Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 05/13/2016 10:21:04) 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 March 31, 2016

 

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 May 6, 2016, the registrant had outstanding 8,089,790 shares of voting common stock, $1.00 par value per share and 1,227,683 shares of non-voting common stock, $1.00 par value per share.

   

 
1

Table Of Contents
 

 

Part I.   Financial Information  3

 

 

Item 1.

 

Financial Statements (unaudited)

3

 

 

 

 

Consolidated Balance Sheets

 3
        March 31, 2016 and June 30, 2015  

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income

 4
        Three Months Ended March 31, 2016 and 2015  
        Nine Months Ended March 31, 2016 and 2015  
           
       

Consolidated Statements of Comprehensive Income

 5
        Three Months Ended March 31, 2016 and 2015  
        Nine Months Ended March 31, 2016 and 2015  
           

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity

 6
        Nine Months Ended March 31, 2016 and 2015  

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 7
        Nine Months Ended March 31, 2016 and 2015  

 

 

 

 

 

 

 

 

 

 

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

 45

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 45
           
Part II.   Other Information  45

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 45

 

 

 

 

 

 

 

 

Item 1 A .

 

Risk Factors

 45

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 45

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 46

 

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 46

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 46

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 46

 

 
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)

   

March 31, 2016

   

June 30, 2015

 

Assets

               

Cash and due from banks

  $ 4,025     $ 2,789  

Short-term investments

    87,427       87,061  

Total cash and cash equivalents

    91,452       89,850  

Available-for-sale securities, at fair value

    90,491       101,908  
                 

Residential real estate loans held for sale

    3,475       7,093  

SBA loans held for sale

    1,880       1,942  

Total loans held for sale

    5,355       9,035  
                 
                 

Loans

               

Commercial real estate

    423,234       348,676  

Residential real estate

    119,327       132,669  

Commercial and industrial

    150,217       123,133  

Consumer

    6,292       7,659  

Total loans

    699,070       612,137  

Less: Allowance for loan losses

    2,223       1,926  

Loans, net

    696,847       610,211  
                 
                 

Premises and equipment, net

    8,101       8,253  

Real estate owned and other possessed collateral, net

    690       1,651  

Federal Home Loan Bank stock, at cost

    2,571       4,102  

Intangible assets, net

    1,840       2,209  

Bank owned life insurance

    15,612       15,276  

Other assets

    9,730       8,223  

Total assets

  $ 922,689     $ 850,718  
                 

Liabilities and Stockholders' Equity

               

Deposits

               

Demand

  $ 60,573     $ 60,383  

Savings and interest checking

    104,802       100,134  

Money market

    234,142       168,527  

Time

    353,432       345,715  

Total deposits

    752,949       674,759  
                 

Federal Home Loan Bank advances

    30,103       30,188  

Wholesale repurchase agreements

    -       10,037  

Short-term borrowings

    2,753       2,349  

Junior subordinated debentures issued to affiliated trusts

    8,771       8,626  

Capital lease obligation

    1,190       1,368  

Other liabilities

    12,397       10,664  

Total liabilities

    808,163       737,991  
                 

Commitments and contingencies

    -       -  
                 
                 

Stockholders' equity

               

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2016 and June 30, 2015

    -       -  

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 8,103,190 and 8,575,144 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively

    8,103       8,575  

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 1,227,683 and 1,012,739 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively

    1,228       1,013  

Additional paid-in capital

    82,983       85,506  

Retained earnings

    24,055       18,921  

Accumulated other comprehensive loss

    (1,843 )     (1,288 )

Total stockholders' equity

    114,526       112,727  

Total liabilities and stockholders' equity

  $ 922,689     $ 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 March 31,

   

Nine Months Ended March 31,

 
   

2016

   

2015

   

2016

   

2015

 

Interest and dividend income:

                               

Interest and fees on loans

  $ 10,904     $ 10,619     $ 33,413     $ 32,487  

Interest on available-for-sale securities

    236       222       700       697  

Other interest and dividend income

    119       72       295       218  

Total interest and dividend income

    11,259       10,913       34,408       33,402  
                                 

Interest expense:

                               

Deposits

    1,566       1,271       4,356       3,681  

Federal Home Loan Bank advances

    255       257       774       845  

Wholesale repurchase agreements

    -       71       65       216  

Short-term borrowings

    5       5       19       21  

Junior subordinated debentures issued to affiliated trusts

    164       171       476       566  

Obligation under capital lease agreements

    15       18       49       56  

Total interest expense

    2,005       1,793       5,739       5,385  
                                 

Net interest and dividend income before provision for loan losses

    9,254       9,120       28,669       28,017  

Provision for loan losses

    236       44       1,301       477  

Net interest and dividend income after provision for loan losses

    9,018       9,076       27,368       27,540  
                                 

Noninterest income:

                               

Fees for other services to customers

    428       303       1,264       1,089  

Gain on sales of residential loans held for sale

    335       355       1,292       1,384  

Gain on sales of portfolio loans

    1,205       425       2,558       950  

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

    (54 )     357       (127 )     303  

Bank-owned life insurance income

    112       110       336       329  

Other noninterest income

    9       4       39       23  

Total noninterest income

    2,035       1,554       5,362       4,078  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    4,846       4,316       13,956       13,586  

Occupancy and equipment expense

    1,327       1,278       3,937       3,662  

Professional fees

    348       386       1,042       1,153  

Data processing fees

    394       361       1,109       1,029  

Marketing expense

    64       54       200       203  

Loan acquisition and collection expense

    297       409       961       1,096  

FDIC insurance premiums

    125       137       354       371  

Intangible asset amortization

    108       128       369       460  

Other noninterest expense

    903       816       2,489       2,272  

Total noninterest expense

    8,412       7,885       24,417       23,832  
                                 

Income before income tax expense

    2,641       2,745       8,313       7,786  

Income tax expense

    832       993       2,892       2,810  

Net income

    1,809       1,752       5,421       4,976  
                                 
                                 

Weighted-average shares outstanding:

                               

Basic

    9,456,198       9,833,033       9,526,302       10,049,983  

Diluted

    9,459,611       9,833,033       9,531,747       10,049,983  
                                 

Earnings per common share:

                               

Basic

  $ 0.19     $ 0.18     $ 0.57     $ 0.50  

Diluted

    0.19       0.18       0.57       0.50  
                                 

Cash dividends declared per common share

  $ 0.01     $ 0.01     $ 0.03     $ 0.03  

 

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 March 31,

   

Nine Months Ended March 31,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Net income

  $ 1,809     $ 1,752     $ 5,421     $ 4,976  
                                 

Other comprehensive loss, before tax:

                               

Available-for-sale securities:

                               

Change in net unrealized gain on available-for-sale securities

    867       571       641       834  

Derivatives and hedging activities:

                               

Change in accumulated lo ss on effective cash flow hedges

    (982 )     (566 )     (1,536 )     (1,341 )

Reclassification adjustments for net gains included in net income

    -       (16 )     -       (49 )

Total derivatives and hedging activities

    (982 )     (582 )     (1,536 )     (1,390 )

Total other comprehensive loss, before tax

    (115 )     (11 )     (895 )     (556 )

Income tax (benefit) expense related to other comprehensive loss

    (44 )     (4 )     (340 )     (191 )

Other comprehensive loss, net of tax

    (71 )     (7 )     (555 )     (365 )

Comprehensive income

  $ 1,738     $ 1,745     $ 4,866     $ 4,611  

 

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

    -       -       -       -       -       -       -       4,976       -       4,976  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (365 )     (365 )

Common stock repurchased

    -       -       (479,936 )     (480 )     -       -       (3,912 )     -       -       (4,392 )

Conversion of voting common stock to non-

voting common stock

    -       -       (30,525 )     (30 )     30,525       30       -       -       -       -  

Dividends on common stock at $0.03 per share

    -       -       -       -       -       -       -       (302 )     -       (302 )

Stock-based compensation

    -       -       -       -       -       -       504       -       -       504  

Issuance of restricted common stock

    -       -       174,000       174       -       -       (174 )     -       -       -  

Cancellation and forfeiture of restricted common stock

    -       -       (15,749 )     (16 )     -       -       16       -       -       -  

Balance at March 31, 2015

    -     $ -       8,908,121     $ 8,908       911,488     $ 911     $ 87,348     $ 16,968     $ (1,648 )   $ 112,487  
                                                                                 

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

    -       -       -       -       -       -       -       5,421       -       5,421  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (555 )     (555 )

Common stock repurchased

    -       -       (309,500 )     (310 )     -       -       (2,905 )     -       -       (3,215 )

Conversion of voting common stock to non-

voting common stock

    -       -       (214,944 )     (215 )     214,944       215       -       -       -       -  

Dividends on common stock at $0.03 per share

    -       -       -       -       -       -       -       (287 )     -       (287 )

Stock-based compensation

    -       -       -       -       -       -       445       -       -       445  

Issuance of restricted common stock

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

Cancellation and forfeiture of restricted common stock

    -       -       (47,510 )     (47 )     -       -       37       -       -       (10 )

Balance at March 31, 2016

    -     $ -       8,103,190     $ 8,103       1,227,683     $ 1,228     $ 82,983     $ 24,055     $ (1,843 )   $ 114,526  

 

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)

   

Nine Months Ended March 31,

 
   

2016

   

2015

 

Operating activities:

               

Net income

  $ 5,421     $ 4,976  

Adjustments to reconcile net income to net cash provided by operating activities:

         

Provision for loan losses

    1,301       477  

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

    121       (303 )

Loss on sale of premises and equipment, net

    6       23  

Accretion of fair value adjustments on loans, net

    (7,348 )     (9,149 )

Accretion of fair value adjustments on deposits, net

    (5 )     (159 )

Accretion of fair value adjustments on borrowings, net

    23       (92 )

Originations of loans held for sale

    (66,929 )     (68,734 )

Net proceeds from sales of loans held for sale

    69,959       77,624  

Gain on sales of residential loans held for sale

    (1,292 )     (1,384 )

Gain on sales of portfolio loans

    (2,558 )     (950 )

Amortization of intangible assets

    369       460  

Bank-owned life insurance income, net

    (336 )     (329 )

Depreciation of premises and equipment

    1,230       1,259  

Stock-based compensation

    445       504  

Amortization of available-for-sale securities, net

    754       765  

Changes in other assets and liabilities:

               

Other assets

    (378 )     (687 )

Other liabilities

    197       1,197  

Net cash provided by operating activities

    980       5,498  

Investing activities:

               

Purchases of available-for-sale securities

    (20,566 )     -  

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

    31,870       8,427  

Loan purchases

    (81,245 )     (57,896 )

Proceeds from sales of portfolio loans

    27,799       7,200  

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

    (24,095 )     (4,434 )

Purchases and disposals of premises and equipment, net

    (1,084 )     (242 )

Redemption of Federal Home Loan Bank stock

    1,531       -  

Proceeds from sales of real estate owned and other repossessed collateral

    1,503       713  

Net cash used in investing activities

    (64,287 )     (46,232 )

Financing activities:

               

Net increase in deposits

    78,195       81,007  

Net increase (decrease) in short-term borrowings

    404       (123 )

Repurchase of common stock

    (3,215 )     (4,392 )

Taxes paid for retirement of common stock

    (10 )     -  

Dividends paid on common stock

    (287 )     (302 )

Repayments of FHLB advances

    -       (12,500 )

Repayment of wholesale repurchase agreements

    (10,000 )     -  

Repayment of capital lease obligation

    (178 )     (142 )

Net cash provided by financing activities

    64,909       63,548  
                 

Net increase in cash and cash equivalents

    1,602       22,814  

Cash and cash equivalents, beginning of period

    89,850       82,259  

Cash and cash equivalents, end of period

  $ 91,452     $ 105,073  
                 

Supplemental schedule of noncash investing and financing activities:

               

Transfers from loans to real estate owned and other repossessed collateral

  $ 663     $ 2,041  

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2016

 

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 (“US 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 2014-09”) 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.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) . The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities will be required to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases . This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within the fiscal year. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”). The new guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this guidance is not expected to have a significant impact on the Company’s 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.

 

   

March 31, 2016

 
   

Amortized

Cost

   

Gross Unrealized

Gains

   

Gross Unrealized

Losses

   

Fair

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 39,479     $ 31     $ (7 )   $ 39,503  

Agency mortgage-backed securities

    46,137       29       (276 )     45,890  

Other investments measured at net asset value

    5,070       28       -       5,098  
    $ 90,686     $ 88     $ (283 )   $ 90,491  

 

   

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 nine months ended March 31, 2016 or 2015. At March 31, 2016, no investment securities 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.

 

   

March 31, 2016

 
   

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

  $ 12,429     $ (7 )   $ -     $ -     $ 12,429     $ (7 )

Agency mortgage-backed securities

    1,774       (2 )     39,451       (274 )     41,225       (276 )

Other investments measured at net asset value

    -       -       -       -       -       -  
    $ 14,203     $ (9 )   $ 39,451     $ (274 )   $ 53,654     $ (283 )

 

   

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 nine months ended March 31, 2016 or 2015.

 

At March 31, 2016, the Company had eighteen securities in a continuous loss position for greater than twelve months. At March 31, 2016, 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 March 31, 2016 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 March 31, 2016, it was 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 were other-than-temporarily impaired at March 31, 2016.

 

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 fund"). The underlying composition of the fund is primarily government agencies or other investment-grade investments. The effective duration of the investments is 4.56 years.

 

 

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of March 31, 2016. 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

  $ 24,037     $ 24,042  

Due after one year through five years

    15,442       15,461  

Due after five years through ten years

    21,394       21,342  

Due after ten years

    24,743       24,548  

Total

  $ 85,616     $ 85,393  

   

 

 

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, and also qualitative considerations surrounding the modification. As a result, if an ASC 310-30 loan is modified to be consistent with, or better than, the Company’s expectations at acquisition, quantitatively and qualitatively, 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.

 

    March 31, 2016     June 30, 2015  
    Originated     Purchased     Total     Originated     Purchased     Total  
    (Dollars in thousands)  

Residential real estate

  $ 97,566     $ 2,638     $ 100,204     $ 106,275     $ 2,068     $ 108,343  

Home equity

    19,123       -       19,123       24,326       -       24,326  

Commercial real estate

    192,432       230,802       423,234       148,425       200,251       348,676  

Commercial and industrial

    150,007       210       150,217       122,860       273       123,133  

Consumer

    6,292       -       6,292       7,659       -       7,659  

Total loans

  $ 465,420     $ 233,650     $ 699,070     $ 409,545     $ 202,592     $ 612,137  

 

Total loans include deferred loan origination fees, net, of $44 thousand and $236 thousand as of March 31, 2016 and June 30, 2015, respectively.

 

 

Past Due and Nonaccrual Loans

 

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

 

   

March 31, 2016

 
   

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

  $ 665     $ 89     $ -     $ 1,754     $ 2,508     $ 95,058     $ 97,566     $ 3,270  

Home equity

    350       99       -       82       531       18,592       19,123       296  

Commercial real estate

    702       -       -       333       1,035       191,397       192,432       602  

Commercial and industrial

    1,910       17       -       -       1,927       148,080       150,007       2  

Consumer

    149       2       -       101       252       6,040       6,292       216  

Total originated portfolio

    3,776       207       -       2,270       6,253       459,167       465,420       4,386  

Purchased portfolio:

                                                               

Residential real estate

    -       -       -       1,185       1,185       1,453       2,638       1,185  

Commercial and industrial

    -       -       -       -       -       210       210       -  

Commercial real estate

    6,700       300       -       3,179       10,179       220,623       230,802       3,179  

Total purchased portfolio

    6,700       300       -       4,364       11,364       222,286       233,650       4,364  

Total loans

  $ 10,476     $ 507     $ -     $ 6,634     $ 17,617     $ 681,453     $ 699,070     $ 8,750  

 

   

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: