Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 11/09/2016 15:49:39) 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, 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 November 2, 2016, the registrant had outstanding 7,487,552 shares of voting common stock, $1.00 par value per share and 1,343,683 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 September 30, 2016 and June 30, 2016

 3

 

 

 

 

 

 

Consolidated Statements of Income Three Months Ended September 30, 2016 and 2015

 4
       
   

Consolidated Statements of Comprehensive Income Three Months Ended September 30, 2016 and 2015

 5
       

 

 

Consolidated Statements of Changes in S hare holders' Equity Three Months Ended September 30, 2016 and 2015

 6

 

 

 

 

 

 

Consolidated Statements of Cash Flows Three Months Ended September 30, 2016 and 2015

 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

 39

 

 

 

 

 

Item 4.

Controls and Procedures

 40
       
Part II. Other Information 40

 

 

 

 

 

Item 1.

Legal Proceedings

 40

 

 

 

 

 

Item 1 A .

Risk Factors

 40

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 41

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 41

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 41

 

 

 

 

 

Item 5.

Other Information

 41

 

 

 

 

 

Item 6.

Exhibits

 41

 

 
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)  

   

September 30, 2016

   

June 30, 2016

 

Assets

               

Cash and due from banks

  $ 3,574     $ 2,459  

Short-term investments

    122,675       148,698  

Total cash and cash equivalents

    126,249       151,157  

Available-for-sale securities, at fair value

    94,583       100,572  
                 

Residential real estate loans held for sale

    4,623       6,449  

SBA loans held for sale

    2,630       1,070  

Total loans held for sale

    7,253       7,519  
                 
                 

Loans

               

Commercial real estate

    449,553       426,568  

Residential real estate

    110,223       113,962  

Commercial and industrial

    156,110       145,956  

Consumer

    5,532       5,950  

Total loans

    721,418       692,436  

Less: Allowance for loan losses

    2,506       2,350  

Loans, net

    718,912       690,086  
                 
                 

Premises and equipment, net

    7,452       7,801  

Real estate owned and other repossessed collateral, net

    3,774       1,652  

Federal Home Loan Bank stock, at cost

    2,408       2,408  

Intangible assets, net

    1,623       1,732  

Bank owned life insurance

    15,839       15,725  

Other assets

    7,475       7,501  

Total assets

  $ 985,568     $ 986,153  
                 

Liabilities and Shareholders' Equity

               

Liabilities

               

Deposits

               

Demand

  $ 74,249     $ 66,686  

Savings and interest checking

    107,365       107,218  

Money market

    302,079       275,437  

Time

    321,716       351,091  

Total deposits

    805,409       800,432  
                 

Federal Home Loan Bank advances

    30,046       30,075  

Subordinated debt

    23,393       23,331  

Capital lease obligation

    1,066       1,128  

Other liabilities

    14,101       14,596  

Total liabilities

    874,015       869,562  
                 

Commitments and contingencies

    -       -  
                 
                 

Shareholders' equity

               

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

    -       -  

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 7,487,552 and 8,089,790 shares issued and outstanding at September 30, 2016 and June 30, 2016, respectively

    7,487       8,089  

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 1,343,683 and 1,227,683 shares issued and outstanding at September 30, 2016 and June 30, 2016, respectively

    1,344       1,228  

Additional paid-in capital

    76,765       83,020  

Retained earnings

    27,818       26,160  

Accumulated other comprehensive loss

    (1,861 )     (1,906 )

Total shareholders' equity

    111,553       116,591  

Total liabilities and shareholders' equity

  $ 985,568     $ 986,153  

   

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 September 30,

 
   

2016

   

2015

 

Interest and dividend income:

               

Interest and fees on loans

  $ 11,803     $ 10,790  

Interest on available-for-sale securities

    239       228  

Other interest and dividend income

    215       95  

Total interest and dividend income

    12,257       11,113  
                 

Interest expense:

               

Deposits

    1,754       1,365  

Federal Home Loan Bank advances

    255       260  

Wholesale repurchase agreements

    -       67  

Short-term borrowings

    -       9  

Subordinated debt

    459       154  

Obligation under capital lease agreements

    14       17  

Total interest expense

    2,482       1,872  
                 

Net interest and dividend income before provision for loan losses

    9,775       9,241  

Provision for loan losses

    193       169  

Net interest and dividend income after provision for loan losses

    9,582       9,072  
                 

Noninterest income:

               

Fees for other services to customers

    408       408  

Gain on sales of residential loans held for sale

    542       560  

Gain on sales of SBA loans

    743       675  

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

    (14 )     (59 )

Bank-owned life insurance income

    114       112  

Other noninterest income

    15       9  

Total noninterest income

    1,808       1,705  
                 

Noninterest expense:

               

Salaries and employee benefits

    5,314       4,256  

Occupancy and equipment expense

    1,229       1,290  

Professional fees

    496       430  

Data processing fees

    421       349  

Marketing expense

    87       70  

Loan acquisition and collection expense

    227       451  

FDIC insurance premiums

    124       114  

Intangible asset amortization

    109       131  

Other noninterest expense

    619       719  

Total noninterest expense

    8,626       7,810  

Income before income tax expense

    2,764       2,967  

Income tax expense

    1,013       1,100  

Net income

  $ 1,751     $ 1,867  
                 
                 

Weighted-average shares outstanding:

               

Basic

    9,106,144       9,562,812  

Diluted

    9,133,383       9,562,812  

 

               
Earnings per common share:                

Basic

  $ 0.19     $ 0.20  

Diluted

    0.19       0.20  
                 

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,

 
   

2016

   

2015

 

Net income

  $ 1,751     $ 1,867  
                 

Other comprehensive income (loss), before tax:

               

Available-for-sale securities:

               

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

    (78 )     466  

Derivatives and hedging activities:

               

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

    154       (838 )

Reclassification adjustments included in net income

    -       -  

Total derivatives and hedging activities

    154       (838 )

Total other comprehensive income (loss), before tax

    76       (372 )

Income tax (benefit) expense related to other comprehensive loss

    31       (141 )

Other comprehensive income (loss), net of tax

    45       (231 )

Comprehensive income

  $ 1,796     $ 1,636  

 

 

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

   

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLID ATED STATEMENTS OF CHANGES IN SHARE HOLDERS’ EQUITY

(Unaudited)

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

 

   

Preferred Stock

   

Voting Common Stock

   

Non-voting Common Stock

   

Additional

   

 

   

Accumulated

Other

   

Total

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Paid-in

Capital

   

Retained

Earnings

   

Comprehensive

Loss

   

Shareholders'

Equity

 
                                                                                 

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 )     -       -       -  

Cancellation and 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  
                                                                                 

Balance at June 30, 2016

    -       -       8,089,790     $ 8,089       1,227,683     $ 1,228     $ 83,020     $ 26,160     $ (1,906 )   $ 116,591  

Net income

    -       -       -       -       -       -       -       1,751       -       1,751  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       45       45  

Common stock repurchased

    -       -       (645,238 )     (645 )     -       -       (6,298 )     -       -       (6,943 )

Conversion of voting common stock to non-

voting common stock

    -       -       (116,000 )     (116 )     116,000       116       -       -       -       -  

Dividends on common stock at $0.01 per share

    -       -       -       -       -       -       -       (93 )     -       (93 )

Stock-based compensation

    -       -       -       -       -       -       202       -       -       202  

Issuance of restricted common stock

    -       -       160,000       160       -       -       (160 )     -       -       -  

Cancellation and forfeiture of restricted common stock

    -       -       (1,000 )     (1 )     -       -       1       -       -       -  

Balance at September 30, 2016

    -     $ -       7,487,552     $ 7,487       1,343,683     $ 1,344     $ 76,765     $ 27,818     $ (1,861 )   $ 111,553  

 

 

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,

 
   

2016

   

2015

 

Operating activities:

               

Net income

  $ 1,751     $ 1,867  
Adjustments to reconcile net income to net cash used in operating activities:                

Provision for loan losses

    193       169  

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

    13       53  

Loss on sale and disposal of premises and equipment, net

    1       6  

Accretion of fair value adjustments on loans, net

    (2,133 )     (2,248 )

