Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in Northeast Bancorp’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the Securities and Exchange Commission.
A Note about Forward Looking Statements
This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to the Company’s financial condition, prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy, simulation of changes in interest rates, capital spending and finance sources and revenue sources. These statements relate to expectations concerning matters that are not historical facts. Accordingly, statements that are based on management’s projections, estimates, assumptions, and judgments constitute forward-looking statements. These forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology such as “believe”, “expect”, “estimate”, “anticipate”, “continue”, “plan”, “approximately”, “intend”, “objective”, “goal”, “project”, or other similar terms or variations on those terms, or the future or conditional verbs such as “will”, “may”, “should”, “could”, and “would”. Although the Company believes that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, the Company cannot give you any assurance that its expectations will, in fact, occur or that its estimates or assumptions will be correct. The Company cautions you that actual results could differ materially from those expressed or implied by such forward-looking statements as a result of, among other factors, changes in interest rates and real estate values; competitive pressures from other financial institutions; weakness in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay the Company’s loans; changes in loan defaults and charge-off rates; changes in the value of securities and other assets, adequacy of loan loss reserves, or deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; the risk that the Company may not be successful in the implementation of its business strategy; the risk of compromises or breaches of the company's security systems; the risk that intangibles recorded in the Company’s financial statements will become impaired; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 as updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this report and the Company does not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.
Description of Business and Strategy
Business Overview
Northeast Bancorp (“we,” “our,” “us,” “Northeast” or the “Company”), 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”). 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. 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. 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.
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 to exclude owner-occupied commercial real estate loans from the commitment to hold commercial real estate loans to within 300% of total risk-based capital. 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 September 30, 2016 follow:
Condition
|
|
Ratios as of September 30, 2016
|
|
(i) Tier 1 leverage capital ratio
|
|
|
12.25
|
%
|
(ii) Total capital ratio
|
|
|
18.82
|
%
|
(iii) Ratio of purchased loans to total loans, including loans held for sale
|
|
|
32.54
|
%
|
(iv) Ratio of loans to core deposits
(1)
|
|
|
90.22
|
%
|
(v) Ratio of commercial real estate loans to total risk-based capital
(2)
|
|
|
179.96
|
%
|
(1) Core deposits include all non-maturity deposits and maturity deposits less than $250 thousand
(2) For purposes of calculating this ratio, commercial real estate includes all non-owner occupied commercial real estate loans defined as such by regulatory guidance, including all land development and construction loans.
As of September 30, 2016, the Company, on a consolidated basis, had total assets of $985.6 million, total deposits of $805.4 million, and shareholders’ equity of $111.6 million. The Company gathers retail deposits through its banking offices in Maine and the Bank's online affinity deposit program, ableBanking; originates loans through the Bank’s Community Banking Division; originates Small Business Administration (“SBA”) loans through the Bank’s national SBA group (“SBA Division”); and purchases and originates commercial loans through the LASG. The Community Banking Division, with ten full-service branches and two loan production offices, operates from the Bank’s headquarters in Lewiston, Maine. LASG, ableBanking, and the SBA Division operate from the Company's offices in Boston, Massachusetts.
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:
Continuing our community banking tradition.
With a history that dates to 1872, our Community Banking Division maintains its focus on sales and service, with the goal of attracting and retaining deposits, and serving the lending needs of retail and commercial customers within our core markets.
Growing LASG’s national originated and purchased loan business.
We purchase commercial real estate loans nationally, at prices that on average have produced yields significantly higher than those available on our originated loan portfolio. We also originate loans nationally, taking advantage of our core expertise in underwriting and servicing national credits.
Growing our national SBA origination business.
We originate loans on a national basis to small businesses, primarily through the SBA 7(a) program, which provides the partial guarantee of the SBA.
Generating deposits to fund our business.
We offer a full line of deposit products through our ten-branch network located in the Community Banking Division’s market. ableBanking is a direct savings platform providing an additional channel to raise core deposits to fund our asset strategy.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. The reader is encouraged to review each of the policies included in Form 10-K for the year ended June 30, 2016 to gain a better understanding of how Northeast’s financial performance is measured and reported. There has been no material change in critical accounting policies during the three months ended September 30, 2016.
Overview
Net income was $1.8 million, or $0.19 per diluted common share, for the quarter ended September 30, 2016, compared to $1.9 million, or $0.20 per diluted common share, for the quarter ended September 30, 2015.
Net interest and dividend income before provision for loan losses increased by $534 thousand, or 5.8%, to $9.8 million for the quarter ended September 30, 2016 compared to the quarter ended September 30, 2015.
The increase is primarily due to higher average balances in the total loan portfolio, offset by higher average deposit balances and the effect of the issuance of the subordinated debt.
Noninterest income increased by $103 thousand for the quarter ended September 30, 2016, compared to the quarter ended September 30, 2015, principally due to an increase in gains realized on sale of SBA loans.
Noninterest expense increased by $816 thousand for the quarter ended September 30, 2016, compared to the quarter ended September 30, 2015,
primarily due to an increase in salaries and employee benefits of $1.1 million, largely attributable to higher employee headcount, increased incentive compensation, and the benefit recognized upon the forfeiture of stock awards in the quarter ended September 30, 2015.
Financial Condition
Overview
Total assets decreased by $585 thousand, or 0.1%, to $985.6 million at September 30, 2016, compared to June 30, 2016. The principal components of the change in the balance sheet were as follows:
|
●
|
The loan portfolio – excluding loans held for sale – has grown by $29.0 million, or 4.2%, compared to June 30, 2016, principally on the strength of $28.5 million of net growth in commercial loans purchased or originated by the LASG and net growth of $5.1 million in originations by the SBA Division. This net growth was offset by a $4.6 million decrease in the Bank’s Community Banking Division loan portfolio.
|
|
|
|
|
●
|
Loans generated by the LASG totaled $55.9 million for the quarter ended September 30, 2016. The growth in LASG loans consisted of $13.9 million of purchased loans, at an average price of 82.5% of unpaid principal balance, and $42.0 million of originated loans. SBA loans closed during the quarter totaled $15.2 million, of which $13.3 million were fully funded in the quarter. In addition, the Company sold $7.4 million of the guaranteed portion of SBA loans in the secondary market, of which $6.3 million were originated in the current quarter and $1.1 million were originated in prior quarters. Residential loan production sold in the secondary market totaled $25.0 million for the quarter.
|
|
|
|
|
|
As noted above in the “
Business
Overview
” section, the Company made certain commitments to the Board of Governors of the Federal Reserve System in connection with the merger of FHB Formation LLC with and into the Company in December 2010. The Company’s loan purchase and commercial real estate loan availability under these conditions follow.
|
Basis for
Regulatory Condition
|
|
Condition
|
|
Availability at September 30, 2016
|
|
|
|
|
(Dollars in millions)
|
Total Loans
|
|
Purchased loans may not exceed 40% of total loans
|
|
$
|
90.6
|
Regulatory Capital
|
|
Non-owner occupied commercial real estate loans may not exceed 300% of total capital
|
|
$
|
165.8
|
|
|
|
|
|
|
An overview of the Bank’s LASG portfolio follows:
|
|
LASG Portfolio
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Purchased (1)
|
|
|
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
|
|
$
|
16,790
|
|
|
$
|
42,002
|
|
|
$
|
-
|
|
|
$
|
58,792
|
|
|
$
|
23,583
|
|
|
$
|
10,941
|
|
|
$
|
-
|
|
|
$
|
34,524
|
|
Net investment basis
|
|
|
13,853
|
|
|
|
42,002
|
|
|
|
-
|
|
|
|
55,855
|
|
|
|
23,458
|
|
|
|
10,941
|
|
|
|
-
|
|
|
|
34,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan returns during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
10.40
|
%
|
|
|
5.88
|
%
|
|
|
0.50
|
%
|
|
|
7.58
|
%
|
|
|
12.07
|
%
|
|
|
5.67
|
%
|
|
|
0.50
|
%
|
|
|
8.23
|
%
|
Total Return (2)
|
|
|
10.43
|
%
|
|
|
5.88
|
%
|
|
|
0.50
|
%
|
|
|
7.59
|
%
|
|
|
12.11
|
%
|
|
|
5.67
|
%
|
|
|
0.50
|
%
|
|
|
8.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans as of period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
269,462
|
|
|
$
|
206,748
|
|
|
$
|
48,000
|
|
|
$
|
524,210
|
|
|
$
|
249,229
|
|
|
$
|
119,732
|
|
|
$
|
60,000
|
|
|
$
|
428,961
|
|
Net investment basis
|
|
|
237,103
|
|
|
|
206,748
|
|
|
|
48,000
|
|
|
|
491,851
|
|
|
|
214,199
|
|
|
|
119,732
|
|
|
|
60,000
|
|
|
|
393,931
|
|
(1) Purchased loan balances include loans held for sale of $789 thousand.
(2) 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, which includes loans held for sale, on an annualized basis. The total return does not include the effect of purchased loan charge-offs or recoveries in the quarter. The total return presented is a non-GAAP measure.
Assets
Cash, Short-term Investments and Securities
Cash and short-term investments were $126.2 million as of September 30, 2016, a decrease of $24.9 million, or 16.5%, from $151.2 million at June 30, 2016. The decrease is primarily due to the increase in loans, offset by the increase in deposits in the period.
Available-for-sale securities totaled $94.6 million as of September 30, 2016, compared to $100.6 million as of June 30, 2016, representing a decrease of $6.0 million, or 6.0% due to the maturity of securities issued by government agencies as well as principal payments on mortgage backed securities. Included in available-for-sale securities are securities issued by government agencies and government-sponsored enterprises, as well as an investment of approximately $5.2 million in a CRA qualified fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies. At September 30, 2016, no securities were pledged for outstanding borrowings.
Loans
The Company’s loan portfolio (excluding loans held-for-sale) by lending division follows:
|
|
September 30, 2016
|
|
|
|
Community Banking Division
|
|
|
LASG
|
|
|
SBA Division
|
|
|
Total
|
|
|
Percent of Total
|
|
|
|
(Dollars in thousands)
|
|
Originated loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
90,097
|
|
|
$
|
-
|
|
|
$
|
133
|
|
|
$
|
90,230
|
|
|
|
12.51
|
%
|
Home equity
|
|
|
17,098
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,098
|
|
|
|
2.37
|
%
|
Commercial real estate: non-owner occupied
|
|
|
50,246
|
|
|
|
56,801
|
|
|
|
9,341
|
|
|
|
116,388
|
|
|
|
16.13
|
%
|
Commercial real estate: owner occupied
|
|
|
19,173
|
|
|
|
66,657
|
|
|
|
16,018
|
|
|
|
101,848
|
|
|
|
14.12
|
%
|
Commercial and industrial
|
|
|
16,639
|
|
|
|
131,290
|
|
|
|
6,079
|
|
|
|
154,008
|
|
|
|
21.35
|
%
|
Consumer
|
|
|
5,532
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,532
|
|
|
|
0.77
|
%
|
Subtotal
|
|
|
198,785
|
|
|
|
254,748
|
|
|
|
31,571
|
|
|
|
485,104
|
|
|
|
67.25
|
%
|
Purchased loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
2,895
|
|
|
|
-
|
|
|
|
2,895
|
|
|
|
0.40
|
%
|
Commercial real estate: non-owner occupied
|
|
|
-
|
|
|
|
132,911
|
|
|
|
-
|
|
|
|
132,911
|
|
|
|
18.42
|
%
|
Commercial real estate: owner occupied
|
|
|
-
|
|
|
|
98,406
|
|
|
|
-
|
|
|
|
98,406
|
|
|
|
13.64
|
%
|
Commercial and industrial
|
|
|
-
|
|
|
|
2,102
|
|
|
|
-
|
|
|
|
2,102
|
|
|
|
0.29
|
%
|
Subtotal
|
|
|
-
|
|
|
|
236,314
|
|
|
|
-
|
|
|
|
236,314
|
|
|
|
32.75
|
%
|
Total
|
|
$
|
198,785
|
|
|
$
|
491,062
|
|
|
$
|
31,571
|
|
|
$
|
721,418
|
|
|
|
100.00
|
%
|
|
|
June 30, 2016
|
|
|
|
Community Banking Division
|
|
|
LASG
|
|
|
SBA Division
|
|
|
Total
|
|
|
Percent of Total
|
|
|
|
(Dollars in thousands)
|
|
Originated loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
93,258
|
|
|
$
|
-
|
|
|
$
|
133
|
|
|
$
|
93,391
|
|
|
|
13.49
|
%
|
Home equity
|
|
|
18,012
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,012
|
|
|
|
2.60
|
%
|
Commercial real estate: non-owner occupied
|
|
|
49,514
|
|
|
|
52,744
|
|
|
|
5,639
|
|
|
|
107,897
|
|
|
|
15.58
|
%
|
Commercial real estate: owner occupied
|
|
|
20,578
|
|
|
|
46,727
|
|
|
|
14,414
|
|
|
|
81,719
|
|
|
|
11.80
|
%
|
Commercial and industrial
|
|
|
16,069
|
|
|
|
123,447
|
|
|
|
6,242
|
|
|
|
145,758
|
|
|
|
21.05
|
%
|
Consumer
|
|
|
5,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,950
|
|
|
|
0.86
|
%
|
Subtotal
|
|
|
203,381
|
|
|
|
222,918
|
|
|
|
26,428
|
|
|
|
452,727
|
|
|
|
65.38
|
%
|
Purchased loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
2,559
|
|
|
|
-
|
|
|
|
2,559
|
|
|
|
0.37
|
%
|
Commercial real estate: non-owner occupied
|
|
|
-
|
|
|
|
142,286
|
|
|
|
-
|
|
|
|
142,286
|
|
|
|
20.55
|
%
|
Commercial real estate: owner occupied
|
|
|
-
|
|
|
|
94,666
|
|
|
|
-
|
|
|
|
94,666
|
|
|
|
13.67
|
%
|
Commercial and industrial
|
|
|
-
|
|
|
|
198
|
|
|
|
-
|
|
|
|
198
|
|
|
|
0.03
|
%
|
Subtotal
|
|
|
-
|
|
|
|
239,709
|
|
|
|
-
|
|
|
|
239,709
|
|
|
|
34.62
|
%
|
Total
|
|
$
|
203,381
|
|
|
$
|
462,627
|
|
|
$
|
26,428
|
|
|
$
|
692,436
|
|
|
|
100.00
|
%
|
Classification of Assets
Loans are classified as non-performing when 90 or more days past due, unless a loan is well-secured and in the process of collection. Loans less than 90 days past due, for which collection of principal or interest is considered doubtful, also may be designated as non-performing. In both situations, accrual of interest ceases. The Company typically maintains such loans as non-performing until the respective borrowers have demonstrated a sustained period of payment performance.
In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications, the loan is classified as a troubled debt restructuring (“TDR”). Concessionary modifications may include adjustments to interest rates, extensions of maturity, or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. Nonaccrual loans that are restructured generally remain on nonaccrual 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.
Other nonperforming assets include other real estate owned (“OREO”) and other personal property securing loans repossessed by the Bank. The real estate and personal property collateral for commercial and consumer loans is written down to its estimated realizable value upon repossession. Revenues and expenses are recognized in the period when received or incurred on OREO and in substance foreclosures. Gains and losses on disposition are recognized in noninterest income
.
The following table details the Company's nonperforming assets and other credit quality indicators as of September 30, 2016 and June 30, 2016. Management believes that, based on their carrying amounts, nonperforming assets are well secured based on the estimated fair value of underlying collateral.
|
|
Non-Performing Assets at September 30, 2016
|
|
|
|
Originated
|
|
|
Purchased
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
3,273
|
|
|
$
|
1,107
|
|
|
$
|
4,380
|
|
Home equity
|
|
|
48
|
|
|
|
-
|
|
|
|
48
|
|
Commercial real estate
|
|
|
361
|
|
|
|
3,618
|
|
|
|
3,979
|
|
Commercial and industrial
|
|
|
347
|
|
|
|
48
|
|
|
|
395
|
|
Consumer
|
|
|
121
|
|
|
|
-
|
|
|
|
121
|
|
Subtotal
|
|
|
4,150
|
|
|
|
4,773
|
|
|
|
8,923
|
|
Real estate owned and other repossessed collateral
|
|
|
764
|
|
|
|
3,010
|
|
|
|
3,774
|
|
Total
|
|
$
|
4,914
|
|
|
$
|
7,783
|
|
|
$
|
12,697
|
|
Ratio of nonperforming loans to total loans
|
|
|
|
|
|
|
|
|
|
|
1.24
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
|
|
|
|
|
|
|
|
1.29
|
%
|
Ratio of loans past due to total loans
|
|
|
|
|
|
|
|
|
|
|
1.36
|
%
|
Nonperforming loans that are current
|
|
|
|
|
|
|
|
|
|
$
|
1,682
|
|
Commercial loans risk rated substandard or worse
|
|
|
|
|
|
|
|
|
|
$
|
3,558
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
On accrual status
|
|
|
|
|
|
|
|
|
|
$
|
6,456
|
|
On nonaccrual status
|
|
|
|
|
|
|
|
|
|
$
|
1,320
|
|
|
|
Non-Performing Assets at June 30, 2016
|
|
|
|
Originated
|
|
|
Purchased
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
2,613
|
|
|
$
|
1,125
|
|
|
$
|
3,738
|
|
Home equity
|
|
|
48
|
|
|
|
-
|
|
|
|
48
|
|
Commercial real estate
|
|
|
474
|
|
|
|
3,387
|
|
|
|
3,861
|
|
Commercial and industrial
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
Consumer
|
|
|
163
|
|
|
|
-
|
|
|
|
163
|
|
Subtotal
|
|
|
3,315
|
|
|
|
4,512
|
|
|
|
7,827
|
|
Real estate owned and other repossessed collateral
|
|
|
830
|
|
|
|
822
|
|
|
|
1,652
|
|
Total
|
|
$
|
4,967
|
|
|
$
|
4,512
|
|
|
$
|
9,479
|
|
Ratio of nonperforming loans to total loans
|
|
|
|
|
|
|
|
|
|
|
1.13
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
|
|
|
|
|
|
|
|
0.96
|
%
|
Ratio of loans past due to total loans
|
|
|
|
|
|
|
|
|
|
|
1.00
|
%
|
Nonperforming loans that are current
|
|
|
|
|
|
|
|
|
|
$
|
2,271
|
|
Commercial loans risk rated substandard or worse
|
|
|
|
|
|
|
|
|
|
$
|
4,518
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
On accrual status
|
|
|
|
|
|
|
|
|
|
$
|
7,036
|
|
Nonaccrual status
|
|
|
|
|
|
|
|
|
|
$
|
1,152
|
|
At September 30, 2016, nonperforming assets totaled $12.7 million, or 1.29% of total assets, as compared to $9.5 million, or 0.96% of total assets, at June 30, 2016. The increase is largely due to one loan added to OREO and the effect of loans acquired in the current quarter which were classified as non-performing upon purchase.
Allowance for Loan Losses
In connection with the application of the acquisition method of accounting for the merger on December 29, 2010, the allowance for loan losses was reduced to zero when the loan portfolio was marked to its then current fair value. Since that date, the Company has provided for an allowance for loan losses as new loans are originated or in the event that credit exposure in the pre-merger loan portfolio or other acquired loans exceeds the exposure estimated when initial fair values were determined.
The Company’s allowance for loan losses was $2.5 million as of September 30, 2016, which represents an increase of $156 thousand from $2.4 million as of June 30, 2016. The increase during the period was principally due to loan growth in the quarter.
The following table details ratios related to the allowance for loan losses for the periods indicated.
|
September 30, 2016
|
|
June 30, 2016
|
|
September 30, 2015
|
Allowance for loan losses to nonperforming loans
|
28.08%
|
|
30.02%
|
|
19.11%
|
Allowance for loan losses to total loans
|
0.35%
|
|
0.34%
|
|
0.33%
|
Last twelve months of net-charge offs to average loans
|
0.18%
|
|
0.18%
|
|
0.03%
|
While management believes that it uses the best information available to make its determinations with respect to the allowance for loan losses, there can be no assurance that the Company will not have to increase its provision for loan losses in the future as a result of changing economic conditions, adverse markets for real estate or other factors.
Other Assets
The cash surrender value of the Company’s bank-owned life insurance (“BOLI”) assets increased $114 thousand, or 0.7% to $15.8 million at September 30, 2016, compared to $15.7 million at June 30, 2016. Increases in cash surrender value are recognized in other income and are not subject to income taxes. Borrowing on, or surrendering a policy, may subject the Company to income tax expense on the increase in cash surrender value. For these reasons, management considers BOLI an illiquid asset. BOLI represented 11.5% of the Company’s total capital at September 30, 2016.
Intangible assets totaled $1.6 million and $1.7 million at September 30, 2016 and June 30, 2016, respectively. The $109 thousand decrease was the result of core deposit intangible asset amortization during the period.
Deposits, Borrowed Funds,
Subordinated Debt, Liquidity, Capital, and Stock Repurchases
Deposits
The Company’s principal source of funding is its core deposit accounts. At September 30, 2016, non-maturity accounts, and certificates of deposit with balances less than $250 thousand represented 99.9% of total deposits.
Total deposits increased $5.0 million to $805.4 million as of September 30, 2016 from $800.4 million as of June 30, 2016. The increase, which funded growth in the Company’s loan portfolio, was centered mainly in money market accounts attracted through the Bank’s Community Banking Division.
The composition of total deposits at September 30, 2016 and June 30, 2016 is as follows:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
|
(Dollars in thousands)
|
|
Demand deposits
|
|
$
|
74,249
|
|
|
|
9.22
|
%
|
|
$
|
66,686
|
|
|
|
8.33
|
%
|
NOW accounts
|
|
|
71,853
|
|
|
|
8.92
|
%
|
|
|
71,148
|
|
|
|
8.89
|
%
|
Regular and other savings
|
|
|
35,512
|
|
|
|
4.41
|
%
|
|
|
36,070
|
|
|
|
4.51
|
%
|
Money market deposits
|
|
|
302,079
|
|
|
|
37.51
|
%
|
|
|
275,437
|
|
|
|
34.41
|
%
|
Total non-certificate accounts
|
|
|
483,693
|
|
|
|
60.06
|
%
|
|
|
449,341
|
|
|
|
56.14
|
%
|
Term certificates less than $250 thousand
|
|
|
321,215
|
|
|
|
39.88
|
%
|
|
|
351,091
|
|
|
|
43.86
|
%
|
Term certificates of $250 thousand or more
|
|
|
501
|
|
|
|
0.06
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Total certificate accounts
|
|
|
321,716
|
|
|
|
39.94
|
%
|
|
|
351,091
|
|
|
|
43.86
|
%
|
Total deposits
|
|
$
|
805,409
|
|
|
|
100.00
|
%
|
|
$
|
800,432
|
|
|
|
100.00
|
%
|
Borrowed Funds
Advances from the FHLBB were $30.0 million at September 30, 2016, as compared to $30.1 million at June 30, 2016. At September 30, 2016, the Company had pledged certain residential real estate loans, commercial real estate loans, and FHLBB deposits free of liens or pledges to secure outstanding advances and provide additional borrowing capacity. At September 30, 2016, no securities were pledged for outstanding borrowings.
Subordinated Debt
On June 29, 2016, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors pursuant to which the Company sold and issued subordinated notes equal to $15.05 million in aggregate principal amount with an interest rate of 6.75% fixed-to-floating maturing in 2026 (“subordinated notes”). The subordinated notes, net of issuance costs of $524 thousand, totaled $14.5 million at both September 30, 2016 and June 30, 2016, respectively.
The Company had junior subordinated debentures issued to affiliated trusts totaling $8.9 million and $8.8 million at September 30, 2016 and June 30, 2016, respectively.
Liquidity
The following table is a summary of unused borrowing capacity of the Company at September 30, 2016, in addition to traditional retail deposit products (dollars in thousands):
Brokered time deposits
|
|
$
|
246,392
|
|
Subject to policy limitation of 25% of total assets
|
Federal Home Loan Bank of Boston
|
|
|
68,478
|
|
Unused advance capacity subject to eligible and qualified collateral
|
Federal Discount Window Borrower-in-Custody
|
|
|
1,742
|
|
Unused credit line subject to the pledge of loans
|
Other available lines
|
|
|
17,500
|
|
|
Total unused borrowing capacity
|
|
$
|
334,112
|
|
|
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 FHLBB 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 FHLBB advance capacity, the purchase of additional capital stock in the Federal Home Loan Bank of Boston may be required.
At September 30, 2016, the Company had $411.2 million of immediately accessible liquidity, defined as cash that the Bank reasonably believes could be raised within seven days through collateralized borrowings, brokered deposits or security sales.
This position represented 41.9% of total assets. The Company also had $126.2 million of cash and cash equivalents at September 30, 2016.
Management believes that there are adequate funding sources to meet its liquidity needs for the foreseeable future. Primary funding sources are the repayment of principal and interest on loans, the renewal of time deposits, the potential for growth in the deposit base, and the credit availability from the FHLB. Management does not believe that the terms and conditions that will be present at the renewal of these funding sources will significantly impact the Company’s operations, due to its management of the maturities of its assets and liabilities.
Capital
The unpaid principal balance and carrying amount of junior subordinated debentures totaled $16.5 million and $8.9 million, respectively, as of September 30, 2016. This debt represents qualifying Tier 1 capital for the Company, up to a maximum of 25% of total Tier 1 capital. At September 30, 2016, the carrying amounts of the junior subordinated notes, net of the Company’s $496 thousand investment in the affiliated trusts, qualified as Tier 1 capital.
At September 30, 2016, shareholders’ equity was $111.6 million, a decrease of $5.0 million, or 4.3% from June 30, 2016. Book value per outstanding common share was $12.63 at September 30, 2016 and $12.51 at June 30, 2016. Tier 1 capital to total average assets of the Company was 12.25% as of September 30, 2016 and 13.27% at June 30, 2016.
Under the capital rules, risk-based capital ratios are calculated by dividing Tier 1 and total 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.
A bank holding company, such as the Company, is considered "well capitalized" if the bank holding company (i) has a total 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 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.
The Company's and the Bank's regulatory capital ratios are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
Minimum To Be Well
|
|
|
|
Actual
|
|
|
Minimum Capital
Requirements
|
|
Capitalized Under Prompt
Correction Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
112,672
|
|
|
|
15.35
|
%
|
|
$
|
33,024
|
|
>
4.5%
|
|
$
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
119,472
|
|
|
|
16.27
|
%
|
|
|
33,048
|
|
>
4.5%
|
|
|
47,736
|
|
|
>
6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
138,130
|
|
|
|
18.82
|
%
|
|
|
58,709
|
|
>
8.0%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
122,243
|
|
|
|
16.65
|
%
|
|
|
58,753
|
|
>
8.0%
|
|
|
73,441
|
|
|
>
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
121,043
|
|
|
|
16.49
|
%
|
|
|
44,032
|
|
>
6.0%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
119,472
|
|
|
|
16.27
|
%
|
|
|
44,064
|
|
>
6.0%
|
|
|
58,753
|
|
|
>
8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
121,043
|
|
|
|
12.25
|
%
|
|
|
39,538
|
|
>
4.0%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
119,472
|
|
|
|
12.09
|
%
|
|
|
39,542
|
|
>
4.0%
|
|
|
49,428
|
|
|
>
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
126,046
|
|
|
|
17.97
|
%
|
|
$
|
31,559
|
|
>
4.5%
|
|
$
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
117,212
|
|
|
|
16.69
|
%
|
|
|
31,611
|
|
>
4.5%
|
|
|
45,660
|
|
|
>
6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
142,988
|
|
|
|
20.39
|
%
|
|
|
56,105
|
|
>
8.0%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
119,971
|
|
|
|
17.08
|
%
|
|
|
56,197
|
|
>
8.0%
|
|
|
70,246
|
|
|
>
10.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
126,046
|
|
|
|
17.97
|
%
|
|
|
42,079
|
|
>
6.0%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
117,212
|
|
|
|
16.69
|
%
|
|
|
42,148
|
|
>
6.0%
|
|
|
56,197
|
|
|
>
8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
126,046
|
|
|
|
13.27
|
%
|
|
|
38,006
|
|
>
4.0%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
117,212
|
|
|
|
12.33
|
%
|
|
|
38,022
|
|
>
4.0%
|
|
|
47,528
|
|
|
>
5.0%
|
|
Stock Repurchases
On August 22, 2016, the Company purchased 645,238 shares at a price of $10.75 per share.
On October 21, 2016, 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 5.7% of the Company’s outstanding common shares. Under the existing program, implemented in April 2014, the Company has purchased 1,970,000 shares through October 25, 2016 and no shares remained available for repurchase under the program on that date, prior to the 500,000 share increase in the repurchase plan. The amended stock repurchase program will expire on October 21, 2018.
Off-balance Sheet
Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the condensed consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 9: Commitments and Contingencies” for further discussion.
Results of Operations
General
Net income decreased by $116 thousand to $1.8 million for the quarter ended September 30, 2016, compared to $1.9 million for the quarter ended September 30, 2015.
The following table details the “Total Return” on purchased loans, which includes transactional interest income of $1.3 million for the quarter ended September 30, 2016. The yield on purchased loans for the quarter ended September 30, 2016 was 10.4% as compared to 12.1% in the quarter ended September 30, 2015, primarily due to lower transactional income in the quarter. The following table details the total return on purchased loans:
|
|
Total Return on Purchased Loans
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Income
|
|
|
Return (1)
|
|
|
Income
|
|
|
Return (1)
|
|
|
|
(Dollars in thousands)
|
|
Regularly scheduled interest and accretion
|
|
$
|
4,754
|
|
|
|
8.13
|
%
|
|
$
|
3,887
|
|
|
|
7.70
|
%
|
Transactional income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on loan sales
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Gain on sale of real estate owned
|
|
|
19
|
|
|
|
0.03
|
%
|
|
|
22
|
|
|
|
0.04
|
%
|
Other noninterest income
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Accelerated accretion and loan fees
|
|
|
1,327
|
|
|
|
2.27
|
%
|
|
|
2,208
|
|
|
|
4.37
|
%
|
Total transactional income
|
|
|
1,346
|
|
|
|
2.30
|
%
|
|
|
2,230
|
|
|
|
4.41
|
%
|
Total
|
|
$
|
6,100
|
|
|
|
10.43
|
%
|
|
$
|
6,117
|
|
|
|
12.11
|
%
|
|
(1)
|
The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, gains on real estate owned and other noninterest income recorded during the period divided by the average invested balance, which includes loans held for sale, on an annualized basis. The total return does not include the effect of purchased loan charge-offs or recoveries in the quarter. The total return presented is a non-GAAP measure.
|
Net Interest Income
Three Months Ended
September 30
, 201
6
and 201
5
Net interest and dividend income before provision for loan losses increased by $534 thousand for the quarter ended September 30, 2016, compared to the quarter ended September 30, 2015. The increase is primarily due to higher average balances in the total loan portfolio, offset by higher average deposit balances and the effect of the issuance of the subordinated debt.
|
|
Interest Income and Yield on Loans
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
|
Balance (1)
|
|
|
Income (2)
|
|
|
Yield
|
|
|
Balance (1)
|
|
|
Income (2)
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Community Banking
|
|
$
|
205,765
|
|
|
$
|
2,401
|
|
|
|
4.63
|
%
|
|
$
|
225,151
|
|
|
$
|
2,707
|
|
|
|
4.77
|
%
|
SBA
|
|
|
31,148
|
|
|
|
519
|
|
|
|
6.61
|
%
|
|
|
13,722
|
|
|
|
217
|
|
|
|
6.27
|
%
|
LASG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
|
|
|
185,109
|
|
|
|
2,742
|
|
|
|
5.88
|
%
|
|
|
118,574
|
|
|
|
1,696
|
|
|
|
5.67
|
%
|
Purchased
|
|
|
231,999
|
|
|
|
6,081
|
|
|
|
10.40
|
%
|
|
|
200,385
|
|
|
|
6,095
|
|
|
|
12.07
|
%
|
Secured Loans to Broker-Dealers
|
|
|
48,000
|
|
|
|
60
|
|
|
|
0.50
|
%
|
|
|
60,007
|
|
|
|
75
|
|
|
|
0.50
|
%
|
Total LASG
|
|
|
465,108
|
|
|
|
8,883
|
|
|
|
7.58
|
%
|
|
|
378,966
|
|
|
|
7,866
|
|
|
|
8.23
|
%
|
Total
|
|
$
|
702,021
|
|
|
$
|
11,803
|
|
|
|
6.67
|
%
|
|
$
|
617,839
|
|
|
$
|
10,790
|
|
|
|
6.93
|
%
|
|
(1)
|
Includes loans held for sale.
|
|
(2)
|
SBA interest income includes fees of $50 thousand and $13 thousand for the quarters ended September 30, 2016 and 2015, respectively.
|
The Company’s interest rate spread decreased by 41 basis points and net interest margin decreased by 39 basis points for the quarter ended September 30, 2016 compared to the quarter ended September 30, 2015. The decrease was principally due to lower transactional interest income in the purchased portfolio, as well as the effect of the issuance of the subordinated debt in June 2016.
The following sets forth
the average balance sheets, interest income and interest expense, and average yields and costs for the three months ended September 30, 2016 and 2015.
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
94,899
|
|
|
$
|
239
|
|
|
|
1.00
|
%
|
|
$
|
102,241
|
|
|
$
|
228
|
|
|
|
0.88
|
%
|
Loans (1) (2) (3)
|
|
|
702,021
|
|
|
|
11,821
|
|
|
|
6.68
|
%
|
|
|
617,839
|
|
|
|
10,808
|
|
|
|
6.94
|
%
|
Federal Home Loan Bank stock
|
|
|
2,408
|
|
|
|
23
|
|
|
|
3.79
|
%
|
|
|
4,102
|
|
|
|
34
|
|
|
|
3.29
|
%
|
Short-term investments (4)
|
|
|
154,392
|
|
|
|
192
|
|
|
|
0.49
|
%
|
|
|
99,649
|
|
|
|
61
|
|
|
|
0.24
|
%
|
Total interest-earning assets
|
|
|
953,720
|
|
|
|
12,275
|
|
|
|
5.11
|
%
|
|
|
823,831
|
|
|
|
11,131
|
|
|
|
5.36
|
%
|
Cash and due from banks
|
|
|
2,941
|
|
|
|
|
|
|
|
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
Other non-interest earning assets
|
|
|
30,812
|
|
|
|
|
|
|
|
|
|
|
|
36,420
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
987,473
|
|
|
|
|
|
|
|
|
|
|
$
|
863,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
70,850
|
|
|
$
|
51
|
|
|
|
0.29
|
%
|
|
$
|
69,619
|
|
|
$
|
46
|
|
|
|
0.26
|
%
|
Money market accounts
|
|
|
291,734
|
|
|
|
682
|
|
|
|
0.93
|
%
|
|
|
170,566
|
|
|
|
353
|
|
|
|
0.82
|
%
|
Savings accounts
|
|
|
35,769
|
|
|
|
12
|
|
|
|
0.13
|
%
|
|
|
36,360
|
|
|
|
12
|
|
|
|
0.13
|
%
|
Time deposits
|
|
|
336,271
|
|
|
|
1,009
|
|
|
|
1.19
|
%
|
|
|
350,867
|
|
|
|
954
|
|
|
|
1.08
|
%
|
Total interest-bearing deposits
|
|
|
734,624
|
|
|
|
1,754
|
|
|
|
0.95
|
%
|
|
|
627,412
|
|
|
|
1,365
|
|
|
|
0.86
|
%
|
Short-term borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
1,950
|
|
|
|
9
|
|
|
|
1.83
|
%
|
Borrowed funds
|
|
|
30,061
|
|
|
|
255
|
|
|
|
3.37
|
%
|
|
|
39,324
|
|
|
|
327
|
|
|
|
3.30
|
%
|
Subordinated debt
|
|
|
23,360
|
|
|
|
459
|
|
|
|
7.80
|
%
|
|
|
8,650
|
|
|
|
154
|
|
|
|
7.06
|
%
|
Capital lease obligations
|
|
|
1,087
|
|
|
|
14
|
|
|
|
5.11
|
%
|
|
|
1,332
|
|
|
|
17
|
|
|
|
5.06
|
%
|
Total interest-bearing liabilities
|
|
|
789,132
|
|
|
|
2,482
|
|
|
|
1.25
|
%
|
|
|
678,668
|
|
|
|
1,872
|
|
|
|
1.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits and escrow accounts
|
|
|
75,672
|
|
|
|
|
|
|
|
|
|
|
|
64,008
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
8,213
|
|
|
|
|
|
|
|
|
|
|
|
7,431
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
873,017
|
|
|
|
|
|
|
|
|
|
|
|
750,107
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
114,456
|
|
|
|
|
|
|
|
|
|
|
|
113,170
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
987,473
|
|
|
|
|
|
|
|
|
|
|
$
|
863,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
9,793
|
|
|
|
|
|
|
|
|
|
|
$
|
9,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
|
|
|
4.27
|
%
|
Net interest margin (5)
|
|
|
|
|
|
|
|
|
|
|
4.07
|
%
|
|
|
|
|
|
|
|
|
|
|
4.46
|
%
|
(1) Interest income and yield are stated on a fully tax-equivalent basis using a 34% tax rate. Fully tax-equivalent adjustment, a non-GAAP measure, totaled $18 thousand for the three months ended September 30, 2016 and 2015.
(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 interest income divided by total interest-earning assets.
The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate
.
|
|
Three Months Ended September 30, 2016 compared to 2015
|
|
|
|
Change Due to Volume
|
|
|
Change Due to Rate
|
|
|
Total Change
|
|
|
|
(Dollars in thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
(17
|
)
|
|
$
|
28
|
|
|
$
|
11
|
|
Loans
|
|
|
1,430
|
|
|
|
(417
|
)
|
|
|
1,013
|
|
Regulatory stock
|
|
|
(15
|
)
|
|
|
4
|
|
|
|
(11
|
)
|
Short-term investments
|
|
|
46
|
|
|
|
85
|
|
|
|
131
|
|
Total interest-earning assets
|
|
|
1,444
|
|
|
|
(300
|
)
|
|
|
1,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
229
|
|
|
|
160
|
|
|
|
389
|
|
Short-term borrowings
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Borrowed funds
|
|
|
(79
|
)
|
|
|
7
|
|
|
|
(72
|
)
|
Subordinated debentures
|
|
|
287
|
|
|
|
18
|
|
|
|
305
|
|
Capital lease obligations
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Total interest-bearing liabilities
|
|
|
431
|
|
|
|
179
|
|
|
|
610
|
|
Total change in net interest income
|
|
$
|
1,013
|
|
|
$
|
(479
|
)
|
|
$
|
534
|
|
Provision for Loan Losses
Quarterly, the Company determines the amount of the allowance for loan losses that is appropriate to provide for losses inherent in the Company’s loan portfolios, with the provision for loan losses determined by the net change in the allowance for loan losses. For loans accounted for under ASC 310-30, a provision for loan loss is recorded when estimates of future cash flows are lower than had been previously expected. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements — Note 4: Loans, Allowance for Loan losses and Credit Quality” for further discussion.
The provision for loan losses for periods subsequent to the merger with FHB Formation LLC 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 quarter ended September 30, 2016 and 2015 was $193 thousand and $169 thousand, respectively. The increase in the Company’s loan loss provision resulted principally due to the increased volume of newly originated loans.
Noninterest Income
Noninterest income increased by $103 thousand for the quarter ended September 30, 2016, compared to the quarter ended September 30, 2015, principally due to an increase in gains realized on sale of SBA loans of $68 thousand.
Noninterest Expense
Noninterest expense increased by $816 thousand for the quarter ended September 30, 2016, compared to the quarter ended September 30, 2015, primarily due to an increase in salaries and employee benefits of $1.1 million, largely attributable to higher employee headcount, increased incentive compensation, and the benefit recognized upon the forfeiture of stock awards in the quarter ended September 30, 2015.
Income Taxes
The Company’s income tax expense was $1.0 million or an effective rate of 36.6%, for the three months ended September 30, 2016, as compared to $1.1 million, or an effective rate of 37.1%, for the three months ended September 30, 2015,
primarily due to state apportionment changes.