Northeast Bancorp
NORTHEAST BANCORP /ME/ (Form: 10-Q, Received: 02/09/2018 12:07:34)

Table of Contents

U NITED 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 Decembe r 3 1 , 201 7

 

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 February 2, 2018, the registrant had outstanding 8,008,634 shares of voting common stock, $1.00 par value per share and 918,639 shares of non-voting common stock, $1.00 par value per share.

 

1

 

Part I.

Financial Information

 
       

 

Item 1.

Financial Statements ( U naudited )

3

 

 

Consolidated Balance Sheets December 31 , 2017 and June 30, 201 7

3

 

 

 

 

 

 

Consolidated Statements of Income Three and Six Months Ended December 31 , 201 7 and 201 6

4
       
   

Consolidated Statements of Comprehensive Income Three and Six Months Ended December 31 , 2017 and 201 6

5
       

 

 

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

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows Six Months Ended December 31, 2017 and 2017

7

 

 

 

 

 

 

Notes to Unaudited 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

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
       
   

Signatures

47

 

2

 

PART 1- FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

( In thousands, except share and per share data)

 

   

December 31, 2017

   

June 30, 2017

 

Assets

               

Cash and due from banks

  $ 2,515     $ 3,582  

Short-term investments

    125,708       159,701  

Total cash and cash equivalents

    128,223       163,283  
                 

Available-for-sale securities, at fair value

    92,339       96,693  
                 

Residential real estate loans held for sale

    5,515       4,508  

SBA loans held for sale

    818       191  

Total loans held for sale

    6,333       4,699  
                 

Loans

               

Commercial real estate

    493,954       498,004  

Commercial and industrial

    178,840       175,654  

Residential real estate

    97,593       101,168  

Consumer

    3,803       4,369  

Total loans

    774,190       779,195  

Less: Allowance for loan losses

    4,355       3,665  

Loans, net

    769,835       775,530  
                 

Premises and equipment, net

    7,061       6,937  

Real estate owned and other repossessed collateral, net

    910       826  

Federal Home Loan Bank stock, at cost

    1,758       1,938  

Intangible assets, net

    1,082       1,300  

Loan s ervicing rights, net

    3,005       2,846  

Bank-owned life insurance

    16,402       16,179  

Other assets

    7,498       6,643  

Total assets

  $ 1,034,446     $ 1,076,874  
                 

Liabilities and Shareholders' Equity

               

Deposits

               

Demand

  $ 71,054     $ 69,827  

Savings and interest checking

    107,750       108,417  

Money market

    352,237       374,569  

Time

    317,613       337,037  

Total deposits

    848,654       889,850  
                 

Federal Home Loan Bank advances

    15,000       20,011  

Subordinated debt

    23,790       23,620  

Capital lease obligation

    741       873  

Other liabilities

    16,258       19,723  

Total liabilities

    904,443       954,077  
                 

Commitments and contingencies

    -       -  
                 

Shareholders' equity

               

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

    -       -  

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 8,017,334 and 7,840,460 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively

    8,017       7,841  

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 921,939 and 991,194 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively

    922       991  

Additional paid-in capital

    76,805       77,455  

Retained earnings

    45,855       38,142  

Accumulated other comprehensive loss

    (1,596 )     (1,632 )

Total shareholders' equity

    130,003       122,797  

Total liabilities and shareholders' equity

  $ 1,034,446     $ 1,076,874  

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

( In thousands, except share and per share data)

 

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 
   

2017

   

2016

   

2017

   

2016

 

Interest and dividend income:

                               

Interest and fees on loans

  $ 14,501     $ 13,913     $ 29,883     $ 25,716  

Interest on available-for-sale securities

    267       247       533       486  

Other interest and dividend income

    492       172       1,022       387  

Total interest and dividend income

    15,260       14,332       31,438       26,589  
                                 

Interest expense:

                               

Deposits

    2,129       1,798       4,305       3,553  

Federal Home Loan Bank advances

    148       220       319       475  

Subordinated debt

    517       468       1,025       927  

Obligation under capital lease agreements

    9       13       21       27  

Total interest expense

    2,803       2,499       5,670       4,982  

Net interest and dividend income before provision for loan losses

    12,457       11,833       25,768       21,607  

Provision for loan losses

    437       628       792       820  

Net interest and dividend income after provision for loan losses

    12,020       11,205       24,976       20,787  
                                 

Noninterest income:

                               

Fees for other services to customers

    475       481       1,002       889  

Gain on sales of residential loans held for sale

    255       337       545       878  

Gain on sales of SBA loans

    341       1,734       1,361       2,476  

Gain on sales of other loans

    21       -       21       -  

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

    11       3       11       (11 )

Bank-owned life insurance income

    111       114       223       228  

Other noninterest income

    14       21       23       38  

Total noninterest income

    1,228       2,690       3,186       4,498  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    5,173       5,161       10,427       10,475  

Occupancy and equipment expense

    1,150       1,252       2,260       2,481  

Professional fees

    425       399       867       895  

Data processing fees

    624       410       1,227       832  

Marketing expense

    70       97       157       184  

Loan acquisition and collection expense

    368       547       733       774  

FDIC insurance premiums

    80       22       160       146  

Intangible asset amortization

    109       109       218       218  

Other noninterest expense

    564       959       1,228       1,577  

Total noninterest expense

    8,563       8,956       17,277       17,582  

Income before income tax expense

    4,685       4,939       10,885       7,703  

Income tax expense

    1,381       1,839       2,995       2,852  

Net income

  $ 3,304     $ 3,100     $ 7,890     $ 4,851  
                                 

Weighted-average shares outstanding:

                               

Basic

    8,924,495       8,831,235       8,883,003       8,968,690  

Diluted

    9,168,084       8,864,618       9,129,010       8,999,062  

Earnings per common share:

                               
                                 

Basic

  $ 0.37     $ 0.35     $ 0.89     $ 0.54  

Diluted

    0.36       0.35       0.86       0.54  
                                 

Cash dividends declared per common share

  $ 0.01     $ 0.01     $ 0.02     $ 0.02  

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 
   

201 7

   

201 6

   

201 7

   

2016

 

Net income

  $ 3,304     $ 3,100     $ 7,890     $ 4,851  

Other comprehensive income, before tax:

                               

Available-for-sale securities:

                               

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

    (297 )     (1,336 )     (175 )     (1,414 )

Derivatives and hedging activities:

                               

Ch ange in accumulated gain on effective cash flow hedges

    160       1,486       181       1,633  

Reclassification adjustments included in interest expense

    26       8       49       14  

Total derivatives and hedging activities

    186       1,494       230       1,647  

Total other comprehensive (loss) income, before tax

    (111 )     158       55       233  

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

    (43 )     62       19       92  

Other comprehensive (loss) income, net of tax

    (68 )     96       36       141  

Comprehensive income

  $ 3,236     $ 3,196     $ 7,926     $ 4,992  

 

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)

(I n thousands, except share and per share data)

 

                                                                   

Accumulated

   

 

 
   

Preferred Stock

   

Voting Common Stock

   

Non-voting Common Stock

   

Additional

Paid-in

   

Retained

   

Other

Comprehensive

   

Total

S hareholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 
                                                                                 

Balance at June 30, 201 6

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

Net income

    -       -       -       -       -       -       -       4,851       -       4,851  

Other comprehensive loss , net of tax

    -       -       -       -       -       -       -       -       141       141  

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       -       -       -       -  

Di vidends on common stock at $0.02 per share

    -       -       -       -       -       -       -       (181 )     -       (181 )

Stock-based compensation

    -       -       -       -       -       -       483       -       -       483  

Issuance of restricted common stock

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

Cancellation and f orfeiture of restricted common stock

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

Balance at December 31, 2016

    -     $ -       7,487,552     $ 7,487       1,343,683     $ 1,344     $ 77,046     $ 30,830     $ (1,765 )   $ 114,942  

Balance at June 30, 201 7

    -       -       7,840,460     $ 7,841       991,194     $ 991     $ 77,455     $ 38,142     $ (1,632 )   $ 122,797  

Net income

    -       -       -       -       -       -       -       7,890       -       7,890  

Other comprehensive loss , net of tax

    -       -       -       -       -       -       -       -       36       36  

Conversion of non-voting common stock to voting common stock

    -       -       69,255       69       (69,255 )     (69 )     -       -       -       -  

Di vidends on common stock at $0.02 per share

    -       -       -       -       -       -       -       (177 )     -       (177 )

Stock-based compensation

    -       -       -       -       -       -       485       -       -       485  

Issuance of restricted common stock

    -       -       12,000       12       -       -       (12 )     -       -       -  

Cancellation and forfeiture of restricted common stock

    -       -       (15,756 )     (16 )     -       -       (39 )     -       -       (55 )

S tock options exercised, net

    -       -       111,375       111       -       -       (1,084 )     -       -       (973 )

Balance at December 31, 2017

    -     $ -       8,017,334     $ 8,017       921,939     $ 922     $ 76,805     $ 45,855     $ (1,596 )   $ 130,003  

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

   

Six Months Ended December 31 ,

 
   

201 7

   

201 6

 

Operating activities:

               

Net income

  $ 7,890     $ 4,851  
Adjustments to reconcile net income to net cash provided by operating activities:                

Provision for loan losses

    792       820  

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

    (11 )     11  

Accretion of fair value adjustments on loans, net

    (4,830 )     (5,640 )

Accretion of fair value adjustments on deposits, net

    -       (2 )

Amortization (accretion) of fair value adjustments on borrowings, net

    104       (51 )

Amortization of subordinated debt issuance costs

    55       138  

Originations of loans held for sale

    (49,309 )     (66,778 )

Net proceeds from sales of loans held for sale

    50,946       71,100  

Gain on sales of residential loans held for sale, net

    (545 )     (878 )

Gain on sales of SBA and other loans held for sale, net

    (1,382 )     (2,476 )

Net increase in loan servicing rights

    (159 )     (577 )

Amortization of intangible assets

    218       218  

Bank- owned life insurance income

    (223 )     (228 )

Depreciation and amortization of premises and equipment

    636       769  

Stock-based compensation

    485       483  

Deferred income tax expense

    498       -  

Amortization of available-for-sale securities, net

    450       555  

Net changes in other assets and liabilities:

               

Other assets

    (1,376 )     595  

Other liabilities

    (3,231 )     702  

Net cash provided by operating activities

    1,008       3,612  

Investing activities:

               

Purchases of available-for-sale securities

    (9,222 )     (9,056 )

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

    12,951       17,126  

Loan purchases

    (38,453 )     (59,886 )

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

    45,540       (13,413 )

Purchases of premises and equipment

    (795 )     (229 )

Redemption of Federal Home Loan Bank stock

    180       470  

Proceeds from sales of real estate owned and other repossessed collateral

    1,264       523  

Net cash provided by (used in) investing activities

    11,465       (64,465 )

Financing activities:

               

Net change in deposits

    (41,196 )     39,141  

Repurchase of common stock

    -       (6,943 )

Dividends paid on common stock

    (177 )     (181 )

Repayment of Federal Home Loan Bank advances

    (5,000 )     (10,000 )

Repayment of capital lease obligation

    (132 )     (125 )

Repurchases for tax withholdings on restricted common stock

    (55 )     -  

Repurchases for tax withholdings on stock options

    (973 )     -  

Net cash (used in) provided by financing activities

    (47,533 )     21,892  

Net decrease in cash and cash equivalents

    (35,060 )     (38,961 )

Cash and cash equivalents, beginning of period

    163,283       151,157  

Cash and cash equivalents, end of period

  $ 128,223     $ 112,196  
                 

Supplemental schedule of noncash investing activities:

               

Transfers from loans to real estate owned and other repossessed collateral

  $ 1,302     $ 1,946  

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

December 31 , 201 7

 

1. Basis of Presentation

 

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

 

These unaudited consolidated 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 accompanying unaudited 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, 2017 (“Fiscal 2017”) 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 Accounting Standards Update (“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 timing of the Company’s revenue recognition is not expected to materially change. The Company is currently performing an assessment of revenue streams and reviewing contracts potentially affected by the ASU to determine the impact of the new guidance. The Company’s largest portions of revenue, interest and fees on loans and gain on sales of loans, are specifically excluded from the scope of the guidance, and the Company currently recognizes the majority of the remaining revenue sources in a manner that management believes is consistent with the new guidance. Because of this, management believes that revenue recognized under the new guidance will generally approximate revenue recognized under current GAAP. These observations are subject to change as the evaluation is completed.

 

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 to determine the potential impact it will have on its consolidated financial statements. The Company’s assets and liabilities will increase based on the present value of the remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company’s results of operations.

 

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 simplified 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 are required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. This guidance became effective for the Company for the fiscal year beginning July 1, 2017. For interim reporting purposes the excess tax benefits or deficiencies shall be recorded as discrete items in the period in which they occur. In addition to the excess tax benefit treatment, the amendment removed the assumed proceeds related to the excess tax benefit from the calculation of diluted shares.

 

 

Upon adoption, the most significant impact of this amendment resulted from the prospective application of current excess tax benefits and deficiencies being recognized in income tax expense, which would previously have been recognized in additional paid-in capita l. In the six months ended December 31, 2017, this item reduced income tax expense and increased net income by approximately $1.1 million, representing an income tax benefit arising from individuals who exercised non-qualified stock options and restricted stock awards that vested during the period. For the year ended June 30, 2017, the Company recognized $27 thousand in additional paid-in-capital related to the excess tax benefit, which, if under the new ASU, would have been recognized as an income tax benefit in the income statement. These amounts, treated as discrete items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then fair market value of the Company's stock in comparison to the compensation cost recognized in the financial statements. In addition to the excess tax benefit treatment, the amendment removed the assumed proceeds related to the excess tax benefit from the calculation of diluted shares which increased diluted weighted average common shares outstanding by 40,966 shares to 9,089,936. This amendment is applied on a prospective basis, and no prior periods were adjusted. Additionally upon adoption, the Company made a policy election to record forfeitures as they occur rather than make use of an estimate. The other provisions did not have a material impact on the Company's consolidated financial statements upon adoption.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) (“ASU 2016-13”). This guidance 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 guidance 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 evaluating the provisions of the guidance, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. Management is in the process of identifying the methodologies and the additional data requirements necessary to implement the guidance and plans to engage an existing third-party service provider to assist in implementation.

   

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”) which amends the scope of modification accounting for share-based payment arrangements. This update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. This update is effective for public business entities for annual periods being after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted including adopting in any interim period. This update should be applied prospectively to awards modified on or after the effective date. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”). This guidance permits hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk, and improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this guidance 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 consolidated financial statements.

 

 

3. Available-for-Sale S ecurities

 

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

 

   

December 31 , 2017

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
   

Cost

   

Gains

    Losses    

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 57,365     $ -     $ (273 )   $ 57,092  

Agency mortgage-backed securities

    29,306       -       (726 )     28,580  

Other investment s measured at net asset value

    6,791       -       (124 )     6,667  
    $ 93,462     $ -     $ (1,123 )   $ 92,339  

 

   

June 30, 201 7

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

 
    Cost    

Gains

   

Losses

   

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 57,401     $ -     $ (233 )   $ 57,168  

Agency mortgage-backed securities

    33,523       -       (620 )     32,903  

Oth er investments measured at net asset value

    6,717       -       (95 )     6,622  
    $ 97,641     $ -     $ (948 )   $ 96,693  

 

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale. There were no securities sold during the three and six months ended December 31, 2017 or 2016. At December 30, 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.

 

   

Dec ember 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

  $ 21,111     $ (86 )   $ 35,981     $ (187 )   $ 57,092     $ (273 )

Agency mortgage-backed securities

    1,627       (9 )     26,953       (717 )     28,580       (726 )

Other investment s measured at net asset value

    -       -       5,142       (124 )     5,142       (124 )
    $ 22,738     $ (95 )   $ 68,076     $ (1,028 )   $ 90,814     $ (1,123 )

 

   

June 30, 201 7

 
   

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

  $ 57,168     $ (233 )   $ -     $ -     $ 57,168     $ (233 )

Agency mortgage-backed securities

    19,571       (298 )     13,332       (322 )     32,903       (620 )

Other investment s measured at net asset value

    5,115       (95 )     -       -       5,115       (95 )
    $ 81,854     $ (626 )   $ 13,332     $ (322 )   $ 95,186     $ (948 )

 

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

 

At December 31, 2017, the Company had 31 securities in a continuous loss position for greater than twelve months. At December 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 December 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 December 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 December 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 December 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 4.66 years.

 

 

The amortized cost and fair values of availab le-for-sale debt securities by contractual maturity are shown below as of December 31, 2017. Actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

 

   

Amortized Cost

   

Fair Value

 
   

(Dollars in thousands)

 

Due within one year

  $ 39,168     $ 38,981  

Due after one year through five years

    18,197       18,111  

Due after five years through ten years

    -       -  

Due after ten years

    -       -  

Total U.S. Government agency securities

    57,365       57,092  

Agency mortgage-backed securities

    29,306       28,580  

Total debt securities

  $ 86,671     $ 85,672  

 

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 and interest 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.

 

   

December 31, 201 7

   

June 30, 201 7

 
   

Originate d

   

Purchase d

   

Tota l

   

Originate d

   

Purchase d

   

Tota l

 
   

(Dollars in thousands )

 

Residential real estat e

  $ 80,462     $ 4,723     $ 85,185     $ 83,759     $ 3,377     $ 87,136  

Home equit y

    12,313       95       12,408       13,931       101       14,032  

Commercial real estat e

    255,679       238,275       493,954       256,280       241,724       498,004  

Commercial and industria l

    177,756       1,084       178,840       174,468       1,186       175,654  

Consumer

    3,803       -       3,803       4,369       -       4,369  

Total loan s

  $ 530,013     $ 244,177     $ 774,190     $ 532,807     $ 246,388     $ 779,195  

 

Total loans include net deferred loan origination costs of $212 thousand and $507 thousand as of December 31, 2017 and June 30, 2017, respectively.

 

Past Due and Nonaccrual Loans

 

The following i s a summary of past due and nonaccrual loans:

 

   

December 31 , 2017

 
   

Past Due

30-59

Days

   

Past Due

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

   

Nonaccrual

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

  $ 1,472     $ 618     $ -     $ 2,108     $ 4,198     $ 76,264     $ 80,462     $ 3,783  

Home equity

    -       148       -       108       256       12,057       12,313       107  

Commercial real estate

    1,870       288       -       123       2,281       253,398       255,679       2,537  

Commercial and industrial

    1,004       36       -       -       1,040       176,716       177,756       2,555  

Consumer

    55       53       -       36       144       3659       3,803       147  

Total originated portfolio

    4,401       1,143       -       2,375       7,919       522,094       530,013       9,129  

Purchased portfolio:

                                                               

Residential real estate and home equity

    -       -       -       220       220       4,598       4,818       220  

Commercial and industrial

    217       -       -       -       217       867       1,084       292  

Commercial real estate

    10,918       5,971       -       4,712       21,601       216,674       238,275       8,450  

Total purchased portfolio

    11,135       5,971       -       4,932       22,038       222,139       244,177       8,962  

Total loans

  $ 15,536     $ 7,114     $ -     $ 7,307     $ 29,957     $ 744,233     $ 774,190     $ 18,091  

 

   

June 30, 2017

 
   

Past Due

30-59

Days

   

Past Due

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

   

Nonaccrual

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

  $ 141     $ 574     $ -     $ 1,398     $ 2,113     $ 81,646     $ 83,759     $ 3,337  