Accretion of fair value adjustments on deposits, net

    (1 )     (3 )

Accretion of fair value adjustments on borrowings, net

    (29 )     (18 )

Amortization of subordinated debt issuance costs

    62       -  

Originations of loans held for sale

    (33,459 )     (26,877 )

Net proceeds from sales of loans held for sale

    33,758       35,318  

Gain on sales of residential loans held for sale

    (542 )     (560 )

Gain on sales of SBA loans held for sale

    (743 )     (675 )

Amortization of intangible assets

    109       131  

Bank-owned life insurance income, net

    (114 )     (112 )

Depreciation of premises and equipment

    395       405  

Stock-based compensation

    202       (16 )

Amortization of available-for-sale securities, net

    286       222  

Changes in other assets and liabilities:

               

Other assets

    (15 )     521  

Other liabilities

    (345 )     (3,059 )

Net cash (used in) provided by operating activities

    (611 )     5,124  

Investing activities:

               

Purchases of available-for-sale securities

    (9,056 )     (5,000 )

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

    14,681       5,808  

Loan purchases

    (13,853 )     (23,458 )

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

    (13,969 )     5,712  

Purchases and disposals of premises and equipment, net

    (47 )     (618 )

Proceeds from sales of real estate owned and other repossessed collateral

    67       642  

Net cash used in investing activities

    (22,177 )     (16,914 )

Financing activities:

               

Net increase in deposits

    4,978       18,722  

Net increase (decrease) in short-term borrowings

    -       130  

Repurchase of common stock

    (6,943 )     (548 )

Dividends paid on common stock

    (93 )     (95 )

Repayment of wholesale repurchase agreements

    -       (10,000 )

Repayment of capital lease obligation

    (62 )     (56 )

Net cash (used in) provided by financing activities

    (2,120 )     8,153  
                 

Net decrease in cash and cash equivalents

    (24,908 )     (3,637 )

Cash and cash equivalents, beginning of period

    151,157       89,850  

Cash and cash equivalents, end of period

  $ 126,249     $ 86,213  
                 

Supplemental schedule of noncash investing activities:

               

Transfers from loans to real estate owned and other repossessed collateral

  $ 2,188     $ 323  

 

 

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, 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, 2016 (“Fiscal 2016”) included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

2. Recent Accounting Pronouncements

 

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. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 

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. Early adoption is permitted for only one of the six amendments. 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.

 

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). This update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). This update clarifies and provides guidance on several cash receipt and cash payment classification issues, including debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. 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.

 

   

September 30, 2016

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 48,856     $ 24     $ (31 )   $ 48,849  

Agency mortgage-backed securities

    40,483       117       (29 )     40,571  

Other investment measured at net asset value

    5,125       38       -       5,163  
    $ 94,464     $ 179     $ (60 )   $ 94,583  

 

 

    June 30, 2016  
    Amortized     Gross Unrealized     Gross Unrealized     Fair   
    Cost      Gains     Losses     Value  
    (Dollars in thousands)  

U.S. Government agency securities

  $ 51,948     $ 98     $ -     $ 52,046  

Agency mortgage-backed securities

    43,330       90       (52 )     43,368  

Other investment measured at net asset value

    5,097       61       -       5,158  
    $ 100,375     $ 249     $ (52 )   $ 100,572  

 

 

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, 2016 or 2015. At September 30, 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.

 

   

September 30, 2016

 
   

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

  $ 36,671     $ (31 )   $ -     $ -     $ 36,671     $ (31 )

Agency mortgage-backed securities

    2,082       (1 )     15,780       (28 )     17,862       (29 )

Other investment measured at net asset value

    -       -       -       -       -       -  
    $ 38,753     $ (32 )   $ 15,780     $ (28 )   $ 54,533     $ (60 )

 

   

June 30, 2016

 
   

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

  $ -     $ -     $ -     $ -     $ -     $ -  

Agency mortgage-backed securities

    -       -       25,350       (52 )     25,350       (52 )

Other investment measured at net asset value

    -       -       -       -       -       -  
    $ -     $ -     $ 25,350     $ (52 )   $ 25,350     $ (52 )

 

There were no other-than-temporary impairment losses on securities during the three months ended September 30, 2016 or 2015.

 

At September 30, 2016, the Company had seven securities in a continuous loss position for greater than twelve months. At September 30, 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 September 30, 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 September 30, 2016, the Company does not intend to sell and it is not more likely than not that the Company will 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, 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 underlying composition of such fund is primarily government agencies or other investment-grade investments. The effective duration of the investments is 4.67 years at September 30, 2016.

 

 

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of September 30, 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

   

Fair

 
   

Cost

   

Value

 
   

(Dollars in thousands)

 

Due within one year

  $ -     $ -  

Due after one year through five years

    48,856       48,849  

Due after five years through ten years

    18,104       18,217  

Due after ten years

    22,379       22,354  

Total

  $ 89,339     $ 89,420  

 

 

 

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 modified 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, 2016     June 30, 2016  
    Originated     Purchased     Total     Originated     Purchased     Total  
    (Dollars in thousands)  

Residential real estate

  $ 90,230     $ 2,895     $ 93,125     $ 93,391     $ 2,559     $ 95,950  

Home equity

    17,098       -       17,098       18,012       -       18,012  

Commercial real estate

    218,236       231,317       449,553       189,616       236,952       426,568  

Commercial and industrial

    154,008       2,102       156,110       145,758       198       145,956  

Consumer

    5,532       -       5,532       5,950       -       5,950  

Total loans

  $ 485,104     $ 236,314     $ 721,418     $ 452,727     $ 239,709     $ 692,436  

 

 

Total loans include deferred loan origination costs of $367 thousand and fees of $58 thousand as of September 30, 2016 and June 30, 2016, respectively.

 

 

Past Due and Nonaccrual Loans

 

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

 

   

September 30, 2016

 
                   

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

  $ 75     $ 637     $ -     $ 2,367     $ 3,079     $ 87,151     $ 90,230     $ 3,273  

Home equity

    50       -       -       48       98       17,000       17,098       48  

Commercial real estate

    256       -       -       94       350       217,886       218,236       361  

Commercial and industrial

    -       -       -       -       -       154,008       154,008       347  

Consumer

    92       8       -       95       195       5,337       5,532       121  

Total originated portfolio

    473       645       -       2,604       3,722       481,382       485,104       4,150  

Purchased portfolio:

                                                               

Residential real estate

    1,108       -       -       -       1,108       1,787       2,895       1,107  

Commercial and industrial

    -       93       -       -       93       2,009       2,102       48  

Commercial real estate

    179       1,411       -       3,269       4,859       226,458       231,317       3,618  

Total purchased portfolio

    1,287       1,504       -       3,269       6,060       230,254       236,314       4,773  

Total loans

  $ 1,760     $ 2,149     $ -     $ 5,873     $ 9,782     $ 711,636     $ 721,418     $ 8,923  

 

   

June 30, 2016

 
                   

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

  $ 302     $ 910     $ -     $ 1,555     $ 2,767     $ 90,624     $ 93,391     $ 2,613  

Home equity

    146       -       -       48       194       17,818       18,012       48  

Commercial real estate

    132       -       -       188       320       189,296       189,616       474  

Commercial and industrial

    -       -       -       15       15       145,743       145,758       17  

Consumer

    73       56       -       74       203       5,747       5,950       163  

Total originated portfolio

    653       966       -       1,880       3,499       449,228       452,727       3,315  

Purchased portfolio:

                                                               

Residential real estate

    -       -       -       -       -       2,559       2,559       1,125  

Commercial and industrial

    -       -       -       -       -       198       198       -  

Commercial real estate

    -       19       -       3,387       3,406       233,546       236,952       3,387  

Total purchased portfolio

    -       19       -       3,387       3,406       236,303       239,709       4,512  

Total loans

  $ 653     $ 985     $ -     $ 5,267     $ 6,905     $ 685,531     $ 692,436     $ 7,827  

 

 

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 and industrial, 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 and industrial: 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. 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 for originated loans 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;

 

 

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; and

 

 

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 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.

 

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, 2016

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial