp and Richard Wayne (incorporated by reference to Exhibit 10.5 of Northeast Bancorp's Current Report on
Form 8-K filed on January 5, 2011). |
|
|
|
|
|
10.5 |
+ |
Non-Qualified Performance-Based Stock Option Agreement, dated March 22, 2013, by and between Northeast Bancorp and Richard Wayne (incorporated by reference to Exhibit 10.1 of Northeast Bancorp's Current Report
on Form 8-K filed on March 26, 2013). |
|
|
|
|
|
10.6 |
+ |
Non-Qualified Time-Based Stock Option Agreement, dated December 29, 2010, by and between Northeast Bancorp and Claire Bean (incorporated by reference to Exhibit 10.7 of Northeast Bancorp's Current Report on
Form 8-K filed on January 5, 2011). |
|
|
|
|
|
10.7 |
+ |
Non-Qualified Performance-Based Stock Option Agreement, dated March 22, 2013, by and between Northeast Bancorp and Claire Bean (incorporated by reference to Exhibit 10.2 of Northeast Bancorp's Current Report on
Form 8-K filed on March 26, 2013). |
|
|
|
|
|
10.8 |
+ |
Non-Qualified Stock Option Agreement, dated December 30, 2010, by and between Northeast Bancorp and Robert Glauber (incorporated by reference to Exhibit 10.11 of Northeast Bancorp's Current Report on
Form 8-K filed on January 5, 2011). |
|
|
|
|
|
10.9 |
+ |
Amended and Restated Performance-Based Stock Appreciation Rights Agreement, dated March 24, 2011, by and between Northeast Bancorp and Matthew Botein (incorporated by reference to Exhibit 10.1 of Northeast
Bancorp's Current Report on Form 8-K filed on March 30, 2011). |
|
|
|
|
|
10.10 |
+ |
Non-Qualified Time-Based Stock Option Agreement, dated March 24, 2011, by and between Northeast Bancorp and Matthew Botein (incorporated by reference to Exhibit 10.2 of Northeast Bancorp's Current Report on
Form 8-K filed on March 30, 2011). |
|
|
|
|
|
10.11 |
+ |
Non-Qualified Performance-Based Stock Option Agreement, dated March 24, 2011, by and between Northeast Bancorp and Matthew Botein (incorporated by reference to Exhibit 10.3 of Northeast Bancorp's Current Report
on Form 8-K filed on March 30, 2011). |
|
|
|
|
|
21 |
* |
Subsidiaries of Northeast Bancorp |
|
|
|
|
|
23.1 |
* |
Consent of Ernst & Young LLP |
|
|
|
|
|
31.1 |
* |
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2 |
* |
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1 |
** |
Rule 13a-14(b) Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
101.INS |
|
XBRL Instance Document* |
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document* |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document* |
|
|
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document* |
|
|
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document* |
|
|
|
|
122
Table of Contents
|
|
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document* |
- *
- Filed
herewith.
- **
- Furnished
herewith
- +
- Management
contract or compensatory plan or agreement
123
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
NORTHEAST BANCORP |
Date: September 28, 2015 |
|
By: |
|
/s/ RICHARD WAYNE
Richard Wayne Chief Executive Officer
(Principal Executive Officer) |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ RICHARD WAYNE
Richard Wayne |
|
Chief Executive Officer and Director (Principal Executive Officer) |
|
September 28, 2015 |
/s/ BRIAN SHAUGHNESSY
Brian Shaughnessy |
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|
September 28, 2015 |
/s/ ROBERT GLAUBER
Robert Glauber |
|
Chairman of the Board |
|
September 28, 2015 |
/s/ MATTHEW BOTEIN
Matthew Botein |
|
Director |
|
September 28, 2015 |
/s/ CHERYL DORSEY
Cheryl Dorsey |
|
Director |
|
September 28, 2015 |
/s/ PETER MCCLEAN
Peter McClean |
|
Director |
|
September 28, 2015 |
/s/ JOHN C. ORESTIS
John C. Orestis |
|
Director |
|
September 28, 2015 |
124
Table of Contents
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ DAVID TANNER
David Tanner |
|
Director |
|
September 28, 2015 |
/s/ JUDITH E. WALLINGFORD
Judith E. Wallingford |
|
Director |
|
September 28, 2015 |
125
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Exhibit 21
Subsidiaries of Registrant
|
|
|
|
|
|
|
|
|
|
|
Name of Subsidiary
|
|
Jurisdiction
of
Incorporation |
|
Year
Acquired
or
Formed |
|
Percentage
of Voting
Securities
Owned |
|
ASI Data Services, Inc. |
|
|
Maine |
|
|
1993 |
|
|
100 |
% |
Northeast Bank (and its 100% owned subsidiaries: Northeast Bank Insurance Group, Inc.; 200 Elm Realty, LLC; 500 Pine Realty,
LLC; 17 Dogwood Realty, LLC) |
|
|
Maine |
|
|
1987 |
|
|
100 |
% |
QuickLinks
Subsidiaries of Registrant
QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Form S-8: Nos. 333-135452, 333-171466 and
333-186356) of Northeast Bancorp and subsidiary of our report dated September 28, 2015, with respect to the consolidated financial statements of Northeast Bancorp and subsidiary, included in
this Annual Report (Form 10-K) for the year ended June 30, 2015.
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/s/ Ernst & Young LLP |
Boston, Massachusetts
September 28, 2015 |
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Consent of Independent Registered Public Accounting Firm
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Exhibit 31.1
CERTIFICATION
I,
Richard Wayne, certify that:
- 1.
- I
have reviewed this annual report on Form 10-K of Northeast Bancorp;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
- (a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- (b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- (c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- (d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- (a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- (b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
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September 28, 2015 |
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/s/ RICHARD WAYNE
Richard Wayne Chief Executive Officer |
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CERTIFICATION
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Exhibit 31.2
CERTIFICATION
I,
Brian Shaughnessy, certify that:
- 1.
- I
have reviewed this annual report on Form 10-K of Northeast Bancorp;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
- (a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- (b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- (c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- (d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- (a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- (b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
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September 28, 2015 |
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/s/ BRIAN SHAUGHNESSY
Brian Shaughnessy Chief Financial Officer |
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CERTIFICATION
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Exhibit 32.1
Certification Pursuant to
Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
In connection with the report of Northeast Bancorp (the "Company") on Form 10-K for the annual period ending June 30,
2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company hereby certify, pursuant to Exchange Act
Rule 13a-14(b) and 18 U.S.C. 1350, that to the best of such officer's knowledge:
(1) The
Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and the
periods covered by the Report.
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September 28, 2015 |
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/s/ RICHARD WAYNE
Richard Wayne Chief Executive Officer |
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/s/ BRIAN SHAUGHNESSY
Brian Shaughnessy Chief Financial Officer |
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Certification Pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350
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