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, 2018, filed with the SEC.
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 Northeast Bancorp’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; operational risks including, but not limited to, cybersecurity breaches, fraud and natural disasters; the risk that the Company may not be successful in the execution of its business strategy; the risk that intangibles recorded in the Company’s financial statements will become impaired; the ability of the Company and the Bank to satisfy the conditions to the completion of the Reorganization; the ability of the Company and the Bank to meet expectations regarding the timing, completion and accounting and tax treatments of the Reorganization; the possibility that any of the anticipated benefits of the Reorganization will not be realized or will not be realized as expected; the failure of the Reorganization to close for any reason; the possibility that the Reorganization may be more expensive to complete than anticipated, including as a result of unexpected factors or events; 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, 2018 as updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the SEC. 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 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 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
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. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve. The Company’s compliance ratios at December 31, 2018 follow:
Condition
|
|
Ratios as of December 31, 2018
|
|
(i) Tier 1 leverage capital ratio
|
|
|
13.20
|
%
|
(ii) Total capital ratio
|
|
|
19.42
|
%
|
(iii) Ratio of purchased loans to total loans, including loans held for sale
|
|
|
35.17
|
%
|
(iv) Ratio of loans to core deposits (1)
|
|
|
94.84
|
%
|
(v) Ratio of non-owner occupied commercial real estate loans to total capital (2)
|
|
|
242.38
|
%
|
(1) Core deposits include all non-maturity deposits and non-brokered insured time deposits.
(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.
On January 7, 2019, the Company announced the Reorganization, pursuant to which its bank holding company structure would be eliminated and the Bank would become the top-level company. If the Reorganization is completed, these commitments to the Federal Reserve will no longer be applicable. The Bank intends to replace these commitments with standards relating to its capital levels and asset portfolio composition, which will be incorporated into its policies and procedures. These newly established standards are designed to help ensure the Bank will continue to operate in a safe and sound manner, but may permit more growth in the Bank’s loan portfolio as compared to operating under the existing commitments.
As a result of the Reorganization, the Bank intends to incorporate the following standards into its policies and procedures:
|
●
|
Maintain a Tier 1 leverage ratio of at least 10%, which is unchanged from the requirement in the commitments to the FRB;
|
|
●
|
Maintain a Total capital ratio of at least 13.5% (as opposed to 15%);
|
|
●
|
Limit purchased loans to 60% of total loans (as opposed to 40%); and
|
|
●
|
Maintain a ratio of the Bank’s loans to core deposits of not more than 125% (as opposed to 100%).
|
A requirement to hold non-owner occupied commercial real estate loans to within 300% of total capital will not formally be incorporated into the Bank’s risk management policies. The Bank nonetheless would continue to be evaluated by the FDIC through the supervisory process under the 300% “screen” used by the federal banking agencies to identify institutions that are potentially exposed to commercial real estate concentration risk.
As of December 31, 2018, the Company, on a consolidated basis, had total assets of $1.2 billion, total deposits of $985.6 million, and shareholders’ equity of $148.5 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 SBA and United States Department of Agriculture loans through the Bank’s SBA Division; and purchases and originates commercial loans through the Bank’s LASG. The Community Banking Division, with ten full-service branches, 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 means of the following strategies:
Continuing to grow the 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 Small Business Administration (“SBA”) 7(a) program, which provides the partial guarantee of the SBA.
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.
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, 2018 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 and six months ended December 31, 2018.
Overview
Net income increased by $1.8 million to $5.1 million for the quarter ended December 31, 2018, compared to net income of $3.3 million for the quarter ended December 31, 2017.
Net interest and dividend income before provision for loan losses increased by $3.2 million to $15.6 million for the quarter ended December 31, 2018, compared to $12.4 million the quarter ended December 31, 2017. The increase was primarily due to higher average balances in the loan portfolio. These increases were partially offset by higher funding costs and higher average deposit balances.
Noninterest income increased by $317 thousand for the quarter ended December 31, 2018, compared to the quarter ended December 31, 2017, principally due to an increase in gain on sale of SBA loans of $601 thousand, due to larger guarantee balances sold in the quarter; partially offset by a decrease in gain on sale of residential loans of $151 thousand and a decrease in fees for other services to customers of $135 thousand.
Noninterest expense increased by $1.3 million for the quarter ended December 31, 2018 compared to the quarter ended December 31, 2017, primarily due to the following:
|
●
|
An increase in salaries and employee benefits expense of $526 thousand, primarily due to increases in base salary, stock-based compensation expense, incentive compensation, and a decrease in deferred salaries expense;
|
|
●
|
An increase in other noninterest expense of $292 thousand, primarily due to a $141 thousand increase in expense related to the quarterly valuation of SBA servicing rights, and increases in travel expense and employee recruitment expense;
|
|
●
|
An increase in professional fees of $231 thousand, primarily due to increased legal expense related to the Reorganization and other consulting costs; and
|
|
●
|
An increase in loan acquisition and collection expense of $217 thousand, largely driven by increased loan expenses and collection expenses incurred on the increased SBA and purchased loan activity during the quarter.
|
Income tax expense increased by $678 thousand to $2.1 million, or an effective tax rate of 28.7%, for the quarter ended December 31, 2018, compared to $1.4 million, or an effective tax rate of 29.5%, for the quarter ended December 31, 2017. The increase in expense was primarily due to the increase in earnings. The decrease in effective tax rate was primarily due to the following:
|
●
|
The new federal corporate income tax rate of 21.0% for the quarter ended December 31, 2018, as compared to the blended federal corporate income tax rate of 28.0% for the quarter ended December 31, 2017; and
|
|
●
|
The $498 thousand revaluation of the deferred tax asset as a result of the Tax Cuts and Jobs Act recorded in the quarter ended December 31, 2017; partially offset by,
|
|
●
|
A decrease in the income tax benefit recognized of $275 thousand arising from the treatment of vested restricted stock awards under ASU 2016-09,
Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, whereby the tax effects of vested awards or exercised options are treated as a discrete item in the reporting period in which they occur.
|
Financial Condition
Overview
As of December 31, 2018, total assets were $1.2 billion, an increase of $36.4 million, or 3.1%, from total assets of $1.2 billion as of June 30, 2018. The principal components of the changes in the balance sheet follow:
|
1.
|
The following table highlights the changes in the loan portfolio for the three and six months ended December 31, 2018:
|
|
|
Loan Portfolio Changes
|
|
|
|
Three Months Ended December 31, 2018
|
|
|
|
December 31, 2018
Balance
|
|
|
September 30, 2018
Balance
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(Dollars in thousands)
|
|
LASG Purchased
|
|
$
|
330,643
|
|
|
$
|
300,548
|
|
|
$
|
30,095
|
|
|
|
10.01
|
%
|
LASG Originated
|
|
|
435,817
|
|
|
|
407,822
|
|
|
|
27,995
|
|
|
|
6.86
|
%
|
SBA
|
|
|
67,282
|
|
|
|
67,212
|
|
|
|
70
|
|
|
|
0.10
|
%
|
Community Banking
|
|
|
104,544
|
|
|
|
111,614
|
|
|
|
(7,070
|
)
|
|
|
(6.33
|
%)
|
Total
|
|
$
|
938,286
|
|
|
$
|
887,196
|
|
|
$
|
51,090
|
|
|
|
5.76
|
%
|
|
|
Six Months Ended December 31, 2018
|
|
|
|
December 31, 2018
Balance
|
|
|
June 30, 2018
Balance
|
|
|
Change ($)
|
|
|
Change (%)
|
|
|
|
(Dollars in thousands)
|
|
LASG Purchased
|
|
$
|
330,643
|
|
|
$
|
290,972
|
|
|
$
|
39,671
|
|
|
|
13.63
|
%
|
LASG Originated
|
|
|
435,817
|
|
|
|
397,363
|
|
|
|
38,454
|
|
|
|
9.68
|
%
|
SBA
|
|
|
67,282
|
|
|
|
60,156
|
|
|
|
7,126
|
|
|
|
11.85
|
%
|
Community Banking
|
|
|
104,544
|
|
|
|
123,311
|
|
|
|
(18,767
|
)
|
|
|
(15.22
|
%)
|
Total
|
|
$
|
938,286
|
|
|
$
|
871,802
|
|
|
$
|
66,484
|
|
|
|
7.63
|
%
|
Loans generated by the Bank's LASG for the quarter ended December 31, 2018 totaled $113.5 million, which consisted of $49.4 million of purchased loans, at an average price of 93.7% of unpaid principal balance, and $64.1 million of originated loans. The Bank's SBA Division closed $13.8 million and funded $13.1 million of new loans during the quarter ended December 31, 2018. In addition, the Company sold $12.8 million of the guaranteed portion of SBA loans in the secondary market, of which $7.6 million were originated in the current quarter and $5.2 million were originated in prior quarters. Residential loan production sold in the secondary market totaled $7.7 million for the quarter ended December 31, 2018.
As noted above in the “
Business Overview
” section, the Company made certain commitments to the Federal Reserve in connection with the merger of FHB 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 December 31, 2018
|
|
|
|
|
|
(Dollars in millions)
|
|
Total Loans
|
|
Purchased loans may not exceed 40% of total loans
|
|
$
|
75.7
|
|
Regulatory Capital
|
|
Non-owner occupied commercial real estate loans may not exceed 300% of total capital
|
|
|
102.8
|
|
On January 7, 2019, the Company announced a corporate reorganization pursuant to which its bank holding company structure would be eliminated and the Bank would become the top-level company. If the Reorganization is completed, these commitments to the FRB will no longer be applicable. The Bank intends to replace these commitments with standards relating to its capital levels and asset portfolio composition, which will be incorporated into its policies and procedures, and compliance with FDIC policy on commercial real estate concentration risk. These newly established standards are designed to help ensure the Bank will continue to operate in a safe and sound manner, but may permit more growth in the Bank’s loan portfolio as compared to operating under the existing commitments.
An overview of the Bank’s LASG portfolio follows:
|
|
LASG Portfolio
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Purchased
|
|
|
Originated
|
|
|
Total LASG
|
|
|
Purchased
|
|
|
Originated
|
|
|
Total LASG
|
|
|
|
(Dollars in thousands)
|
|
Loans purchased or originated during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
52,672
|
|
|
$
|
64,117
|
|
|
$
|
116,789
|
|
|
$
|
38,205
|
|
|
$
|
44,285
|
|
|
$
|
82,490
|
|
Net investment basis
|
|
|
49,334
|
|
|
|
64,117
|
|
|
|
113,451
|
|
|
|
34,802
|
|
|
|
44,285
|
|
|
|
79,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan returns during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
10.30
|
%
|
|
|
7.61
|
%
|
|
|
8.75
|
%
|
|
|
11.00
|
%
|
|
|
6.49
|
%
|
|
|
8.31
|
%
|
Total Return on Purchased Loans (1)
|
|
|
10.30
|
%
|
|
|
7.61
|
%
|
|
|
8.75
|
%
|
|
|
11.00
|
%
|
|
|
6.49
|
%
|
|
|
8.31
|
%
|
|
|
Six Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Purchased
|
|
|
Originated
|
|
|
Total LASG
|
|
|
Purchased
|
|
|
Originated
|
|
|
Total LASG
|
|
|
|
(Dollars in thousands)
|
|
Loans purchased or originated during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
89,748
|
|
|
$
|
135,253
|
|
|
$
|
225,001
|
|
|
$
|
42,523
|
|
|
$
|
85,064
|
|
|
$
|
127,587
|
|
Net investment basis
|
|
|
84,137
|
|
|
|
135,253
|
|
|
|
219,390
|
|
|
|
38,453
|
|
|
|
85,064
|
|
|
|
123,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan returns during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
9.88
|
%
|
|
|
7.53
|
%
|
|
|
8.53
|
%
|
|
|
11.65
|
%
|
|
|
6.42
|
%
|
|
|
8.58
|
%
|
Total Return on Purchased Loans (1)
|
|
|
9.88
|
%
|
|
|
7.53
|
%
|
|
|
8.53
|
%
|
|
|
11.65
|
%
|
|
|
6.42
|
%
|
|
|
8.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans as of period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance
|
|
$
|
368,345
|
|
|
$
|
435,817
|
|
|
$
|
804,162
|
|
|
$
|
276,440
|
|
|
$
|
346,874
|
|
|
$
|
623,314
|
|
Net investment basis
|
|
|
330,643
|
|
|
|
435,817
|
|
|
|
766,460
|
|
|
|
244,177
|
|
|
|
346,874
|
|
|
|
591,051
|
|
(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 purchased loans held for sale, on an annualized basis. The total return on purchased loans does not include the effect of purchased loan charge-offs or recoveries during the period. Total return on purchased loans is considered a non-GAAP financial measure. See reconciliation in below table entitled “Total Return on Purchased Loans.”
Assets
Cash and Due from Ba
nks, Short-T
erm Investments and
Investment
Securities
Cash and cash equivalents were $137.6 million as of December 31, 2018, a decrease of $19.8 million, or 12.6%, from $157.4 million at June 30, 2018. The decrease is primarily due to the increase in loans, offset by the increase in deposits in the period.
Investment securities totaled $84.8 million as of December 31, 2018, compared to $87.7 million as of June 30, 2018, representing a decrease of $2.8 million, or 3.2%, primarily due to principal payments on mortgage-backed securities. Included in investment securities are securities issued by government agencies and government-sponsored enterprises, as well as an investment of $5.1 million in a Community Reinvestment Act (“CRA”) qualified fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies and an investment of $1.5 million in a CRA qualified fund that primarily invests in the federally guaranteed portion of SBA 7(a) loans. At December 31, 2018, no securities were pledged for outstanding borrowings.
Loans
The Company’s loan portfolio (excluding loans held-for-sale) by lending division follows:
|
|
December 31, 2018
|
|
|
|
Community Banking Division
|
|
|
LASG
|
|
|
SBA Division
|
|
|
Total
|
|
|
Percent of Total
|
|
|
|
(Dollars in thousands)
|
|
Originated loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
66,248
|
|
|
$
|
9,724
|
|
|
$
|
-
|
|
|
$
|
75,972
|
|
|
|
8.10
|
%
|
Commercial real estate: non-owner occupied
|
|
|
17,049
|
|
|
|
156,158
|
|
|
|
36,597
|
|
|
|
209,804
|
|
|
|
22.36
|
%
|
Commercial real estate: owner occupied
|
|
|
10,100
|
|
|
|
76,144
|
|
|
|
24,130
|
|
|
|
110,374
|
|
|
|
11.76
|
%
|
Commercial and industrial
|
|
|
8,359
|
|
|
|
193,791
|
|
|
|
6,555
|
|
|
|
208,705
|
|
|
|
22.24
|
%
|
Consumer
|
|
|
2,788
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,788
|
|
|
|
0.30
|
%
|
Total originated loans
|
|
|
104,544
|
|
|
|
435,817
|
|
|
|
67,282
|
|
|
|
607,643
|
|
|
|
64.76
|
%
|
Purchased loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
16,594
|
|
|
|
-
|
|
|
|
16,594
|
|
|
|
1.77
|
%
|
Commercial real estate: non-owner occupied
|
|
|
-
|
|
|
|
187,558
|
|
|
|
-
|
|
|
|
187,558
|
|
|
|
19.99
|
%
|
Commercial real estate: owner occupied
|
|
|
-
|
|
|
|
125,703
|
|
|
|
-
|
|
|
|
125,703
|
|
|
|
13.40
|
%
|
Commercial and industrial
|
|
|
-
|
|
|
|
788
|
|
|
|
-
|
|
|
|
788
|
|
|
|
0.08
|
%
|
Total purchased loans
|
|
|
-
|
|
|
|
330,643
|
|
|
|
-
|
|
|
|
330,643
|
|
|
|
35.24
|
%
|
Total loans
|
|
$
|
104,544
|
|
|
$
|
766,460
|
|
|
$
|
67,282
|
|
|
$
|
938,286
|
|
|
|
100.00
|
%
|
|
|
June 30, 2018
|
|
|
|
Community Banking Division
|
|
|
LASG
|
|
|
SBA Division
|
|
|
Total
|
|
|
Percent of Total
|
|
|
|
(Dollars in thousands)
|
|
Originated loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
79,091
|
|
|
$
|
7,111
|
|
|
$
|
128
|
|
|
$
|
86,330
|
|
|
|
9.90
|
%
|
Commercial real estate: non-owner occupied
|
|
|
18,698
|
|
|
|
137,463
|
|
|
|
29,488
|
|
|
|
185,649
|
|
|
|
21.29
|
%
|
Commercial real estate: owner occupied
|
|
|
11,351
|
|
|
|
81,916
|
|
|
|
24,483
|
|
|
|
117,750
|
|
|
|
13.51
|
%
|
Commercial and industrial
|
|
|
10,927
|
|
|
|
170,873
|
|
|
|
6,057
|
|
|
|
187,857
|
|
|
|
21.55
|
%
|
Consumer
|
|
|
3,244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,244
|
|
|
|
0.37
|
%
|
Total originated loans
|
|
|
123,311
|
|
|
|
397,363
|
|
|
|
60,156
|
|
|
|
580,830
|
|
|
|
66.62
|
%
|
Purchased loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
|
-
|
|
|
|
13,926
|
|
|
|
-
|
|
|
|
13,926
|
|
|
|
1.60
|
%
|
Commercial real estate: non-owner occupied
|
|
|
-
|
|
|
|
150,805
|
|
|
|
-
|
|
|
|
150,805
|
|
|
|
17.30
|
%
|
Commercial real estate: owner occupied
|
|
|
-
|
|
|
|
125,246
|
|
|
|
-
|
|
|
|
125,246
|
|
|
|
14.37
|
%
|
Commercial and industrial
|
|
|
-
|
|
|
|
995
|
|
|
|
-
|
|
|
|
995
|
|
|
|
0.11
|
%
|
Total purchased loans
|
|
|
-
|
|
|
|
290,972
|
|
|
|
-
|
|
|
|
290,972
|
|
|
|
33.38
|
%
|
Total loans
|
|
$
|
123,311
|
|
|
$
|
688,335
|
|
|
$
|
60,156
|
|
|
$
|
871,802
|
|
|
|
100.00
|
%
|
Classification of Assets
Loans are classified as nonperforming 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 nonperforming. In both situations, accrual of interest ceases. The Company typically maintains such loans as nonperforming 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 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 recorded at fair value less estimated costs to sell 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 December 31, 2018 and June 30, 2018. Management believes that, based on their carrying amounts, nonperforming assets are well secured based on the estimated fair value of underlying collateral.
|
|
Nonperforming Assets at December 31, 2018
|
|
|
|
Originated
|
|
|
Purchased
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
2,595
|
|
|
$
|
202
|
|
|
$
|
2,797
|
|
Commercial real estate
|
|
|
2,764
|
|
|
|
4,755
|
|
|
|
7,519
|
|
Commercial and industrial
|
|
|
1,420
|
|
|
|
394
|
|
|
|
1,814
|
|
Consumer
|
|
|
216
|
|
|
|
-
|
|
|
|
216
|
|
Total nonperforming loans
|
|
|
6,995
|
|
|
|
5,351
|
|
|
|
12,346
|
|
Real estate owned and other repossessed collateral
|
|
|
32
|
|
|
|
1,431
|
|
|
|
1,463
|
|
Total nonperforming assets
|
|
$
|
7,027
|
|
|
$
|
6,782
|
|
|
$
|
13,809
|
|
Ratio of nonperforming loans to total loans
|
|
|
|
|
|
|
|
1.32
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
|
1.16
|
%
|
Ratio of loans past due to total loans
|
|
|
|
|
|
|
|
1.95
|
%
|
Nonperforming loans that are current
|
|
|
|
|
|
|
$
|
3,125
|
|
Commercial loans risk rated substandard or worse
|
|
|
$
|
8,931
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
On accrual status
|
|
|
|
|
|
|
|
|
|
$
|
10,629
|
|
On nonaccrual status
|
|
|
|
|
|
|
|
|
|
$
|
3,193
|
|
|
|
Nonperforming Assets at June 30, 2018
|
|
|
|
Originated
|
|
|
Purchased
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
3,212
|
|
|
$
|
202
|
|
|
$
|
3,414
|
|
Commercial real estate
|
|
|
1,499
|
|
|
|
5,180
|
|
|
|
6,679
|
|
Commercial and industrial
|
|
|
1,368
|
|
|
|
363
|
|
|
|
1,731
|
|
Consumer
|
|
|
134
|
|
|
|
-
|
|
|
|
134
|
|
Total nonperforming loans
|
|
|
6,213
|
|
|
|
5,745
|
|
|
|
11,958
|
|
Real estate owned and other repossessed collateral
|
|
|
115
|
|
|
|
2,118
|
|
|
|
2,233
|
|
Total nonperforming assets
|
|
$
|
6,328
|
|
|
$
|
7,863
|
|
|
$
|
14,191
|
|
Ratio of nonperforming loans to total loans
|
|
|
|
|
|
|
|
1.37
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
|
1.23
|
%
|
Ratio of loans past due to total loans
|
|
|
|
|
|
|
|
0.89
|
%
|
Nonperforming loans that are current
|
|
|
|
|
|
|
$
|
4,897
|
|
Commercial loans risk rated substandard or worse
|
|
|
$
|
9,090
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
On accrual status
|
|
|
|
|
|
|
|
|
|
$
|
11,915
|
|
Nonaccrual status
|
|
|
|
|
|
|
|
|
|
$
|
3,543
|
|
As of December 31, 2018, nonperforming assets totaled $13.8 million, or 1.16% of total assets, as compared to $14.2 million, or 1.23% of total assets, as of June 30, 2018.
OREO decreased by $770 thousand, or 34.5%, to $1.5 million at December 31, 2018, compared to $2.2 million at June 30, 2018. The decrease was primarily the result of the sale of one property in the quarter ended September 30, 2018.
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 $5.3 million as of December 31, 2018, compared to $4.8 million as of June 30, 2018. The increase in the period is primarily the result of changes in the composition of the loan portfolio from an increase in loans originated by the SBA division, as well as an increase in specific reserve on two loan relationships.
The following table details ratios related to the allowance for loan losses for the periods indicated.
|
|
December 31, 2018
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Allowance for loan losses to nonperforming loans
|
|
42.99%
|
|
|
40.20%
|
|
|
24.07%
|
|
Allowance for loan losses to total loans
|
|
0.57%
|
|
|
0.55%
|
|
|
0.56%
|
|
Last twelve months of net-charge offs to average loans
|
|
0.04%
|
|
|
0.04%
|
|
|
0.04%
|
|
While management believes that it uses the best information available to make its determinations with respect to the allowance, there can be no assurance that the Company will not have to increase its provision for loan losses in the future as a result of changing economic conditions, adverse markets for real estate or other factors.
Other Assets
Premises and equipment, net, decreased by $479 thousand, or 7.3%, to $6.1 million at December 31, 2018, compared to $6.6 million at June 30, 2018. The decrease was primarily due to depreciation and amortization.
Intangible assets totaled $649 thousand and $867 thousand at December 31, 2018 and June 30, 2018, respectively. The $218 thousand decrease was the result of intangible asset amortization during the period.
Servicing rights, net totaled $2.9 million and $3.0 million at December 31, 2018 and June 30, 2018, respectively. The $36 thousand decrease was the result of amortization and the revaluation of the servicing rights performed on a quarterly basis, offset by SBA loans sold during the six months ended December 31, 2018.
The cash surrender value of the Company’s bank-owned life insurance (“BOLI”) assets increased $219 thousand, or 1.3% to $16.8 million at December 31, 2018, compared to $16.6 million at June 30, 2018. Increases in cash surrender value are recognized in noninterest 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 9.4% of the Company’s regulatory total capital at December 31, 2018.
Deposits, FHLBB Advances, Subordinated Debt, Liquidity,
and
Capital
Deposits
The Company’s principal source of funding is its core deposit accounts. At December 31 2018, non-maturity accounts and non-brokered insured time deposits represented 100% of total deposits.
Total deposits increased by $30.7 million, or 3.2%, from June 30, 2018, attributable primarily to an increase in time deposits of $112.2 million, or 31.9%, as a result of campaigns in the current period, partially offset by decreases in money market accounts of $75.7 million, or 18.0%, and demand deposits of $3.9 million, or 5.5%.
The composition of total deposits at December 31, 2018 and June 30, 2018 is as follows:
|
|
December 31, 2018
|
|
|
June 30, 2018
|
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
Amount
|
|
|
Percent of Total
|
|
|
|
(Dollars in thousands)
|
|
Demand deposits
|
|
$
|
68,324
|
|
|
|
6.93
|
%
|
|
$
|
72,272
|
|
|
|
7.57
|
%
|
NOW accounts
|
|
|
72,679
|
|
|
|
7.37
|
%
|
|
|
73,347
|
|
|
|
7.68
|
%
|
Regular and other savings
|
|
|
35,090
|
|
|
|
3.56
|
%
|
|
|
36,290
|
|
|
|
3.80
|
%
|
Money market deposits
|
|
|
345,149
|
|
|
|
35.03
|
%
|
|
|
420,886
|
|
|
|
44.07
|
%
|
Total non-certificate accounts
|
|
|
521,242
|
|
|
|
52.89
|
%
|
|
|
602,795
|
|
|
|
63.12
|
%
|
Term certificates of $250 thousand or less
|
|
|
464,349
|
|
|
|
47.11
|
%
|
|
|
352,145
|
|
|
|
36.88
|
%
|
Term certificates greater than $250 thousand
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Total certificate accounts
|
|
|
464,349
|
|
|
|
47.11
|
%
|
|
|
352,145
|
|
|
|
36.88
|
%
|
Total deposits
|
|
$
|
985,591
|
|
|
|
100.00
|
%
|
|
$
|
954,940
|
|
|
|
100.00
|
%
|
FHLBB Advances
Advances from the FHLBB were $15.0 million at both December 31, 2018 and June 30, 2018. As of December 31, 2018, the Company had pledged certain residential real estate loans and commercial real estate loans to secure outstanding advances and provide additional borrowing capacity. As of December 31, 2018, 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 issued subordinated notes equal to $15.1 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, totaled $14.8 million and $14.7 million at December 31, 2018 and June 30, 2018, respectively.
The Company had junior subordinated debentures issued to affiliated trusts totaling $9.4 million and $9.2 million at December 31, 2018 and June 30, 2018, respectively. The unpaid principal balance of the junior subordinated debentures totaled $16.5 million at both December 31, 2018 and June 30, 2018.
In connection with the Reorganization, the Company intends to redeem the junior subordinated debentures and the Bank will assume the Company’s obligations under the subordinated notes.
Liquidity
The following table is a summary of unused borrowing capacity of the Company at December 31, 2018, in addition to traditional retail deposit products:
|
|
As of December 31, 2018
|
|
|
|
|
(Dollars in thousands)
|
|
|
Brokered time deposits
|
|
$
|
298,532
|
|
Subject to policy limitation of 25% of total assets
|
Federal Home Loan Bank of Boston
|
|
|
39,902
|
|
Unused advance capacity subject to eligible and qualified collateral
|
Federal Discount Window Borrower-in-Custody
|
|
|
991
|
|
Unused credit line subject to the pledge of loans
|
Other available lines
|
|
|
17,500
|
|
|
Total unused borrowing capacity
|
|
$
|
356,925
|
|
|
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 of the FHLBB may be required.
At December 31, 2018, the Company had $422.7 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 35.4% of total assets. The Company also had $137.6 million of cash and cash equivalents at December 31, 2018.
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 FHLBB. 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 $9.4 million, respectively, as of December 31, 2018. The unpaid principal balance and carrying amount of subordinated debt totaled $15.1 million and $14.8 million, respectively, as of December 31, 2018. The junior subordinated debt represents qualifying Tier 1 capital for the Company, up to a maximum of 25% of total Tier 1 capital, and subordinated debt represents qualifying Tier 2 capital for the Company. At December 31, 2018, the carrying amounts of the junior subordinated debt, net of the Company’s $496 thousand investment in the affiliated trusts, qualified as Tier 1 capital, and the subordinated debt qualified as Tier 2 capital.
At December 31, 2018, shareholders’ equity was $148.5 million, an increase of $10.1 million, or 7.3% from June 30, 2018. Book value per outstanding common share was $16.41 at December 31, 2018 and $15.49 at June 30, 2018. Tier 1 capital to total average assets of the Company was 13.2% as of December 31, 2018 and 13.1% at June 30, 2018.
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 Bank are considered "well capitalized" under all regulatory definitions. 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 Corrective
Action Provisions
|
|
|
Minimum
Capital Ratio
with Capital Conservation
Buffer
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2018:
|
|
|
|
Common equity tier 1 capital to risk weighted assets:
|
|
|
|
Company
|
|
$
|
149,439
|
|
|
|
16.26
|
%
|
|
$
|
41,356
|
|
|
|
>
4.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
7.0
|
%
|
Bank
|
|
|
167,805
|
|
|
|
18.25
|
%
|
|
|
41,374
|
|
|
>
4.5
|
%
|
|
$
|
59,762
|
|
|
>
6.5
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
178,431
|
|
|
|
19.42
|
%
|
|
|
73,521
|
|
|
>
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10.5
|
%
|
Bank
|
|
|
173,165
|
|
|
|
18.83
|
%
|
|
|
73,554
|
|
|
>
8.0
|
%
|
|
|
91,942
|
|
|
>
10.0
|
%
|
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
158,297
|
|
|
|
17.22
|
%
|
|
|
55,141
|
|
|
>
6.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8.5
|
%
|
Bank
|
|
|
167,805
|
|
|
|
18.25
|
%
|
|
|
55,165
|
|
|
>
6.0
|
%
|
|
|
73,554
|
|
|
>
8.0
|
%
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
158,297
|
|
|
|
13.20
|
%
|
|
|
47,975
|
|
|
>
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
4.0
|
%
|
Bank
|
|
|
167,805
|
|
|
|
14.00
|
%
|
|
|
47,948
|
|
|
>
4.0
|
%
|
|
|
59,935
|
|
|
>
5.0
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
139,247
|
|
|
|
16.02
|
%
|
|
$
|
39,113
|
|
|
>
4.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
7.0
|
%
|
Bank
|
|
|
156,856
|
|
|
|
18.04
|
%
|
|
|
39,120
|
|
|
>
4.5
|
%
|
|
$
|
56,506
|
|
|
>
6.5
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
167,567
|
|
|
|
19.28
|
%
|
|
|
69,535
|
|
|
>
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10.5
|
%
|
Bank
|
|
|
161,714
|
|
|
|
18.60
|
%
|
|
|
69,546
|
|
|
>
8.0
|
%
|
|
|
86,933
|
|
|
>
10.0
|
%
|
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
147,990
|
|
|
|
17.03
|
%
|
|
|
52,151
|
|
|
>
6.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8.5
|
%
|
Bank
|
|
|
156,856
|
|
|
|
18.04
|
%
|
|
|
52,160
|
|
|
>
6.0
|
%
|
|
|
69,546
|
|
|
>
8.0
|
%
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
147,990
|
|
|
|
13.12
|
%
|
|
|
45,102
|
|
|
>
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
4.0
|
%
|
Bank
|
|
|
156,856
|
|
|
|
13.92
|
%
|
|
|
45,075
|
|
|
>
4.0
|
%
|
|
|
56,344
|
|
|
>
5.0
|
%
|
|
|
4.0
|
%
|
In addition to the minimum regulatory capital required for capital adequacy purposes included in the table above, the Company is required to maintain a capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the capital conservation buffer was 2.5% on January 1, 2019.
The Bank may not declare or pay a cash dividend on, or repurchase, any of its capital stock from the Company 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 on December 29, 2010, 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 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 capital. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve.
As discussed in more detail above, in connection with the Reorganization, the Bank intends to replace these commitments with standards relating to its capital levels and asset portfolio composition, which will be incorporated into its policies and procedures, and compliance with FDIC policy on commercial real estate concentration risk.
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, standby letters of credit, and commitments to fund investments. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized on 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 increased by $1.8 million to $5.1 million for the quarter ended December 31, 2018, compared to net income of $3.3 million for the quarter ended December 31, 2017, primarily due to the increase in net interest income and noninterest income, offset by an increase in noninterest expense.
Net Interest Income
Three Months Ended
December 31
, 2018 and 2017
Net interest and dividend income before provision for loan losses increased by $3.2 million to $15.6 million for the quarter ended December 31, 2018, compared to $12.4 million the quarter ended December 31, 2017. The increase was primarily due to higher average balances in the loan portfolio. These increases were partially offset by higher funding costs and higher average deposit balances.
The following table summarizes interest income and related yields recognized on the loan portfolios:
|
|
Interest Income and Yield on Loans
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
|
Balance (1)
|
|
|
Income
|
|
|
Yield
|
|
|
Balance (1)
|
|
|
Income
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Community Banking
|
|
$
|
108,344
|
|
|
$
|
1,448
|
|
|
|
5.30
|
%
|
|
$
|
141,486
|
|
|
$
|
1,753
|
|
|
|
4.92
|
%
|
SBA
|
|
|
73,467
|
|
|
|
1,440
|
|
|
|
7.78
|
%
|
|
|
49,457
|
|
|
|
814
|
|
|
|
6.53
|
%
|
LASG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
|
|
|
420,816
|
|
|
|
8,077
|
|
|
|
7.61
|
%
|
|
|
340,240
|
|
|
|
5,565
|
|
|
|
6.49
|
%
|
Purchased
|
|
|
307,094
|
|
|
|
7,969
|
|
|
|
10.30
|
%
|
|
|
229,732
|
|
|
|
6,369
|
|
|
|
11.00
|
%
|
Total LASG
|
|
|
727,910
|
|
|
|
16,046
|
|
|
|
8.75
|
%
|
|
|
569,972
|
|
|
|
11,934
|
|
|
|
8.31
|
%
|
Total
|
|
$
|
909,721
|
|
|
$
|
18,934
|
|
|
|
8.26
|
%
|
|
$
|
760,915
|
|
|
$
|
14,501
|
|
|
|
7.56
|
%
|
(1) Includes loans held for sale.
|
|
The following table details the “Total Return” on purchased loans. When compared to the three months ended December 31, 2017, transactional income for the three months ended December 31, 2018 increased by $206 thousand. The total return on purchased loans for the three months ended December 31, 2018 was 10.3%. The following table details the total return on purchased loans:
|
|
Total Return on Purchased Loans
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Income
|
|
|
Return (1)
|
|
|
Income
|
|
|
Return (1)
|
|
|
|
(Dollars in thousands)
|
|
Regularly scheduled interest and accretion
|
|
$
|
5,860
|
|
|
|
7.57
|
%
|
|
$
|
4,466
|
|
|
|
7.71
|
%
|
Transactional income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on loan sales
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Gain on sale of real estate owned
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Other noninterest income
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Accelerated accretion and loan fees
|
|
|
2,109
|
|
|
|
2.73
|
%
|
|
|
1,903
|
|
|
|
3.29
|
%
|
Total transactional income
|
|
|
2,109
|
|
|
|
2.73
|
%
|
|
|
1,903
|
|
|
|
3.29
|
%
|
Total
|
|
$
|
7,969
|
|
|
|
10.30
|
%
|
|
$
|
6,369
|
|
|
|
11.00
|
%
|
|
(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 purchased 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. Total return is considered a non-GAAP financial measure.
|
The Company’s interest rate spread increased by 32 basis points and net interest margin increased by 40 basis points for the quarter ended December 31, 2018 compared to the quarter ended December 31, 2017. The increase was principally due to higher transactional income and higher average balances in the quarter, offset by higher deposit rates and average deposit balances.
The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the three months ended December 31, 2018 and 2017.
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
85,325
|
|
|
$
|
425
|
|
|
|
1.98
|
%
|
|
$
|
93,945
|
|
|
$
|
267
|
|
|
|
1.13
|
%
|
Loans (1) (2) (3)
|
|
|
909,721
|
|
|
|
18,934
|
|
|
|
8.26
|
%
|
|
|
760,915
|
|
|
|
14,501
|
|
|
|
7.56
|
%
|
Federal Home Loan Bank stock
|
|
|
1,652
|
|
|
|
24
|
|
|
|
5.76
|
%
|
|
|
1,860
|
|
|
|
21
|
|
|
|
4.48
|
%
|
Short-term investments (4)
|
|
|
168,768
|
|
|
|
946
|
|
|
|
2.22
|
%
|
|
|
145,305
|
|
|
|
471
|
|
|
|
1.29
|
%
|
Total interest-earning assets
|
|
|
1,165,466
|
|
|
|
20,329
|
|
|
|
6.92
|
%
|
|
|
1,002,025
|
|
|
|
15,260
|
|
|
|
6.04
|
%
|
Cash and due from banks
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
2,731
|
|
|
|
|
|
|
|
|
|
Other non-interest earning assets
|
|
|
31,344
|
|
|
|
|
|
|
|
|
|
|
|
33,164
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,199,410
|
|
|
|
|
|
|
|
|
|
|
$
|
1,037,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
74,027
|
|
|
$
|
69
|
|
|
|
0.37
|
%
|
|
$
|
70,287
|
|
|
$
|
52
|
|
|
|
0.29
|
%
|
Money market accounts
|
|
|
373,409
|
|
|
|
1,461
|
|
|
|
1.55
|
%
|
|
|
367,265
|
|
|
|
1,030
|
|
|
|
1.11
|
%
|
Savings accounts
|
|
|
35,004
|
|
|
|
14
|
|
|
|
0.16
|
%
|
|
|
36,872
|
|
|
|
12
|
|
|
|
0.13
|
%
|
Time deposits
|
|
|
443,779
|
|
|
|
2,438
|
|
|
|
2.18
|
%
|
|
|
303,246
|
|
|
|
1,035
|
|
|
|
1.35
|
%
|
Total interest-bearing deposits
|
|
|
926,219
|
|
|
|
3,982
|
|
|
|
1.71
|
%
|
|
|
777,670
|
|
|
|
2,129
|
|
|
|
1.09
|
%
|
Federal Home Loan Bank advances
|
|
|
15,000
|
|
|
|
125
|
|
|
|
3.31
|
%
|
|
|
17,719
|
|
|
|
148
|
|
|
|
3.31
|
%
|
Subordinated debt
|
|
|
24,087
|
|
|
|
573
|
|
|
|
9.44
|
%
|
|
|
23,745
|
|
|
|
517
|
|
|
|
8.64
|
%
|
Capital lease obligations
|
|
|
490
|
|
|
|
6
|
|
|
|
4.86
|
%
|
|
|
764
|
|
|
|
9
|
|
|
|
4.67
|
%
|
Total interest-bearing liabilities
|
|
|
965,796
|
|
|
|
4,686
|
|
|
|
1.92
|
%
|
|
|
819,898
|
|
|
|
2,803
|
|
|
|
1.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits and escrow accounts
|
|
|
81,223
|
|
|
|
|
|
|
|
|
|
|
|
83,855
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
5,676
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,053,532
|
|
|
|
|
|
|
|
|
|
|
|
909,429
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
145,878
|
|
|
|
|
|
|
|
|
|
|
|
128,491
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,199,410
|
|
|
|
|
|
|
|
|
|
|
$
|
1,037,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
15,643
|
|
|
|
|
|
|
|
|
|
|
$
|
12,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
4.68
|
%
|
Net interest margin (5)
|
|
|
|
|
|
|
|
|
|
|
5.33
|
%
|
|
|
|
|
|
|
|
|
|
|
4.93
|
%
|
(1) Interest income and yield are stated on a fully tax-equivalent basis using the statutory 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 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 December 31, 2018 Compared to 2017
|
|
|
|
Change Due to Volume
|
|
|
Change Due to Rate
|
|
|
Total Change
|
|
|
|
(Dollars in thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
(26
|
)
|
|
$
|
184
|
|
|
$
|
158
|
|
Loans
|
|
|
3,013
|
|
|
|
1,420
|
|
|
|
4,433
|
|
Federal Home Loan Bank stock
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
3
|
|
Short-term investments
|
|
|
86
|
|
|
|
389
|
|
|
|
475
|
|
Total interest-earning assets
|
|
|
3,071
|
|
|
|
1,998
|
|
|
|
5,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
595
|
|
|
|
1,258
|
|
|
|
1,853
|
|
Federal Home Loan Bank advances
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
(23
|
)
|
Subordinated debt
|
|
|
7
|
|
|
|
49
|
|
|
|
56
|
|
Capital lease obligations
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Total interest-bearing liabilities
|
|
|
576
|
|
|
|
1,307
|
|
|
|
1,883
|
|
Total change in net interest income
|
|
$
|
2,495
|
|
|
$
|
691
|
|
|
$
|
3,186
|
|
Six
Months Ended
December 31, 2018 and 2017
Net interest and dividend income before provision for loan losses increased by $4.2 million for the quarter ended December 31, 2018, compared to the quarter ended December 31, 2017. The increase was primarily due to higher average balances in the loan portfolio. These increases were partially offset by lower transactional income, higher funding costs and higher average deposit balances.
The following table summarizes interest income and related yields recognized on the loan portfolios:
|
|
Interest Income and Yield on Loans
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
|
|
|
|
Balance (1)
|
|
|
Income
|
|
|
Yield
|
|
|
Balance (1)
|
|
|
Income
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Community Banking
|
|
$
|
114,342
|
|
|
$
|
2,970
|
|
|
|
5.15
|
%
|
|
$
|
145,832
|
|
|
$
|
3,496
|
|
|
|
4.76
|
%
|
SBA
|
|
|
72,316
|
|
|
|
2,726
|
|
|
|
7.48
|
%
|
|
|
51,499
|
|
|
|
1,756
|
|
|
|
6.76
|
%
|
LASG:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated
|
|
|
409,575
|
|
|
|
15,541
|
|
|
|
7.53
|
%
|
|
|
334,507
|
|
|
|
10,831
|
|
|
|
6.42
|
%
|
Purchased
|
|
|
305,600
|
|
|
|
15,223
|
|
|
|
9.88
|
%
|
|
|
234,928
|
|
|
|
13,800
|
|
|
|
11.65
|
%
|
Total LASG
|
|
|
715,175
|
|
|
|
30,764
|
|
|
|
8.53
|
%
|
|
|
569,435
|
|
|
|
24,631
|
|
|
|
8.58
|
%
|
Total
|
|
$
|
901,833
|
|
|
$
|
36,460
|
|
|
|
8.02
|
%
|
|
$
|
766,766
|
|
|
$
|
29,883
|
|
|
|
7.73
|
%
|
(2) Includes loans held for sale.
|
|
The following table details the “Total Return” on purchased loans. When compared to the six months ended December 31, 2017, transactional income for the six months ended December 31, 2018 decreased by $1.1 million. This decrease over the prior comparable period was primarily due to lower accelerated accretion and loan fees in the six months ended December 31, 2018. The total return on purchased loans for the six months ended December 31, 2018 was 9.9%. The following table details the total return on purchased loans:
|
|
Total Return on Purchased Loans
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Income
|
|
|
Return (1)
|
|
|
Income
|
|
|
Return (1)
|
|
|
|
(Dollars in thousands)
|
|
Regularly scheduled interest and accretion
|
|
$
|
11,621
|
|
|
|
7.54
|
%
|
|
$
|
9,079
|
|
|
|
7.67
|
%
|
Transactional income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on loan sales
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Gain on sale of real estate owned
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Other noninterest income (expense)
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
Accelerated accretion and loan fees
|
|
|
3,602
|
|
|
|
2.34
|
%
|
|
|
4,721
|
|
|
|
3.98
|
%
|
Total transactional income
|
|
|
3,602
|
|
|
|
2.34
|
%
|
|
|
4,721
|
|
|
|
3.98
|
%
|
Total
|
|
$
|
15,223
|
|
|
|
9.88
|
%
|
|
$
|
13,800
|
|
|
|
11.65
|
%
|
|
(2)
|
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 purchased 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. Total return is considered a non-GAAP financial measure.
|
The Company’s interest rate spread increased by one basis point and net interest margin increased by 10 basis points for the six months ended December 31, 2018 compared to the six months ended December 31, 2017. The increase was principally due to higher average balances in the loan portfolio, offset by higher deposit rates and average deposit balances, as well as lower transactional income recognized in the six months ended December 31, 2018.
The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the six months ended December 31, 2018 and 2017.
|
|
Six Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
86,599
|
|
|
$
|
784
|
|
|
|
1.80
|
%
|
|
$
|
94,886
|
|
|
$
|
533
|
|
|
|
1.11
|
%
|
Loans (1) (2) (3)
|
|
|
901,833
|
|
|
|
36,460
|
|
|
|
8.02
|
%
|
|
|
766,766
|
|
|
|
29,893
|
|
|
|
7.73
|
%
|
Federal Home Loan Bank stock
|
|
|
1,652
|
|
|
|
49
|
|
|
|
5.88
|
%
|
|
|
1,899
|
|
|
|
41
|
|
|
|
4.28
|
%
|
Short-term investments (4)
|
|
|
170,705
|
|
|
|
1,802
|
|
|
|
2.09
|
%
|
|
|
152,830
|
|
|
|
981
|
|
|
|
1.27
|
%
|
Total interest-earning assets
|
|
|
1,160,789
|
|
|
|
39,095
|
|
|
|
6.68
|
%
|
|
|
1,016,381
|
|
|
|
31,448
|
|
|
|
6.14
|
%
|
Cash and due from banks
|
|
|
2,585
|
|
|
|
|
|
|
|
|
|
|
|
2,933
|
|
|
|
|
|
|
|
|
|
Other non-interest earning assets
|
|
|
31,289
|
|
|
|
|
|
|
|
|
|
|
|
32,025
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,194,663
|
|
|
|
|
|
|
|
|
|
|
$
|
1,051,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
71,866
|
|
|
$
|
124
|
|
|
|
0.34
|
%
|
|
$
|
69,931
|
|
|
$
|
102
|
|
|
|
0.29
|
%
|
Money market accounts
|
|
|
389,757
|
|
|
|
3,008
|
|
|
|
1.53
|
%
|
|
|
377,449
|
|
|
|
2,127
|
|
|
|
1.12
|
%
|
Savings accounts
|
|
|
35,590
|
|
|
|
28
|
|
|
|
0.16
|
%
|
|
|
36,953
|
|
|
|
25
|
|
|
|
0.13
|
%
|
Time deposits
|
|
|
424,965
|
|
|
|
4,504
|
|
|
|
2.10
|
%
|
|
|
307,865
|
|
|
|
2,051
|
|
|
|
1.32
|
%
|
Total interest-bearing deposits
|
|
|
922,178
|
|
|
|
7,664
|
|
|
|
1.65
|
%
|
|
|
792,198
|
|
|
|
4,305
|
|
|
|
1.08
|
%
|
Federal Home Loan Bank advances
|
|
|
15,000
|
|
|
|
242
|
|
|
|
3.20
|
%
|
|
|
18,863
|
|
|
|
319
|
|
|
|
3.35
|
%
|
Subordinated debt
|
|
|
24,042
|
|
|
|
1,174
|
|
|
|
9.69
|
%
|
|
|
23,703
|
|
|
|
1,025
|
|
|
|
8.58
|
%
|
Capital lease obligations
|
|
|
525
|
|
|
|
14
|
|
|
|
5.29
|
%
|
|
|
797
|
|
|
|
21
|
|
|
|
5.23
|
%
|
Total interest-bearing liabilities
|
|
|
961,745
|
|
|
|
9,094
|
|
|
|
1.88
|
%
|
|
|
835,561
|
|
|
|
5,670
|
|
|
|
1.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits and escrow accounts
|
|
|
81,615
|
|
|
|
|
|
|
|
|
|
|
|
82,210
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
8,126
|
|
|
|
|
|
|
|
|
|
|
|
7,071
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,051,486
|
|
|
|
|
|
|
|
|
|
|
|
924,842
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
143,177
|
|
|
|
|
|
|
|
|
|
|
|
126,497
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,194,663
|
|
|
|
|
|
|
|
|
|
|
$
|
1,051,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (5)
|
|
|
|
|
|
$
|
30,001
|
|
|
|
|
|
|
|
|
|
|
$
|
25,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
4.79
|
%
|
Net interest margin (6)
|
|
|
|
|
|
|
|
|
|
|
5.13
|
%
|
|
|
|
|
|
|
|
|
|
|
5.03
|
%
|
(1) Interest income and yield are stated on a fully tax-equivalent basis using the statutory 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) Includes tax exempt interest income of $10 thousand for the six months ended December 31, 2017.
|
(6) 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.
|
|
Six Months Ended December 31, 2018 Compared to 2017
|
|
|
|
Change Due to Volume
|
|
|
Change Due to Rate
|
|
|
Total Change
|
|
|
|
(Dollars in thousands)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
(130
|
)
|
|
$
|
381
|
|
|
$
|
251
|
|
Loans
|
|
|
5,427
|
|
|
|
1,140
|
|
|
|
6,567
|
|
Federal Home Loan Bank stock
|
|
|
(14
|
)
|
|
|
22
|
|
|
|
8
|
|
Short-term investments
|
|
|
126
|
|
|
|
695
|
|
|
|
821
|
|
Total interest-earning assets
|
|
|
5,409
|
|
|
|
2,238
|
|
|
|
7,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
996
|
|
|
|
2,363
|
|
|
|
3,359
|
|
Federal Home Loan Bank advances
|
|
|
(63
|
)
|
|
|
(14
|
)
|
|
|
(77
|
)
|
Subordinated debt
|
|
|
15
|
|
|
|
134
|
|
|
|
149
|
|
Capital lease obligations
|
|
|
(8
|
)
|
|
|
1
|
|
|
|
(7
|
)
|
Total interest-bearing liabilities
|
|
|
940
|
|
|
|
2,484
|
|
|
|
3,424
|
|
Total change in net interest income
|
|
$
|
4,469
|
|
|
$
|
(246
|
)
|
|
$
|
4,223
|
|
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 reflects the impact of adjusting loans to their then fair values, as well as the elimination of the allowance for loan losses in accordance with the acquisition method of accounting. Subsequent to the merger, the provision for loan losses has been recorded based on estimates of inherent losses in newly originated loans and for incremental reserves required for pre-merger loans based on estimates of deteriorated credit quality post-merger.
Three Months Ended December 31, 2018 and 2017
The provision for loan losses for the three months ended December 31, 2018 and 2017 was $101 thousand and $437 thousand, respectively. The decrease in the Company’s provision for loan losses was primarily due to changes in the composition of the loan portfolio.
Six Months Ended December 31, 2018 and 2017
The provision for loan losses for the six months ended December 31, 2018 and 2017 was $633 thousand and $792 thousand, respectively. The decrease in the Company’s provision for loan losses was primarily due to changes in the composition of the loan portfolio.
Noninterest Income
Three Months Ended
December 31
, 2018 and 2017
Noninterest income increased by $317 thousand for the quarter ended December 31, 2018, compared to the quarter ended December 31, 2017, principally due to the following:
|
●
|
An increase in gain on sale of SBA loans of $601 thousand, due to larger guarantee balances sold in the quarter; partially offset by,
|
|
●
|
A decrease in gain on sale of residential loans of $151 thousand, due to lower volume of residential loans sold in the quarter; and
|
|
●
|
A decrease in fees for other services to customers of $135 thousand, due to lower commercial loan servicing fees as a result of the write-off of servicing assets related to SBA loans that paid off during the quarter.
|
Six Months Ended December 31, 2018 and 2017
Noninterest income decreased by $88 thousand for the six months ended December 31, 2018, compared to the six months ended December 31, 2017, principally due to the following:
|
●
|
A decrease in gain on sale of residential loans of $266 thousand, due to lower volume of residential loans sold in the period; and
|
|
●
|
A decrease in fees for other services to customers of $170 thousand, due to lower commercial loan servicing fees as a result of the write-off of servicing assets related to SBA loans that paid off during the quarter.; offset by,
|
|
●
|
An increase in gain on sale of SBA loans of $432 thousand, due to a higher volume of SBA guarantees sold.
|
Noninterest Expense
Three Months Ended
December 31
, 2018 and 2017
Noninterest expense increased by $1.3 million for the quarter ended December 31, 2018 compared to the quarter ended December 31, 2017, primarily due to the following:
|
●
|
An increase in salaries and employee benefits expense of $526 thousand, primarily due to increases in base salary, stock-based compensation expense, incentive compensation, and a decrease in deferred salaries expense;
|
|
●
|
An increase in other noninterest expense of $292 thousand, primarily due to a $141 thousand increase in expense related to the quarterly valuation of SBA servicing rights, and increases in travel expense and employee recruitment expense;
|
|
●
|
An increase in professional fees of $231 thousand, primarily due to increased legal expense related to the anticipated reorganization and other consulting costs; and
|
|
●
|
An increase in loan acquisition and collection expense of $217 thousand, largely driven by increased loan expenses and collection expenses incurred on the increased SBA and purchased loan activity during the quarter.
|
Six Months Ended December 31, 2018 and 2017
Noninterest expense increased by $2.0 million for the six months ended December 31, 2018, compared to the six months ended December 31, 2017, primarily due to the following:
|
●
|
An increase in salaries and employee benefits expense of $781 thousand, primarily due to increases in incentive compensation and stock-based compensation expense;
|
|
●
|
An increase in other noninterest expense of $459 thousand, primarily due to the quarterly valuation of SBA servicing rights;
|
|
●
|
An increase in professional fees of $323 thousand, primarily due to increased legal expense related to the anticipated reorganization and other consulting costs; and
|
|
●
|
An increase in loan acquisition and collection expense of $291 thousand, largely driven by increased loan expenses and collection expenses incurred on the increased SBA and purchased loan activity during the period.
|
Income Taxes
Three Months Ended
December 31
, 2018 and 2017
Income tax expense increased by $678 thousand to $2.1 million, or an effective tax rate of 28.7%, for the quarter ended December 31, 2018, compared to $1.4 million, or an effective tax rate of 29.5%, for the quarter ended December 31, 2017. The increase in expense was primarily due to the increase in earnings. The decrease in the effective tax rate was primarily due to the following:
|
●
|
The new federal corporate income tax rate of 21.0% for the quarter ended December 31, 2018, as compared to the blended federal corporate income tax rate of 28.0% for the quarter ended December 31, 2017; and
|
|
●
|
The $498 thousand revaluation of the deferred tax asset as a result of the Tax Cuts and Jobs Act recorded in the quarter ended December 31, 2017; partially offset by,
|
|
●
|
A decrease in the income tax benefit recognized of $275 thousand arising from the treatment of vested restricted stock awards under ASU 2016-09,
Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, whereby the tax effects of vested awards or exercised options are treated as a discrete item in the reporting period in which they occur.
|
Six Months Ended December 31, 2018 and 2017
Income tax expense increased by $555 thousand to $3.6 million, or an effective tax rate of 26.9%, for the six months ended December 31, 2018, compared to $3.0 million, or an effective tax rate of 27.5%, the six months ended December 31, 2017. The increase in expense was primarily due to the increase in earnings. The decrease in the effective tax rate was primarily due to the following:
|
●
|
The new federal corporate income tax rate of 21.0% for the six months ended December 31, 2018, as compared to the blended federal corporate income tax rate of 28.0% for the six months ended December 31, 2017; and
|
|
●
|
The $498 thousand revaluation of the deferred tax asset as a result of the Tax Cuts and Jobs Act recorded in the six months ended December 31, 2017; partially offset by,
|
|
●
|
A decrease in the income tax benefit recognized of $905 thousand arising from the treatment of vested restricted stock awards under ASU 2016-09,
Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
whereby the tax effects of vested awards or exercised stock options are treated as a discrete item in the reporting period in which they occur.
|