Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 05/10/2017 10:00:48) 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, 2017

 

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 by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐  

   

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 5, 2017, the registrant had outstanding 7,830,460 shares of voting common stock, $1.00 par value per share and 991,194 shares of non-voting common stock, $1.00 par value per share  

 

 
1

Table of Contents
 

 

P ar t I.

Financial Information

 

Item 1.

Financial Statements (unaudited)

3

 

 

Consolidated Balance Sheets March 31, 2017 and June 30, 2016

 3

 

 

 

 

 

 

Consolidated Statements of Income   Three Months Ended March 31, 2017 and 2016 Nine Months Ended March 31, 2017 and 2016

 4
   

 

 
   

Consolidated Statements of Comprehensive Income  Three Months Ended March 31, 2017 and 2016 Nine Months Ended March 31, 2017 and 2016

 5
   

 

 

 

 

Consolidated Statements of Changes in S hare holders' Equity Nine Months Ended March 31, 2017 and 2016

 6

 

 

 

 

 

 

Consolidated Statements of Cash Flows Nine Months Ended March 31, 2017 and 2016

 7

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 8

 

 

 

 

 

Item 2.

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

 29

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

 44

 

 

 

 

 

Item 4.

Controls and Procedures

 45
       

Part II.

Other Information

 

 

 

 

 

Item 1.

Legal Proceedings

 46

 

 

 

 

 

Item 1 A .

Risk Factors

 46

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 46

 

 

 

 

 

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- FINA NCIAL 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, 2017

   

June 30, 2016

 

Assets

               

Cash and due from banks

  $ 3,559     $ 2,459  

Short-term investments

    143,883       148,698  

Total cash and cash equivalents

    147,442       151,157  
                 
                 

Available-for-sale securities, at fair value

    98,865       100,572  
                 

Residential real estate loans held for sale

    1,424       6,449  

SBA loans held for sale

    3,210       1,070  

Total loans held for sale

    4,634       7,519  
                 
                 

Loans

               

Commercial real estate

    479,260       426,568  

Residential real estate

    103,254       113,962  

Commercial and industrial

    154,343       145,956  

Consumer

    4,871       5,950  

Total loans

    741,728       692,436  

Less: Allowance for loan losses

    3,375       2,350  

Loans, net

    738,353       690,086  
                 
                 

Premises and equipment, net

    7,002       7,801  

Real estate owned and other repossessed collateral, net

    3,761       1,652  

Federal Home Loan Bank stock, at cost

    1,938       2,408  

Intangible assets, net

    1,408       1,732  

Bank owned life insurance

    16,065       15,725  

Other assets

    7,578       7,501  

Total assets

  $ 1,027,046     $ 986,153  
                 

Liabilities and Shareholders' Equity

               

Deposits

               

Demand

  $ 72,369     $ 66,686  

Savings and interest checking

    108,507       107,218  

Money market

    347,658       275,437  

Time

    320,945       351,091  

Total deposits

    849,479       800,432  
                 

Federal Home Loan Bank advances

    20,017       30,075  

Subordinated debt

    23,544       23,331  

Capital lease obligation

    938       1,128  

Other liabilities

    14,393       14,596  

Total liabilities

    908,371       869,562  
                 

Commitments and contingencies

    -       -  
                 
                 

Shareholders' equity

               

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2017 and June 30, 2016

    -       -  

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 7,824,085 and 8,089,790 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively

    7,824       8,089  

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 991,194 and 1,227,683 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively

    991       1,228  

Additional paid-in capital

    77,249       83,020  

Retained earnings

    34,204       26,160  

Accumulated other comprehensive loss

    (1,593 )     (1,906 )

Total shareholders' equity

    118,675       116,591  

Total liabilities and shareholders' equity

  $ 1,027,046     $ 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 March 31,

   

Nine Months Ended March 31,

 
   

2017

   

2016

   

2017

   

2016

 

Interest and dividend income:

                               

Interest and fees on loans

  $ 14,417     $ 10,904     $ 40,132     $ 33,413  

Interest on available-for-sale securities

    261       236       748       700  

Other interest and dividend income

    282       119       669       295  

Total interest and dividend income

    14,960       11,259       41,549       34,408  
                                 

Interest expense:

                               

Deposits

    1,855       1,566       5,407       4,356  

Federal Home Loan Bank advances

    159       255       634       774  

Wholesale repurchase agreements

    -       -       -       65  

Short-term borrowings

    -       5       -       19  

Subordinated debt

    475       164       1,401       476  

Obligation under capital lease agreements

    12       15       39       49  

Total interest expense

    2,501       2,005       7,481       5,739  
                                 

Net interest and dividend income before provision for loan losses

    12,459       9,254       34,068       28,669  

Provision for loan losses

    384       236       1,205       1,301  

Net interest and dividend income after provision for loan losses

    12,075       9,018       32,863       27,368  
                                 

Noninterest income:

                               

Fees for other services to customers

    516       428       1,405       1,264  

Gain on sales of residential loans held for sale

    281       335       1,160       1,292  

Gain on sales of SBA loans

    951       1,205       3,411       2,558  

Gain on sale of other loans

    365       -       365       -  

Gain (loss) recognized on real estate owned and other repossessed collateral, net

    20       (54 )     9       (127 )

Bank-owned life insurance income

    113       112       341       336  

Other noninterest income

    62       9       115       39  

Total noninterest income

    2,308       2,035       6,806       5,362  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    5,203       4,846       15,678       13,956  

Occupancy and equipment expense

    1,299       1,327       3,781       3,937  

Professional fees

    370       348       1,265       1,042  

Data processing fees

    455       394       1,286       1,109  

Marketing expense

    89       64       272       200  

Loan acquisition and collection expense

    728       297       1,502       961  

FDIC insurance premiums

    78       125       224       354  

Intangible asset amortization

    107       108       324       369  

Other noninterest expense

    513       903       2,093       2,489  

Total noninterest expense

    8,842       8,412       26,425       24,417  
                                 

Income before income tax expense

    5,541       2,641       13,244       8,313  

Income tax expense

    2,080       832       4,932       2,892  

Net income

  $ 3,461     $ 1,809     $ 8,312     $ 5,421  
                                 
                                 

Weighted-average shares outstanding:

                               

Basic

    8,830,442       9,456,198       8,923,280       9,526,302  

Diluted

    8,893,534       9,459,611       8,963,483       9,531,747  

 

                               
Earnings per common share:                                

Basic

  $ 0.39     $ 0.19     $ 0.93     $ 0.57  

Diluted

    0.39       0.19       0.93       0.57  
                                 

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,

 
   

2017

   

2016

   

2017

   

2016

 

Net income

  $ 3,461     $ 1,809     $ 8,312     $ 5,421  
                                 

Other comprehensive income, before tax:

                               

Available-for-sale securities:

                               

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

    206       867       (1,208 )     641  

Derivatives and hedging activities:

                               

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

    59       (982 )     1,692       (1,536 )

Reclassification adjustments included in net income

    12       -       26       -  

Total derivatives and hedging activities

    71       (982 )     1,718       (1,536 )

Total other comprehensive income (loss), before tax

    277       (115 )     510       (895 )

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

    105       (44 )     197       (340 )

Other comprehensive income (loss), net of tax

    172       (71 )     313       (555 )

Comprehensive income

  $ 3,633     $ 1,738     $ 8,625     $ 4,866  

 

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

   

Retained

   

Accumulated

Other

Comprehensive

   

Total

Shareholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Paid-in Capital

   

Earnings

   

Loss

   

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

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

Other comprehensive loss, net of tax

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

Common stock repurchased

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

Conversions between voting common stock and non- voting common stock, net

    -       -       (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  
                                                                                 

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

    -       -       -       -       -       -       -       8,312       -       8,312  

Other comprehensive gain, net of tax

    -       -       -       -       -       -       -       -       313       313  

Common stock repurchased

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

Conversions between voting common stock and non- voting common stock, net

    -       -       236,489       237       (236,489 )     (237 )     -       -       -       -  

Dividends on common stock at $0.03 per share

    -       -       -       -       -       -       -       (268 )     -       (268 )

Stock-based compensation

    -       -       -       -       -       -       689       -       -       689  

Issuance of restricted common stock

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

Cancellation and forfeiture of restricted common stock

    -       -       (16,956 )     (17 )     -       -       4       -       -       (13 )

Other tax related APIC adjustment

    -       -       -       -       -       -       (6 )     -       -       (6 )

Balance at March 31, 2017

    -     $ -       7,824,085     $ 7,824       991,194     $ 991     $ 77,249     $ 34,204     $ (1,593 )   $ 118,675  

 

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,

 
   

2017

   

2016

 

Operating activities:

               

Net income

  $ 8,312     $ 5,421  

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

         

Provision for loan losses

    1,205       1,301  

(Gain) loss on sale and impairment of real estate owned and other repossessed collateral, net

    (90 )     121  

Loss on sale and disposal of premises and equipment, net

    82       6  

Accretion of fair value adjustments on loans, net

    (8,702 )     (7,348 )

Accretion of fair value adjustments on deposits, net

    (5 )     (5 )

Accretion of fair value adjustments on borrowings, net

    72       23  

Amortization of subordinated debt issuance costs

    83       -  

Originations of loans held for sale

    (89,237 )     (66,929 )

Net proceeds from sales of loans held for sale

    98,027       97,758  

Gain on sales of residential loans held for sale

    (1,160 )     (1,292 )

Gain on sales of SBA and other loans held for sale

    (3,776 )     (2,558 )

Amortization of intangible assets

    324       369  

Bank-owned life insurance income, net

    (341 )     (336 )

Depreciation of premises and equipment

    1,138       1,230  

Stock-based compensation

    689       445  

Amortization of available-for-sale securities, net

    810       754  

Changes in other assets and liabilities:

               

Other assets

    (1,245 )     (378 )

Other liabilities

    1,515       197  

Net cash provided by operating activities

    7,701       28,779  
                 

Investing activities:

               

Purchases of available-for-sale securities

    (19,526 )     (20,566 )

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

    19,214       31,870  
Proceeds from sale of other loans     18,624       -  

Loan purchases

    (67,747 )     (81,245 )

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

    5,658       (24,095 )

Purchases and disposals of premises and equipment, net

    (421 )     (1,084 )

Redemption of Federal Home Loan Bank stock

    470       1,531  

Proceeds from sales of real estate owned and other repossessed collateral

    680       1,503  

Net cash used in investing activities

    (43,048 )     (92,086 )
                 

Financing activities:

               

Net increase in deposits

    49,052       78,195  

Net increase in short-term borrowings

    -       404  

Repurchase of common stock

    (6,943 )     (3,215 )

Taxes paid for retirement of common stock and other tax related APIC adjustment

    (19 )     (10 )

Dividends paid on common stock

    (268 )     (287 )

Repayment of wholesale repurchase agreements

    -       (10,000 )

Repayment of Federal Home Loan Bank advances

    (10,000 )     -  

Repayment of capital lease obligation

    (190 )     (178 )

Net cash provided by financing activities

    31,632       64,909  
                 

Net (decrease) increase in cash and cash equivalents

    (3,715 )     1,602  

Cash and cash equivalents, beginning of period

    151,157       89,850  

Cash and cash equivalents, end of period

  $ 147,442     $ 91,452  
                 

Supplemental schedule of noncash investing activities:

               

Transfers from loans to real estate owned and other repossessed collateral, net

  $ 2,699     $ 663  

 

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, 2017

 

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 2015-14”) 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 the adoption of ASU 2016-13 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.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. 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.

 

In March 2017, the FASB issued ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20) (“ASU 2017-08”). This update amends the amortization period for certain purchased callable debt securities held at a premium, and shortens the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018, 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.

 

   

March 31, 2017

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 57,540     $ 2     $ (204 )   $ 57,338  

Agency mortgage-backed securities

    35,653       -       (685 )     34,968  

Other investments measured at net asset value

    6,683       -       (124 )     6,559  
    $ 99,876     $ 2     $ (1,013 )   $ 98,865  

 

   

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 investments 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 and nine months ended March 31, 2017 or 2016. At March 31, 2017, 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, 2017

 
   

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

  $ 54,336     $ (204 )   $ -     $ -     $ 54,336     $ (204 )

Agency mortgage-backed securities

    21,051       (334 )     13,917       (351 )     34,968       (685 )

Other investments measured at net asset value

    5,059       (124 )     -       -       5,059       (124 )
    $ 80,446     $ (662 )   $ 13,917     $ (351 )   $ 94,363     $ (1,013 )

 

   

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 investments measured at net asset value

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

 

There were no other-than-temporary impairment losses on securities during the three and nine months ended March 31, 2017 or 2016.

 

At March 31, 2017, the Company had seven securities in a continuous loss position for greater than twelve months. At March 31, 2017, 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, 2017 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, 2017, 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 March 31, 2017.

 

The investments measured at net asset value include a fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies, as well as a fund that primarily invests in the federally guaranteed portion of SBA 7(a) loans that adjust quarterly or monthly and are indexed to the Prime Rate. The underlying composition of these funds is primarily government agencies, other investment-grade investments, or the guaranteed portion of SBA 7(a) loans, as applicable. As of March 31, 2017, the effective duration of the fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies is 5.35 years.

 

 

The amortized cost and fair values of available-for-sale debt securities by contractual maturity are shown below as of March 31, 2017. 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

  $ 15,173     $ 15,153  

Due after one year through five years

    43,438       43,250  

Due after five years through ten years

    14,316       14,118  

Due after ten years

    20,266       19,785  

Total

  $ 93,193     $ 92,306  

 

 

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.

 

 

   

March 31, 2017

   

June 30, 2016

 
    Originated    

Purchased

   

Total

   

Originated

   

Purchased

   

Total

 
  (Dollars in thousands)  

Residential real estate

  $ 85,487     $ 3,026     $ 88,513     $ 93,391     $ 2,559     $ 95,950  

Home equity

    14,741       -       14,741       18,012       -       18,012  

Commercial real estate

    246,841       232,419       479,260       189,616       236,952       426,568  

Commercial and industrial

    153,192       1,151       154,343       145,758       198       145,956  

Consumer

    4,871       -       4,871       5,950       -       5,950  

Total loans

  $ 505,132     $ 236,596     $ 741,728     $ 452,727     $ 239,709     $ 692,436  

 

 

Total loans include net deferred loan origination costs of $748 thousand as of March 31, 2017 and net deferred loan origination fees of $58 thousand as of June 30, 2016.

 

 

Past Due and Nonaccrual Loans

 

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

 

   

March 31, 2017

 
               

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

  $ 1,199     $ 430     $ -     $ 1,170     $ 2,799     $ 82,688     $ 85,487     $ 3,265  

Home equity

    147       -       -       48       195       14,546       14,741       48  

Commercial real estate

    940       29       -       136       1,105       245,736       246,841       420  

Commercial and industrial

    -       -       -       2,468       2,468       150,724       153,192       2,636  

Consumer

    35       104       -       21       160       4,711       4,871       65  

Total originated portfolio

    2,321       563       -       3,843       6,727       498,405       505,132       6,434  

Purchased portfolio:

                                                               

Residential real estate

    1,057       16       -       -       1,073       1,953       3,026       1,073  

Commercial and industrial

    118       7       -       27       152       999       1,151       68  

Commercial real estate

    9,679       5,875       -       626       16,180       216,239       232,419       7,247  

Total purchased portfolio

    10,854       5,898       -       653       17,405       219,191       236,596       8,388  

Total loans

  $ 13,175     $ 6,461     $ -     $ 4,496     $ 24,132     $ 717,596     $ 741,728     $ 14,822  

 

   

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     $