Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 02/12/2016 14:43:46) Table Of Contents

 

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

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 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 February 1, 2016, the registrant had outstanding 8,482,819 shares of voting common stock, $1.00 par value per share and 1,029,110 shares of non-voting common stock, $1.00 par value per share.

 

 
1

Table Of Contents
 

 

Part I.

Financial Information

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Consolidated Balance Sheets

 
    December 31, 2015 and June 30, 2015 3

 

 

 

 

 

 

Consolidated Statements of Income

 
    Three Months Ended December 31, 2015 and 2014  
    Six Months Ended December 31, 2015 and 2014 4
       
   

Consolidated Statements of Comprehensive Income

 
    Three Months Ended December 31, 2015 and 2014  
    Six Months Ended December 31, 2015 and 2014 5
       

 

 

Consolidated Statements of Changes in Stockholders' Equity

 
    Six Months Ended December 31, 2015 and 2014 6

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 
    Six Months Ended December 31, 2015 and 2014 7

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

30

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

44

 

 

 

 

 

Item 4.

Controls and Procedures

44
       

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

 

 

Item 1 A .

Risk Factors

44

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

44

 

 

 

 

 

Item 4.

Mine Safety Disclosures

45

 

 

 

 

 

Item 5.

Other Information

45

 

 

 

 

 

Item 6.

Exhibits

45

 

 

 
2

Table Of Contents
 

PART 1- FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

   

December 31, 2015

   

June 30, 2015

 

Assets

               

Cash and due from banks

  $ 3,485     $ 2,789  

Short-term investments

    62,878       87,061  

Total cash and cash equivalents

    66,363       89,850  
                 

Available-for-sale securities, at fair value

    104,339       101,908  
                 

Residential real estate loans held for sale

    7,592       7,093  

SBA loans held for sale

    -       1,942  

Total loans held for sale

    7,592       9,035  
                 
                 

Loans

               

Commercial real estate

    401,075       348,676  

Residential real estate

    122,427       132,669  

Commercial and industrial

    149,154       123,133  

Consumer

    6,780       7,659  

Total loans

    679,436       612,137  

Less: Allowance for loan losses

    2,129       1,926  

Loans, net

    677,307       610,211  
                 
                 

Premises and equipment, net

    8,461       8,253  

Real estate owned and other possessed collateral, net

    1,238       1,651  

Federal Home Loan Bank stock, at cost

    2,571       4,102  

Intangible assets, net

    1,947       2,209  

Bank owned life insurance

    15,499       15,276  

Other assets

    8,784       8,223  

Total assets

  $ 894,101     $ 850,718  
                 

Liabilities and Stockholders' Equity

               

Deposits

               

Demand

  $ 64,087     $ 60,383  

Savings and interest checking

    101,117       100,134  

Money market

    208,324       168,527  

Time

    353,238       345,715  

Total deposits

    726,766       674,759  
                 

Federal Home Loan Bank advances

    30,131       30,188  

Wholesale repurchase agreements

    -       10,037  

Short-term borrowings

    2,426       2,349  

Junior subordinated debentures issued to affiliated trusts

    8,723       8,626  

Capital lease obligation

    1,252       1,368  

Other liabilities

    10,190       10,664  

Total liabilities

    779,488       737,991  
                 

Commitments and contingencies

    -       -  
                 

Stockholders' equity

               

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at December 31, 2015 and June 30, 2015

    -       -  

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 8,490,619 and 8,575,144 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively

    8,491       8,575  

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 1,029,110 and 1,012,739 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively

    1,029       1,013  

Additional paid-in capital

    84,525       85,506  

Retained earnings

    22,340       18,921  

Accumulated other comprehensive loss

    (1,772 )     (1,288 )

Total stockholders' equity

    114,613       112,727  

Total liabilities and stockholders' equity

  $ 894,101     $ 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 and per share data)  

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 

Interest and dividend income:

                               

Interest and fees on loans

  $ 11,719     $ 10,948     $ 22,509     $ 21,870  

Interest on available-for-sale securities

    236       232       464       475  

Other interest and dividend income

    80       79       176       146  

Total interest and dividend income

    12,035       11,259       23,149       22,491  
                                 

Interest expense:

                               

Deposits

    1,425       1,281       2,789       2,410  

Federal Home Loan Bank advances

    259       265       519       588  

Wholesale repurchase agreements

    -       73       67       145  

Short-term borrowings

    5       7       13       16  

Junior subordinated debentures issued to affiliated trusts

    158       188       312       394  

Obligation under capital lease agreements

    16       19       33       38  

Total interest expense

    1,863       1,833       3,733       3,591  
                                 

Net interest and dividend income before provision for loan losses

    10,172       9,426       19,416       18,900  

Provision for loan losses

    896       113       1,065       433  

Net interest and dividend income after provision for loan losses

    9,276       9,313       18,351       18,467  
                                 

Noninterest income:

                               

Fees for other services to customers

    428       392       836       786  

Gain on sales of residential loans held for sale

    398       447       957       1,029  

Gain on sales of portfolio loans

    679       445       1,354       525  

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

    (14 )     (31 )     (74 )     (54 )

Bank-owned life insurance income

    112       110       224       219  

Other noninterest income

    21       7       29       19  

Total noninterest income

    1,624       1,370       3,326       2,524  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    4,854       4,737       9,110       9,270  

Occupancy and equipment expense

    1,320       1,181       2,610       2,384  

Professional fees

    264       458       694       766  

Data processing fees

    366       347       714       692  

Marketing expense

    66       80       136       148  

Loan acquisition and collection expense

    219       413       663       687  

FDIC insurance premiums

    116       110       229       234  

Intangible asset amortization

    131       166       262       331  

Other noninterest expense

    860       718       1,589       1,437  

Total noninterest expense

    8,196       8,210       16,007       15,949  
                                 

Income before income tax expense

    2,704       2,473       5,670       5,042  

Income tax expense

    960       893       2,059       1,818  

Net income

    1,744       1,580       3,611       3,224  
                                 

Weighted-average shares outstanding:

                               

Basic

    9,559,369       10,132,349       9,560,913       10,155,598  

Diluted

    9,569,585       10,132,349       9,567,138       10,155,598  
                                 

Earnings per common share:

                               

Basic

  $ 0.18     $ 0.16     $ 0.38     $ 0.32  

Diluted

    0.18       0.16       0.38       0.32  
                                 

Cash dividends declared per common share

  $ 0.01     $ 0.01     $ 0.02     $ 0.02  

 

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 December 31,

   

Six Months Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 

Net income

  $ 1,744     $ 1,580     $ 3,611     $ 3,224  
                                 

Other comprehensive (loss) income, before tax:

                               

Available-for-sale securities:

                               

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

    (692 )     538       (226 )     263  

Derivatives and hedging activities:

                               

Change in accumulated gain (loss) on effective cash flow hedges

    284       (500 )     (554 )     (770 )

Reclassification adjustments for net gains included in net income

    -       (24 )     -       (34 )

Total derivatives and hedging activities

    284       (524 )     (554 )     (804 )

Total other comprehensive (loss) income, before tax

    (408 )     14       (780 )     (541 )

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

    (155 )     4       (296 )     (183 )

Other comprehensive (loss) income, net of tax

    (253 )     10       (484 )     (358 )

Comprehensive income

  $ 1,491     $ 1,590     $ 3,127     $ 2,866  

 

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 and per share data)  

   

Preferred Stock

   

Voting Common Stock

   

Non-voting Common Stock

   

Additional

Paid-in

   

Retained

   

Accumulated

Other

Comprehensive

   

Total

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

    -       -       -       -       -       -       -       3,224       -       3,224  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (358 )     (358 )

Common stock repurchased

    -       -       (448,686 )     (449 )     -       -       (3,653 )     -       -       (4,102 )

Conversion of voting common stock to non- voting common stock

    -       -       -       -       -       -       -       -       -       -  

Dividends on common stock at $0.02 per share

    -       -       -       -       -       -       -       (204 )     -       (204 )

Stock-based compensation

    -       -       -       -       -       -       297       -       -       297  

Issuance of restricted common stock

    -       -       168,000       168       -       -       (168 )     -       -       -  

Forfeiture of restricted common stock

    -       -       (14,221 )     (14 )     -       -       14       -       -       -  

Balance at December 31, 2014

    -     $ -       8,965,424     $ 8,965       880,963     $ 881     $ 87,404     $ 15,314     $ (1,641 )   $ 110,923  
                                                                                 

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

    -       -       -       -       -       -       -       3,611       -       3,611  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (484 )     (484 )

Common stock repurchased

    -       -       (125,100 )     (125 )     -       -       (1,204 )     -       -       (1,329 )

Conversion of voting common stock to non- voting common stock

    -       -       (16,371 )     (16 )     16,371       16       -       -       -       -  

Dividends on common stock at $0.02 per share

    -       -       -       -       -       -       -       (192 )     -       (192 )

Stock-based compensation

    -       -       -       -       -       -       280       -       -       280  

Issuance of restricted common stock

    -       -       100,000       100       -       -       (100 )     -       -       -  

Forfeiture of restricted common stock

    -       -       (43,054 )     (43 )     -       -       43       -       -       -  

Balance at December 31, 2015

    -     $ -       8,490,619     $ 8,491       1,029,110     $ 1,029     $ 84,525     $ 22,340     $ (1,772 )   $ 114,613  

 

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)  

   

Six Months Ended December 31,

 
   

2015

   

2014

 

Operating activities:

               

Net income

  $ 3,611     $ 3,224  

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

         

Provision for loan losses

    1,065       433  

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

    68       26  

Loss on sale of premises and equipment, net

    6       28  

Accretion of fair value adjustments on loans, net

    (5,600 )     (6,117 )

Accretion of fair value adjustments on deposits, net

    (4 )     (120 )

Accretion of fair value adjustments on borrowings, net

    3       (72 )

Originations of loans held for sale

    (49,640 )     (49,444 )

Net proceeds from sales of loans held for sale

    50,098       57,264  

Gain on sales of residential loans held for sale

    (957 )     (1,029 )

Gain on sales of portfolio loans

    (1,354 )     (525 )

Amortization of intangible assets

    262       331  

Bank-owned life insurance income, net

    (224 )     (219 )

Depreciation of premises and equipment

    824       847  

Stock-based compensation

    280       297  

Amortization of available-for-sale securities, net

    490       519  

Changes in other assets and liabilities:

               

Other assets

    165       (1,665 )

Other liabilities

    (1,027 )     (1,071 )

Net cash (used in) provided by operating activities

    (1,934 )     2,707  

Investing activities:

               

Purchases of available-for-sale securities

    (17,548 )     -  

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

    14,400       5,786  

Loan purchases

    (59,311 )     (39,667 )

Proceeds from sales of portfolio loans

    14,427       3,665  

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

    (15,424 )     (16,778 )

Purchases and disposals of premises and equipment, net

    (1,038 )     (234 )

Redemption of Federal Home Loan Bank stock

    1,531       -  

Proceeds from sales of real estate owned and other repossessed collateral

    959       129  

Net cash used in investing activities

    (62,004 )     (47,099 )

Financing activities:

               

Net increase in deposits

    52,011       57,511  

Net increase (decrease) in short-term borrowings

    77       (209 )

Repurchase of common stock

    (1,329 )     (4,102 )

Dividends paid on common stock

    (192 )     (204 )

Repayments of FHLB advances

    -       (7,500 )

Repayment of wholesale repurchase agreements

    (10,000 )     -  

Repayment of capital lease obligation

    (116 )     (94 )

Net cash provided by financing activities

    40,451       45,402  

Net (decrease) increase in cash and cash equivalents

    (23,487 )     1,010  

Cash and cash equivalents, beginning of period

    89,850       82,259  

Cash and cash equivalents, end of period

  $ 66,363     $ 83,269  
                 

Supplemental schedule of noncash investing and financing activities:

               

Transfers from loans to real estate owned and other repossessed collateral

  $ 614     $ 241  

Transfers from real estate owned and other repossessed collateral to loans

    -       2  

 

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

 

NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

December 31, 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 2015-14, Revenue from Contracts with Customers (Topic 606) (“ASU 2015-14”) was issued in August 2015 which defers adoption to annual reporting periods beginning after December 15, 2017.

 

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.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values, however; the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current US GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within the fiscal year. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.

 

 

 

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.

 

   

December 31, 2015

 
   

Amortized

Cost

   

Gross Unrealized

Gains

   

Gross Unrealized

Losses

   

Fair

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 51,572     $ 1     $ (78 )   $ 51,495  

Agency mortgage-backed securities

    48,785       -       (943 )     47,842  

Other investments measured at net asset value

    5,044       -       (42 )     5,002  
    $ 105,401     $ 1     $ (1,063 )   $ 104,339  

 

   

June 30, 2015

 
   

Amortized

Cost

   

Gross Unrealized

Gains

   

Gross Unrealized

Losses

   

Fair

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

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

Agency mortgage-backed securities

    54,553       2       (877 )     53,678  

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 and six months ended December 31, 2015 or 2014. At December 31, 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.

 

   

December 31, 2015

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 42,495     $ (78 )   $ -     $ -     $ 42,495     $ (78 )

Agency mortgage-backed securities

    10,620       (129 )     37,222       (814 )     47,842       (943 )

Other investments measured at net asset value

    5,002       (42 )     -       -       5,002       (42 )
    $ 58,117     $ (249 )   $ 37,222     $ (814 )   $ 95,339     $ (1,063 )

 

   

June 30, 2015

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 
   

(Dollars in thousands)

 

U.S. Government agency securities

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

Agency mortgage-backed securities

    10,295       (106 )     41,349       (771 )     51,644       (877 )

Other investments measured at net asset value

    -       -       -       -       -       -  
    $ 13,294     $ (107 )   $ 41,349     $ (771 )   $ 54,643     $ (878 )

 

There were no other-than-temporary impairment losses on securities during the three and six months ended December 31, 2015 or 2014.

 

At December 31, 2015, the Company had sixteen securities in a continuous loss position for greater than twelve months. At December 31, 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 December 31, 2015 is attributable to changes in interest rates.

 

In addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company’s investment portfolio, management of the Company also considers the Company’s ability and intent to hold such securities to maturity or recovery of cost. At December 31, 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 December 31, 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 4.55 years.

 

 

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of December 31, 2015. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

Amortized

Cost

   

Fair

Value

 
   

(Dollars in thousands)

 

Due within one year

  $ 39,082     $ 39,067  

Due after one year through five years

    12,490       12,428  

Due after five years through ten years

    22,966       22,620  

Due after ten years

    25,819       25,222  
Total    $ 100,357     $ 99,337  

 

 

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.

 

   

December 31, 2015

   

June 30, 2015

 
   

Originated

   

Purchased

   

Total

   

Originated

   

Purchased

   

Total

 
    (Dollars in thousands)  

Residential real estate

  $ 99,312     $ 2,658     $ 101,970     $ 106,275     $ 2,068     $ 108,343  

Home equity

    20,457       -       20,457       24,326       -       24,326  

Commercial real estate

    177,941       223,134       401,075       148,425       200,251       348,676  

Commercial and industrial

    148,932       222       149,154       122,860       273       123,133  

Consumer

    6,780       -       6,780       7,659       -       7,659  

Total loans

  $ 453,422     $ 226,014     $ 679,436     $ 409,545     $ 202,592     $ 612,137  

 

 

Past Due and Nonaccrual Loans

 

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

 

   

December 31, 2015

 
   

30-59

Days

   

60-89

Days

   

Past Due

90 Days or

More-Still

Accruing

   

Past Due

90 Days or

More-

Nonaccrual

   

 

Total

Past

Due

   

Total

Current

   

Total

Loans

   

Non-

Accrual

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

  $ 607     $ 552     $ -     $ 2,199     $ 3,558     $ 95,954     $ 99,312     $ 3,263  

Home equity

    -       -       -       11       11       20,446       20,457       11  

Commercial real estate

    227       188       -       278       693       177,248       177,941       399  

Commercial and industrial

    -       -       -       2       2       148,930       148,932       2  

Consumer

    55       70       -       107       232       6,548       6,780       204  

Total originated portfolio

    889       810       -       2,597       4,296       449,126       453,422       3,879  

Purchased portfolio:

                                                               

Residential real estate

    -       1,186       -       -       1,186       1,472       2,658       -  

Commercial and industrial

    -       -       -       -       -       222       222       -  

Commercial real estate

    8,426       743       -       2,214       11,383       211,751       223,134       2,221  

Total purchased portfolio

    8,426       1,929       -       2,214       12,569       213,445       226,014       2,221  

Total loans

  $ 9,315     $ 2,739     $ -     $ 4,811     $ 16,865     $ 662,571     $ 679,436     $ 6,100  
                                                                 

 

   

June 30, 2015

 
   

30-59

Days

   

60-89

Days

   

Past Due

90 Days or

More-Still

Accruing

   

Past Due

90 Days or

More-

Nonaccrual

   

Total

Past

Due

   

Total

Current

   

Total

Loans

   

Non-

Accrual

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

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

Home equity

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

Commercial real estate

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

Commercial and industrial

    -       -       -       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

    -