Home equity

    49       -       -       58       107       13,824       13,931       58  

Commercial real estate

    2,266       -       -       124       2,390       253,890       256,280       413  

Commercial and industrial

    -       -       -       2,433       2,433       172,035       174,468       2,600  

Consumer

    69       50       -       32       151       4,218       4,369       103  

Total originated portfolio

    2,525       624       -       4,045       7,194       525,613       532,807       6,511  

Purchased portfolio:

                                                               

Residential real estate and home equity

    -       1,082       -       16       1,098       2,380       3,478       1,056  

Commercial and industrial

    -       -       -       -       -       1,186       1,186       32  

Commercial real estate

    173       1,997       -       2,922       5,092       236,632       241,724       6,364  

Total purchased portfolio

    173       3,079       -       2,938       6,190       240,198       246,388       7,452  

Total loans

  $ 2,698     $ 3,703     $ -     $ 6,983     $ 13,384     $ 765,811     $ 779,195     $ 13,963  

 

 

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 estimated 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: residential real estate, commercial real estate, commercial and industrial, consumer, 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 and operating statements, 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. This segment also includes loans to non-bank lenders, which are generally secured by a collateral assignment of the notes and mortgages on loans originated by the non-bank lenders. 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 the 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 December 31 , 2017

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 513     $ 2,443     $ 727     $ 41     $ 310     $ -     $ 4,034  

Provision

    176       74       (42 )     19       210       -       437  

Recoveries

    1       -       5       25       -       -       31  

Charge-offs

    (112 )     -       -       (35 )     -       -       (147 )

Ending balance

  $ 578     $ 2,517     $ 690     $ 50     $ 520     $ -     $ 4,355  

 

   

Three Months Ended December 31, 2016

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 541     $ 1,421     $ 318     $ 68     $ 158     $ -     $ 2,506  

Provision

    6       351       207       40       24       -       628  

Recoveries

    27       19       6       21       -       -       73  

Charge-offs

    -       (41 )     -       (59 )     -       -       (100 )

Ending balance

  $ 574     $ 1,750     $ 531     $ 70     $ 182     $ -     $ 3,107  

 

   

Six Months Ended December 31, 2017

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 477     $ 2,312     $ 520     $ 53     $ 303     $ -     $ 3,665  

Provision

    217       205       147       6       217       -       792  

Recoveries

    8       -       23       31       -       -       62  

Charge-offs

    (124 )     -       -       (40 )     -       -       (164 )

Ending balance

  $ 578     $ 2,517     $ 690     $ 50     $ 520     $ -     $ 4,355  

 

   

Six Months Ended December 31, 201 6

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 663     $ 1,195     $ 297     $ 62     $ 133     $ -     $ 2,350  

Provision

    (93 )     577       224       63       49       -       820  

Recoveries

    29       19       11       32       -       -       91  

Charge-offs

    (25 )     (41 )     (1 )     (87 )     -       -       (154 )

Ending balance

  $ 574     $ 1,750     $ 531     $ 70     $ 182     $ -     $ 3,107  

 

 

The following table sets forth information regarding the allowance for loan losses by portfolio segment and impairment methodology.

 

   

Dec ember 31, 2017

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Allowance for loan losses:

                                                       

Individually evaluated

  $ 307     $ 163     $ 144     $ 9     $ -     $ -     $ 623  

Collectively evaluated

    271       2,354       546       41       -       -       3,212  

ASC 310-30

    -       -       -       -       520       -       520  

Total

  $ 578     $ 2,517     $ 690     $ 50     $ 520     $ -     $ 4,355  

Loans:

                                                       

Individually evaluated

  $ 6,053     $ 3,867     $ 2,592     $ 315     $ -     $ -     $ 12,827  

Collectively evaluated

    86,722       251,812       175,164       3,488       -       -       517,186  

ASC 310-30

    -       -       -       -       244,177       -       244,177  

Total

  $ 92,775     $ 255,679     $ 177,756     $ 3,803     $ 244,177     $ -     $ 774,190  

 

<
   

June 30, 201 7

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Allowance for loan losses: