Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 11/13/2015 14:44:51) Table Of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

Commission File Number: 1-14588

 

 

Northeast Bancorp


(Exact name of registrant as specified in its charter)

 

Maine

 

01-0425066

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

     

500 Canal Street, Lewiston, Maine

 

04240

(Address of Principal executive offices)

 

(Zip Code)

 

(207) 786-3245

Registrant's telephone number, including area code

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days.  Yes  No ___

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 8, 2015 the registrant had outstanding 8,559,312 shares of voting common stock, $1.00 par value per share and 1,022,717 shares of non-voting common stock, $1.00 par value per share.

 

 

 
1

Table Of Contents
 

   

      Page
Part I. Financial Information  
       

 

Item 1.

Financial Statements (unaudited)

3
       

 

 

Consolidated Balance Sheets September 30, 2015 and June 30, 2015

3

 

 

 

 

 

 

Consolidated Statements of Income  Three Months Ended September 30, 2015 and 2014

4
       
   

Consolidated Statements of Comprehensive Income  Three Months Ended September 30, 2015 and 2014

5
       

 

 

Consolidated Statements of Changes in Stockholders' Equity Three Months Ended September 30, 2015 and 2014

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows Three Months Ended September 30, 2015 and 2014

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

28

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

38

 

 

 

 

 

Item 4.

Controls and Procedures

38
       

Part II.

Other Information

 

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

 

 

Item 1 A .

Risk Factors

39

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

39

 

 

 

 

 

Item 4.

Mine Safety Disclosures

39

 

 

 

 

 

Item 5.

Other Information

39

 

 

 

 

 

Item 6.

Exhibits

39

 

 

 
2

Table Of Contents
 

   

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

   

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share data)

 

   

September 30, 2015

   

June 30, 2015

 

Assets

               

Cash and due from banks

  $ 2,979     $ 2,789  

Short-term investments

    83,234       87,061  

Total cash and cash equivalents

    86,213       89,850  
                 

Available-for-sale securities, at fair value

    101,344       101,908  
                 

Residential real estate loans held for sale

    5,366       7,093  

SBA loans held for sale

    2,170       1,942  

Total loans held for sale

    7,536       9,035  
                 

Loans

    625,842       612,137  

Less: Allowance for loan losses

    2,065       1,926  

Loans, net

    623,777       610,211  
                 

Premises and equipment, net

    8,460       8,253  

Real estate owned and other repossessed collateral, net

    1,279       1,651  

Federal Home Loan Bank stock, at cost

    4,102       4,102  

Intangible assets, net

    2,078       2,209  

Bank owned life insurance

    15,387       15,276  

Other assets

    8,073       8,223  

Total assets

  $ 858,249     $ 850,718  
                 

Liabilities and Stockholders' Equity

               

Liabilities

               

Deposits:

               

Demand

  $ 62,687     $ 60,383  

Savings and interest checking

    106,679       100,134  

Money market

    182,690       168,527  

Time

    341,422       345,715  

Total deposits

    693,478       674,759  
                 

Federal Home Loan Bank advances

    30,159       30,188  

Wholesale repurchase agreements

    -       10,037  

Short-term borrowings

    2,479       2,349  

Junior subordinated debentures issued to affiliated trusts

    8,674       8,626  

Capital lease obligation

    1,312       1,368  

Other liabilities

    8,443       10,664  

Total liabilities

    744,545       737,991  
                 

Commitments and contingencies

    -       -  
                 

Stockholders' equity

               

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at September 30, 2015 and June 30, 2015

    -       -  

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 8,569,612 and 8,575,144 shares issued and outstanding at September 30, 2015 and June 30, 2015, respectively

    8,570       8,575  

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 1,022,717 and 1,012,739 shares issued and outstanding at September 30, 2015 and June 30, 2015, respectively

    1,023       1,013  

Additional paid-in capital

    84,937       85,506  

Retained earnings

    20,693       18,921  

Accumulated other comprehensive loss

    (1,519 )     (1,288 )

Total stockholders' equity

    113,704       112,727  

Total liabilities and stockholders' equity

  $ 858,249     $ 850,718  

 

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

 

 

   

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except share data)

 

   

Three Months Ended September 30,

 
   

2015

   

2014

 

Interest and dividend income:

               

Interest and fees on loans

  $ 10,790     $ 10,922  

Interest on available-for-sale securities

    228       244  

Other interest and dividend income

    95       66  

Total interest and dividend income

    11,113       11,232  
                 

Interest expense:

               

Deposits

    1,365       1,130  

Federal Home Loan Bank advances

    260       323  

Wholesale repurchase agreements

    67       73  

Short-term borrowings

    9       9  

Junior subordinated debentures issued to affiliated trusts

    154       206  

Obligation under capital lease agreements

    17       20  

Total interest expense

    1,872       1,761  
                 

Net interest and dividend income before provision for loan losses

    9,241       9,471  

Provision for loan losses

    169       320  

Net interest and dividend income after provision for loan losses

    9,072       9,151  
                 

Noninterest income:

               

Fees for other services to customers

    408       394  

Gain on sales of residential loans held for sale

    560       584  

Gain on sales of portfolio loans

    675       80  

Loss recognized on real estate owned and other repossessed collateral, net

    (59 )     (23 )

Bank-owned life insurance income

    112       109  

Other noninterest income

    9       10  

Total noninterest income

    1,705       1,154  
                 

Noninterest expense:

               

Salaries and employee benefits

    4,256       4,533  

Occupancy and equipment expense

    1,290       1,202  

Professional fees

    430       308  

Data processing fees

    349       345  

Marketing expense

    70       69  

Loan acquisition and collection expense

    451       274  

FDIC insurance premiums

    114       124  

Intangible asset amortization

    131       166  

Other noninterest expense

    719       689  

Total noninterest expense

    7,810       7,710  
                 

Income before income tax expense

    2,967       2,595  

Income tax expense

    1,100       948  

Net income

  $ 1,867     $ 1,647  
                 
                 

Weighted average shares outstanding during the period:

               

Basic

    9,562,812       10,180,038  

Diluted

    9,562,812       10,180,038  
                 

Earnings per common share:

               

Basic

  $ 0.20     $ 0.16  

Diluted

    0.20       0.16  
                 

Cash dividends declared per common share

  $ 0.01     $ 0.01  

 

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

 

 

   

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

   

Three Months Ended September 30,

 
   

2015

   

2014

 
                 

Net income

  $ 1,867     $ 1,647  
                 

Other comprehensive loss, before tax:

               

Available-for-sale securities:

               

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

    466       (275 )

Reclassification adjustment for net gains included in net income

    -       -  

Total available-for-sale securities

    466       (275 )

Derivatives and hedging activities:

               

Change in accumulated loss on effective cash flow hedges

    (838 )     (272 )

Reclassification adjustments for net gains included in net income

    -       (9 )

Total derivatives and hedging activities

    (838 )     (281 )

Total other comprehensive loss, before tax

    (372 )     (556 )

Income tax benefit related to other comprehensive loss

    (141 )     (188 )

Other comprehensive loss, net of tax

    (231 )     (368 )

Comprehensive income

  $ 1,636     $ 1,279  

 

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

 

 

   

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except share data)

 

                                                                   

Accumulated

         
                                    Non-voting     Additional            

Other

   

Total

 
   

Preferred Stock

   

Voting Common Stock

   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 
                                                                                 

Balance at June 30, 2014

    -     $ -       9,260,331     $ 9,260       880,963     $ 881     $ 90,914     $ 12,294     $ (1,283 )   $ 112,066  

Net income

    -       -       -       -       -       -       -       1,647       -       1,647  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (368 )     (368 )

Common stock repurchased

    -       -       (14,400 )     (14 )     -       -       (120 )     -       -       (134 )

Conversion of voting common stock to non- voting common stock

    -       -       -       -       -       -       -       -       -       -  

Dividends on common stock at $0.01 per share

    -       -       -       -       -       -       -       (102 )     -       (102 )

Stock-based compensation

    -       -       -       -       -       -       136       -       -       136  

Issuance of restricted common stock

    -       -       128,000       128       -       -       (128 )     -       -       -  

Forfeiture of restricted common stock

    -       -       (6,860 )     (7 )     -       -       7       -       -       -  

Balance at September 30, 2014

    -     $ -       9,367,071     $ 9,367       880,963     $ 881     $ 90,809     $ 13,839     $ (1,651 )   $ 113,245  
                                                                                 

Balance at June 30, 2015

    -     $ -       8,575,144     $ 8,575       1,012,739     $ 1,013     $ 85,506     $ 18,921     $ (1,288 )   $ 112,727  

Net income

    -       -       -       -       -       -       -       1,867       -       1,867  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (231 )     (231 )

Common stock repurchased

    -       -       (52,500 )     (53 )     -       -       (495 )     -       -       (548 )

Conversion of voting common stock to non- voting common stock

    -       -       (9,978 )     (10 )     9,978       10       -       -       -       -  

Dividends on common stock at $0.01 per share

    -       -       -       -       -               -       (95 )     -       (95 )

Stock-based compensation

    -       -       -       -       -       -       (16 )     -       -       (16 )

Issuance of restricted common stock

    -       -       97,500       98       -       -       (98 )     -       -       -  

Forfeiture of restricted common stock

    -       -       (40,554 )     (40 )     -       -       40       -       -       -  

Balance at September 30, 2015

    -     $ -       8,569,612     $ 8,570       1,022,717     $ 1,023     $ 84,937     $ 20,693     $ (1,519 )   $ 113,704  

 

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

 

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

   

Three Months Ended September 30,

 
   

2015

   

2014

 

Operating activities:

               

Net income

  $ 1,867     $ 1,647  

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

         

Provision for loan losses

    169       320  

Loss (gain) on sale and impairment of real estate owned and other repossessed collateral, net

    53       (5 )

Accretion of fair value adjustments on loans, net

    (2,248 )     (3,097 )

Accretion of fair value adjustments on deposits, net

    (3 )     (64 )

Accretion of fair value adjustments on borrowings, net

    (18 )     (47 )

Originations of residential loans held for sale

    (26,877 )     (27,676 )

Net proceeds from sales of residential loans held for sale

    29,164       31,136  

Gain on sales of residential loans held for sale, net

    (560 )     (584 )

Gain on sales of portfolio loans, net

    (675 )     (80 )

Amortization of intangible assets

    131       166  

Bank-owned life insurance income, net

    (112 )     (109 )

Depreciation of premises and equipment

    405       432  

Loss on sale and disposal of premises and equipment, net

    6       28  

Stock-based compensation

    (16 )     136  

Amortization of available-for-sale securities, net

    222       262  

Changes in other assets and liabilities:

               

Other assets

    521       (367 )

Other liabilities

    (3,059 )     (1,284 )

Net cash (used in) provided by operating activities

    (1,030 )     814  
                 

Investing activities:

               

Purchases of available-for-sale securities

    (5,000 )     -  

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

    5,808       2,994  

Loan purchases

    (23,458 )     (13,167 )

Proceeds from sales of portfolio loans

    6,154       793  

Loan originations, principal collections, and purchased loan paydowns, net

    5,712       (10,213 )

Purchases and disposals of premises and equipment, net

    (618 )     (105 )

Proceeds from sales of real estate owned and other repossessed collateral

    642       88  

Net cash used in investing activities

    (10,760 )     (19,610 )
                 

Financing activities:

               

Net increase in deposits

    18,722       19,530  

Net increase in short-term borrowings

    130       820  

Repurchase of common stock

    (548 )     (134 )

Dividends paid on common stock

    (95 )     (102 )

Repayment of wholesale repurchase agreements

    (10,000 )     -  

Repayment of capital lease obligation

    (56 )     (47 )

Net cash provided by financing activities

    8,153       20,067  
                 

Net (decrease) increase in cash and cash equivalents

    (3,637 )     1,271  

Cash and cash equivalents, beginning of period

    89,850       82,259  

Cash and cash equivalents, end of period

  $ 86,213     $ 83,530  
                 

Supplemental schedule of noncash investing and financing activities:

               

Transfers from loans to real estate owned and other repossessed collateral

  $ 323     $ 209  

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

1.   Basis of Presentation

 

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

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the interim periods presented. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2015 (“Fiscal 2015”) included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

2.  Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects ("ASU 2014-01"). The amendments in ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company adopted the standard in the current period. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 6: Investments in Qualified Affordable Housing Projects” for further discussion and related effect.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 , Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for annual periods beginning after December 15, 2016 and is not expected to have a significant impact on the Company’s financial statements.

 

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 was effective July 1, 2015 and did not have a significant impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (“ ASU 2014-14 ”) .  ASU 2014-14 affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD), and the U.S. Department of Veterans Affairs (VA). The update requires that, upon foreclosure, a guaranteed mortgage loan be derecognized and a separate other receivable be recognized when specific criteria are met. ASU 2014-14 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance did not have a significant impact on the Company’s financial statements.

 

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). The amendment affects reporting entities that elect to measure the fair value of an investment using the net asset value per share as a practical expedient. The Company adopted the standard in the current period. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 11: Fair Value Measurements” for further discussion and related effect.

 

 

3.   Securities Available-for-Sale

 

The following presents a summary of the amortized cost, gross unrealized holding gains and losses, and fair value of securities available for sale.

 

   

September 30, 2015

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 45,134     $ 34     $ (1 )   $ 45,167  

Agency mortgage-backed securities

    51,562       21       (438 )     51,145  

Other investments measured at net asset value

    5,018       14       -       5,032  
    $ 101,714     $ 69     $ (439 )   $ 101,344  

 

   

June 30, 2015

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 48,191     $ 40     $ (1 )   $ 48,230  

Agency mortgage-backed securities

    54,553       2       (877 )     53,678  

Other investments measured at net asset value

    -       -       -       -  
    $ 102,744     $ 42     $ (878 )   $ 101,908  

 

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale. There were no securities sold during the three months ended September 30, 2015 or 2014. At September 30, 2015, investment securities with a fair value of approximately $3.0 million were pledged as collateral to secure outstanding borrowings.

 

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

     

   

September 30, 2015

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 2,997     $ (1 )   $ -     $ -     $ 2,997     $ (1 )

Agency mortgage-backed securities

    7,871       (34 )     39,617       (404 )     47,488       (438 )
    $ 10,868     $ (35 )   $ 39,617     $ (404 )   $ 50,485     $ (439 )

 

   

June 30, 2015

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 2,999     $ (1 )   $ -     $ -     $ 2,999     $ (1 )

Agency mortgage-backed securities

    10,295       (106 )     41,349       (771 )     51,644       (877 )
    $ 13,294     $ (107 )   $ 41,349     $ (771 )   $ 54,643     $ (878 )

     

There were no other-than-temporary impairment losses on securities during the three months ended September 30, 2015 or 2014.

 

At September 30, 2015, the Company had sixteen securities in a continuous loss position for greater than twelve months. At September 30, 2015, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or government-sponsored enterprises. The decline in fair value of the Company’s available-for-sale securities at September 30, 2015 is attributable to changes in interest rates.

 

Management of the Company, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company’s investment portfolio, also considers the Company’s ability and intent to hold such securities to maturity or recovery of cost. At September 30, 2015, it is more likely than not that the Company will not sell or be required to sell the investment securities before recovery of its amortized cost. As such, management does not believe any of the Company’s available-for-sale securities are other-than-temporarily impaired at September 30, 2015.

 

The investment measured at net asset value is a fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies. The underlying composition of the fund is primarily government agencies or other investment-grade investments. The effective duration of the investments is 4.32 years.

 

 

 

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of September 30, 2015. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

Amortized

   

Fair

 
   

Cost

   

Value

 
   

(Dollars in thousands)

 

Due within one year

  $ 33,077     $ 33,095  

Due after one year through five years

    12,058       12,072  

Due after five years through ten years

    24,618       24,516  

Due after ten years

    26,943       26,629  
Total    $ 96,696     $ 96,312  

 

 

 

4.   Loans, Allowance for Loan Losses and Credit Quality

 

Loans are carried at the principal amounts outstanding, or amortized acquired fair value in the case of acquired loans, adjusted by partial charge-offs and net of deferred loan costs or fees.  Loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method.  When a loan is paid off, the unamortized portion is recognized in interest income.  Interest income is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status.

 

Loans purchased by the Company are accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).  At acquisition, the effective interest rate is determined based on the discount rate that equates the present value of the Company’s estimate of cash flows with the purchase price of the loan.  Prepayments are not assumed in determining a purchased loan’s effective interest rate and income accretion.  The application of ASC 310-30 limits the yield that may be accreted on the purchased loan, or the “accretable yield,” to the excess of the Company’s estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company’s initial investment in the loan.  The excess of contractually required payments receivable over the cash flows expected to be collected on the loan represents the purchased loan’s “nonaccretable difference.”  Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase to the loan’s effective yield through a reclassification of some, or all, of the nonaccretable difference to accretable yield.  The effect of subsequent credit-related declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses.

 

Loans are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when in management’s judgment the collectability of interest or principal of the loan has been significantly impaired.  Loans accounted for under ASC 310-30 are placed on nonaccrual when it is not possible to reach a reasonable expectation of the timing and amount of cash flows to be collected on the loan.  When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans.  Interest on nonaccrual loans is accounted for on a cash-basis or using the cost-recovery method when collectability is doubtful.  A loan is returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a reasonable period of time.

 

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”), and therefore by definition is an impaired loan.  Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral.  For loans accounted for under ASC 310-30, the Company evaluates whether it has granted a concession by comparing the restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition.  As a result, if an ASC 310-30 loan is modified to be consistent with, or better than, the Company’s expectations at acquisition, the loan would not qualify as a TDR. Nonaccrual loans that are restructured generally remain on nonaccrual status for a minimum period of six months to demonstrate that the borrower can meet the restructured terms.  If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status.  If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a nonaccrual loan. With limited exceptions, loans classified as TDRs remain classified as such until the loan is paid off.

 

The composition of the Company’s loan portfolio is as follows on the dates indicated.

 

   

September 30, 2015

   

June 30, 2015

 
   

Originated

   

Purchased

   

Total

   

Originated

   

Purchased

   

Total

 
   

(Dollars in thousands)

 

Residential real estate

  $ 102,570     $ 3,214     $ 105,784     $ 106,275     $ 2,068     $ 108,343  

Home equity

    22,480       -       22,480       24,326       -       24,326  

Commercial real estate

    152,873       210,727       363,600       148,425       200,251       348,676  

Commercial business

    126,476       258       126,734       122,860       273       123,133  

Consumer

    7,244       -       7,244       7,659       -       7,659  

Total loans

  $ 411,643     $ 214,199     $ 625,842     $ 409,545     $ 202,592     $ 612,137  

 

 

 

Past Due and Nonaccrual Loans

 

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

 

   

September 30, 2015

 
                   

Past Due

   

Past Due

                                 
                   

90 Days or

   

90 Days or

   

Total

                   

Non-

 
    30-59     60-89    

More-Still

   

More-

   

Past

   

Total

   

Total

   

Accrual

 
   

Days

   

Days

   

Accruing

   

Nonaccrual

   

Due

   

Current

   

Loans

   

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

  $ 176     $ 950     $ -     $ 1,658     $ 2,784     $ 99,786     $ 102,570     $ 3,165  

Home equity

    -       -       -       20       20       22,460       22,480       20  

Commercial real estate

    219       173       -       402       794       152,079       152,873       529  

Commercial business

    22       -       -       2       24       126,452       126,476       2  

Consumer

    198       41       -       50       289       6,955       7,244       153  

Total originated portfolio

    615       1,164       -       2,132       3,911       407,732       411,643       3,869  

Purchased portfolio:

                                                               

Residential real estate

    -       -       -       -       -       3,214       3,214       -  

Commercial business

    -       -       -       -       -       258       258       -  

Commercial real estate

    1,009       1,110       -       2,407       4,526       206,201       210,727       6,939  

Total purchased portfolio

    1,009       1,110       -       2,407       4,526       209,673       214,199       6,939  

Total loans

  $ 1,624     $ 2,274     $ -     $ 4,539     $ 8,437     $ 617,405     $ 625,842     $ 10,808  

 

   

June 30, 2015

 
                   

Past Due

   

Past Due

                                 
                   

90 Days or

   

90 Days or

   

Total

                   

Non-

 
    30-59     60-89    

More-Still

   

More-

   

Past

   

Total

   

Total

   

Accrual

 
   

Days

   

Days

   

Accruing

   

Nonaccrual

   

Due

   

Current

   

Loans

   

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

  $ 239     $ 973     $ -     $ 1,393     $ 2,605     $ 103,670     $ 106,275     $ 3,021  

Home equity

    9       -       -       11       20       24,306       24,326       11  

Commercial real estate

    300       -       -       704       1,004       147,421       148,425       994  

Commercial business

    -       -       -       2       2       122,858       122,860       2  

Consumer

    105       29       -       56       190       7,469       7,659       190  

Total originated portfolio

    653       1,002       -       2,166       3,821       405,724       409,545       4,218  

Purchased portfolio:

                                                               

Residential real estate

    -       -       -       -       -       2,068       2,068       -  

Commercial business

    -       -       -       -       -       273       273       -  

Commercial real estate

    86       299       -       2,410       2,795       197,456       200,251       6,532  

Total purchased portfolio

    86       299       -       2,410       2,795       199,797       202,592       6,532  

Total loans

  $ 739     $ 1,301     $ -     $ 4,576     $ 6,616     $ 605,521     $ 612,137     $ 10,750  

   

Allowance for Loan Losses and Impaired Loans

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  For residential and consumer loans, a charge-off is recorded no later than the point at which a loan is 180 days past due if the loan balance exceeds the fair value of the collateral, less costs to sell.  For commercial loans, a charge-off is recorded on a case-by-case basis when all or a portion of the loan is deemed to be uncollectible.  Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses consists of general, specific, and unallocated reserves and reflects management’s estimate of probable loan losses inherent in the loan portfolio at the balance sheet date.  Management uses a consistent and systematic process and methodology to evaluate the appropriateness of the allowance for loan losses on a quarterly basis.  The calculation of the allowance for loan losses is segregated by portfolio segments, which include:  commercial real estate, commercial business, consumer, residential real estate, and purchased loans.  Risk characteristics relevant to each portfolio segment are as follows:

 

Residential real estate:  All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality, loan-to-value ratio and income of the individual borrower.  The overall health of the economy, particularly unemployment rates and housing prices, has a significant effect on the credit quality in this segment.  For purposes of the Company’s allowance for loan loss calculation, home equity loans and lines of credit are included in residential real estate.

 

Commercial real estate:  Loans in this segment are primarily income-producing properties. For owner-occupied properties, the cash flows are derived from an operating business, and the underlying cash flows may be adversely affected by deterioration in the financial condition of the operating business.  The underlying cash flows generated by non-owner occupied properties may be adversely affected by increased vacancy rates.  Management periodically obtains rent rolls, with which it monitors the cash flows of these loans.  Adverse developments in either of these areas will have an adverse effect on the credit quality of this segment.  For purposes of the allowance for loan losses, this segment also includes construction loans.

 

 

 

Commercial business:  Loans in this segment are made to businesses and are generally secured by the assets of the business. Repayment is expected from the cash flows of the business.  Weakness in national or regional economic conditions, and a corresponding weakness in consumer or business spending, will have an adverse effect on the credit quality of this segment.

 

Consumer:  Loans in this segment are generally secured, and repayment is dependent on the credit quality of the individual borrower.  Repayment of consumer loans is generally based on the earnings of individual borrowers, which may be adversely impacted by regional labor market conditions.

 

Purchased:  Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the Bank’s Loan Acquisition and Servicing Group (“LASG”).  Loans acquired by the LASG are, with limited exceptions, performing loans at the date of purchase.  Loans in this segment acquired with specific material credit deterioration since origination are identified as purchased credit-impaired.  Repayment of loans in this segment is largely dependent on cash flow from the successful operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied property.  Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the real estate market, such as geographic location or property type.  Loans in this segment are evaluated for impairment under ASC 310-30. The Company reviews expected cash flows from purchased loans on a quarterly basis. The effect of a decline in expected cash flows subsequent to the acquisition of the loan is recognized through a specific allocation in the allowance for loan losses.

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by loan segment.  The Company does not weight periods used in that analysis to determine the average loss rate in each portfolio segment.  This historical loss factor is adjusted for the following qualitative factors:

 

 

Levels and trends in delinquencies and nonperforming loans

 

 

Trends in the volume and nature of loans

 

 

Trends in credit terms and policies, including underwriting standards, procedures and practices, and the experience and ability of lending management and staff

 

 

Trends in portfolio concentration

 

 

National and local economic trends and conditions

 

 

Effects of changes or trends in internal risk ratings

 

 

Other effects resulting from trends in the valuation of underlying collateral

 

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

 

For all portfolio segments, except loans accounted for under ASC 310-30, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to realize cash flows as expected at acquisition.  For loans accounted for under ASC 310-30 for which cash flows can reasonably be estimated, loan impairment is measured based on the decrease in expected cash flows from those estimated at acquisition, excluding changes due to changes in interest rate indices and other non-credit related factors, discounted at the loan’s effective rate assumed at acquisition.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting the scheduled principal and interest payments when due .

 

 

   

The following table sets forth activity in the Company’s allowance for loan losses.

 

   

Three Months Ended September 30, 2015

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

Business

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 741     $ 694     $ 117     $ 35     $ 283     $ 56     $ 1,926  

Provision

    (21 )     62       16       31       81