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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, 2015

Commission File Number: 1-14588

Northeast Bancorp

(Exact name of registrant as specified in its charter)

Maine		01-0425066
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 Canal Street, Lewiston, Maine		04240
(Address of Principal executive offices)		(Zip Code)

(207) 786-3245

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days. Yes x No o

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 x No o

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 o		Accelerated filer o

Non-accelerated filer o		Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 30, 2015 the registrant had outstanding 8,894,721 shares of voting common stock, $1.00 par value per share and 911,488 shares of non-voting common stock, $1.00 par value per share.

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Part I.	Financial Information
	Item 1.	Financial Statements (unaudited)
		Consolidated Balance Sheets March 31, 2015 and June 30, 2014	3

		Consolidated Statements of Income Three Months Ended March 31, 2015 and 2014 Nine Months Ended March 31, 2015 and 2014	4

		Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2015 and 2014 Nine Months Ended March 31, 2015 and 2014	5

		Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended March 31, 2015 and 2014	6

		Consolidated Statements of Cash Flows Nine Months Ended March 31, 2015 and 2014	7

		Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	46

	Item 4.	Controls and Procedures	46

Part II.	Other Information

	Item 1.	Legal Proceedings	46

	Item 1A.	Risk Factors	46

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

	Item 3.	Defaults Upon Senior Securities	47

	Item 4.	Mine Safety Disclosures	47

	Item 5.	Other Information	47

	Item 6.	Exhibits	48

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PART 1- FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share data)

	March 31, 2015			June 30, 2014
Assets
Cash and due from banks	$	2,496		$	3,372
Short-term investments	102,577			78,887
Total cash and cash equivalents	105,073			82,259

Available-for-sale securities, at fair value	105,523			113,881
Loans held for sale	4,439			11,945

Loans	579,193			516,416
Less: Allowance for loan losses	1,741			1,367
Loans, net	577,452			515,049

Premises and equipment, net	8,095			9,135
Real estate owned and other repossessed collateral, net	3,694			1,991
Federal Home Loan Bank stock, at cost	4,102			4,102
Intangible assets, net	2,338			2,798
Bank owned life insurance	15,165			14,836
Other assets	7,047			5,935
Total assets	$	832,928		$	761,931
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Demand	$	50,870		$	50,140
Savings and interest checking	98,050			98,340
Money market	163,004			83,901
Time	343,253			341,948
Total deposits	655,177			574,329

Federal Home Loan Bank advances	30,216			42,824
Wholesale repurchase agreements	10,077			10,199
Short-term borrowings	2,861			2,984
Junior subordinated debentures issued to affiliated trusts	8,578			8,440
Capital lease obligation	1,416			1,558
Other liabilities	12,116			9,531
Total liabilities	720,441			649,865
Commitments and contingencies	—			—
Stockholders’ equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2015 and June 30, 2014	—			—
Voting common stock, $1.00 par value, 25,000,000 shares authorized; 8,908,121 and 9,260,331 shares issued and outstanding at March 31, 2015 and June 30, 2014, respectively	8,908			9,260
Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 911,488 and 880,963 shares issued and outstanding at March 31, 2015 and June 30, 2014, respectively	911			881
Additional paid-in capital	87,348			90,914
Retained earnings	16,968			12,294
Accumulated other comprehensive loss	(1,648		)	(1,283		)
Total stockholders’ equity	112,487			112,066
Total liabilities and stockholders’ equity	$	832,928		$	761,931

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

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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,
	2015		2014		2015		2014
Interest and dividend income:
Interest and fees on loans	$	10,619	$	8,403	$	32,487	$	27,142
Interest on available-for-sale securities	222		253		697		797
Other interest and dividend income	72		61		218		208
Total interest and dividend income	10,913		8,717		33,402		28,147

Interest expense:
Deposits	1,271		1,022		3,681		3,048
Federal Home Loan Bank advances	257		324		845		975
Wholesale repurchase agreements	71		93		216		285
Short-term borrowings	5		6		21		17
Junior subordinated debentures issued to affiliated trusts	171		140		566		525
Obligation under capital lease agreements	18		20		56		63
Total interest expense	1,793		1,605		5,385		4,913

Net interest and dividend income before provision for loan losses	9,120		7,112		28,017		23,234
Provision for loan losses	44		180		477		407
Net interest and dividend income after provision for loan losses	9,076		6,932		27,540		22,827

Noninterest income:
Fees for other services to customers	303		385		1,089		1,246
Gain on sales of loans held for sale	355		265		1,384		1,145
Gain on sales of portfolio loans	425		373		950		603
Gain recognized on real estate owned and other repossessed collateral, net	357		165		303		50
Bank-owned life insurance income	110		108		329		342
Other noninterest income	4		12		23		46
Total noninterest income	1,554		1,308		4,078		3,432

Noninterest expense:
Salaries and employee benefits	4,316		3,759		13,586		12,624
Occupancy and equipment expense	1,278		1,450		3,662		4,075
Professional fees	386		366		1,153		1,115
Data processing fees	361		257		1,029		770
Marketing expense	54		86		203		225
Loan acquisition and collection expense	409		440		1,096		1,203
FDIC insurance premiums	137		127		371		354
Intangible asset amortization	128		162		460		582
Legal settlement recovery	—		—		—		(250		)
Other noninterest expense	816		869		2,272		2,284
Total noninterest expense	7,885		7,516		23,832		22,982

Income from continuing operations before income tax expense	2,745		724		7,786		3,277
Income tax expense	993		287		2,810		1,119
Net income from continuing operations	1,752		437		4,976		2,158

(Loss) income from discontinued operations before tax (benefit) expense	—		—		—		(12		)
Income tax (benefit) expense	—		—		—		(4		)
Net (loss) income from discontinued operations	—		—		—		(8		)
Net income	$	1,752	$	437	$	4,976	$	2,150

Weighted-average shares outstanding:
Basic	9,833,033		10,432,494		10,049,983		10,435,300
Diluted	9,833,033		10,432,494		10,049,983		10,435,300
Earnings per common share:
Basic:
Income from continuing operations	$	0.18	$	0.04	$	0.50	$	0.21
Income from discontinued operations	—		—		—		—
Net Income	$	0.18	$	0.04	$	0.50	$	0.21
Diluted:
Income from continuing operations	$	0.18	$	0.04	$	0.50	$	0.21
Income from discontinued operations	—		—		—		—
Net income	$	0.18	$	0.04	$	0.50	$	0.21
Cash dividends declared per common share	$	0.01	$	0.09	$	0.03	$	0.27

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

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NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2015			2014			2015			2014
Net income	$	1,752		$	437		$	4,976		$	2,150

Other comprehensive (loss) income, before tax:
Available-for-sale securities:
Change in net unrealized gain or loss on available-for-sale securities	571			579			834			449
Reclassification adjustment for net gains included in net income	—			—			—			—
Total available-for-sale securities	571			579			834			449
Derivatives and hedging activities:
Change in accumulated loss on effective cash flow hedges	(566		)	(528		)	(1,341		)	56
Reclassification adjustments for net gains included in net income	(16		)	(72		)	(49		)	(108		)
Total derivatives and hedging activities	(582		)	(600		)	(1,390		)	(52		)
Total other comprehensive (loss) income, before tax	(11		)	(21		)	(556		)	397
Income tax (benefit) expense related to other comprehensive (loss) income	(4		)	(7		)	(191		)	135
Other comprehensive (loss) income, net of tax	(7		)	(14		)	(365		)	262
Comprehensive income	$	1,745		$	423		$	4,611		$	2,412

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

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NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

																		Accumulated
																		Other			Total
	Preferred Stock			Voting Common Stock					Non-voting Common Stock			Additional			Retained			Comprehensive			Stockholders’
	Shares	Amount		Shares		Amount			Shares	Amount		Paid-in Capital			Earnings			Loss			Equity
Balance at June 30, 2013	—	$	—	9,565,680		$	9,566		880,963	$	881	$	92,745		$	12,524		$	(1,914	)	$	113,802
Net income	—	—		—		—			—	—		—			2,150			—			2,150
Other comprehensive income, net of tax	—	—		—		—			—	—		—			—			262			262
Dividends on common stock at $0.27 per share	—	—		—		—			—	—		—			(2,818		)	—			(2,818		)
Stock-based compensation	—	—		—		—			—	—		612			—			—			612
Forfeiture of restricted common stock	—	—		(14,149	)	(14		)	—	—		14			—			—			—
Balance at March 31, 2014	—	$	—	9,551,531		$	9,552		880,963	$	881	$	93,371		$	11,856		$	(1,652	)	$	114,008
Balance at June 30, 2014	—	$	—	9,260,331		$	9,260		880,963	$	881	$	90,914		$	12,294		$	(1,283	)	$	112,066
Net income	—	—		—		—			—	—		—			4,976			—			4,976
Other comprehensive loss, net of tax	—	—		—		—			—	—		—			—			(365		)	(365		)
Common stock repurchased	—	—		(479,936	)	(480		)	—	—		(3,912		)	—			—			(4,392		)
Conversion of voting common stock to non- voting common stock	—	—		(30,525	)	(30		)	30,525	30		—			—			—			—
Dividends on common stock at $0.03 per share	—	—		—		—			—			—			(302		)	—			(302		)
Stock-based compensation	—	—		—		—			—	—		504			—			—			504
Issuance of restricted common stock	—	—		174,000		174			—	—		(174		)	—			—			—
Forfeiture of restricted common stock	—	—		(15,749	)	(16		)	—	—		16			—			—			—
Balance at March 31, 2015	—	$	—	8,908,121		$	8,908		911,488	$	911	$	87,348		$	16,968		$	(1,648	)	$	112,487

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

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NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended March 31,
	2015			2014
Operating activities:
Net income	$	4,976		$	2,150
Adjustments to reconcile net income to net cash provided by (used in) by operating activities:
Provision for loan losses	477			407
Gain on sale and impairment of real estate owned and other repossessed collateral, net	(303		)	(50		)
Accretion of fair value adjustments on loans, net	(9,149		)	(5,048		)
Accretion of fair value adjustments on deposits, net	(159		)	(489		)
Accretion of fair value adjustments on borrowings, net	(92		)	(191		)
Originations of loans held for sale	(68,734		)	(62,911		)
Net proceeds from sales of loans held for sale	77,624			62,823
Gain on sales of loans held for sale	(1,384		)	(1,145		)
Gain on sales of portfolio loans	(950		)	(603		)
Amortization of intangible assets	460			582
Bank-owned life insurance income, net	(329		)	(342		)
Depreciation of premises and equipment	1,259			1,540
Loss on sale of premises and equipment	23			16
Stock-based compensation	504			612
Amortization of securities, net	765			972
Changes in other assets and liabilities:
Other assets	(687		)	(1,978		)
Other liabilities	1,197			(460		)
Net cash provided by (used in) operating activities	5,498			(4,115		)

Investing activities:
Purchases of available-for-sale securities	—			(42,340		)
Proceeds from maturities and principal payments on available-for-sale securities	8,427			50,682
Loan purchases	(57,896		)	(46,267		)
Proceeds from sales of portfolio loans	7,200			5,575
Loan originations, principal collections, and purchased loan paydowns, net	(4,434		)	(33,757		)
Purchases of premises and equipment	(385		)	(703		)
Proceeds from sales of premises and equipment	143			11
Proceeds from sales of real estate owned and other repossessed collateral	713			1,160
Net cash used in investing activities	(46,232		)	(65,639		)

Financing activities:
Net increase in deposits	81,007			79,176
Net (decrease) increase in short-term borrowings	(123		)	1,960
Repurchase of common stock	(4,392		)	—
Dividends paid on common stock	(302		)	(2,818		)
Proceeds from FHLB advances	—			15,000
Repayments of FHLB advances	(12,500		)	—
Repayment of wholesale repurchase agreements	—			(15,000		)
Repayment of capital lease obligation	(142		)	(135		)
Net cash provided by financing activities	63,548			78,183

Net increase in cash and cash equivalents	22,814			8,429
Cash and cash equivalents, beginning of period	82,259			65,934
Cash and cash equivalents, end of period	$	105,073		$	74,363

Supplemental schedule of noncash investing and financing activities:
Transfers from loans to real estate owned and other repossessed collateral	$	2,104		$	2,174
Transfers from real estate owned and other repossessed collateral to loans	—			1,155

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

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NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2015

1. Basis of Presentation

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

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods presented. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2014 (“Fiscal 2014”) included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

2. Recent Accounting Pronouncements

In January 2014, the FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (“ASU 2014-01”). The amendments in ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for fiscal years, and interim periods within those years, beginning after December 31, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company does not expect ASU 2014-01 to have material impact on the consolidated financial statements.

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 2014-09 is effective January 1, 2017 and is not expected to have a significant impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”). ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 is effective January 1, 2015 and is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (“ASU 2014-14”). ASU 2014-14 affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD), and the U.S. Department of Veterans Affairs (VA). The update requires that, upon foreclosure, a guaranteed mortgage loan be derecognized and a separate other receivable be recognized when specific criteria are met. ASU 2014-14 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

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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, 2015
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
U.S. Government agency securities	$	48,246	$	38	$	(1	)	$	48,283
Agency mortgage-backed securities	57,721		26		(507		)	57,240
	$	105,967	$	64	$	(508	)	$	105,523

	June 30, 2014
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
U.S. Government agency securities	$	48,415	$	31	$	(28	)	$	48,418
Agency mortgage-backed securities	66,744		3		(1,284		)	65,463
	$	115,159	$	34	$	(1,312	)	$	113,881

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, 2015 or 2014. At March 31, 2015, investment securities with a fair value of approximately $34.2 million were pledged as collateral to secure outstanding borrowings.

The following summarizes the Company’s gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

	March 31, 2015
	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	$	6,058	$	(1	)	$	—	$	—		$	6,058	$	(1	)
Agency mortgage-backed securities	2,085		(21		)	52,938		(486		)	55,023		(507		)
	$	8,143	$	(22	)	$	52,938	$	(486	)	$	61,081	$	(508	)

	June 30, 2014
	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	$	24,141	$	(28	)	$	—	$	—		$	24,141	$	(28	)
Agency mortgage-backed securities	—		—			62,734		(1,284		)	62,734		(1,284		)
	$	24,141	$	(28	)	$	62,734	$	(1,284	)	$	86,875	$	(1,312	)

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

At March 31, 2015, the Company had twenty-two securities in a continuous loss position for greater than twelve months. At March 31, 2015, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or government-sponsored enterprises. The decline in fair value of the Company’s available-for-sale securities at March 31, 2015 is attributable to changes in interest rates.

Management of the Company, in addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company’s investment portfolio, also considers the Company’s ability and intent to hold such securities to maturity or recovery of cost. At March 31, 2015, it is more likely than not that the Company will not sell or be required to sell the investment securities before recovery of its amortized cost. As such, management does not believe any of the Company’s available-for-sale securities are other-than-temporarily impaired at March 31, 2015.

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

	Amortized		Fair
	Cost		Value
	(Dollars in thousands)
Due within one year	$	24,028	$	24,045
Due after one year through five years	24,218		24,237
Due after five years through ten years	28,263		28,188
Due after ten years	29,458		29,053
	$	105,967	$	105,523

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4. Loans, Allowance for Loan Losses and Credit Quality

Loans are carried at the principal amounts outstanding, or amortized acquired fair value in the case of acquired loans, adjusted by partial charge-offs and net of deferred loan costs or fees. Loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method. When a loan is paid off, the unamortized portion is recognized in interest income. Interest income is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status.

Loans purchased by the Company are accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). At acquisition, the effective interest rate is determined based on the discount rate that equates the present value of the Company’s estimate of cash flows with the purchase price of the loan. Prepayments are not assumed in determining a purchased loan’s effective interest rate and income accretion. The application of ASC 310-30 limits the yield that may be accreted on the purchased loan, or the “accretable yield,” to the excess of the Company’s estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company’s initial investment in the loan. The excess of contractually required payments receivable over the cash flows expected to be collected on the loan represents the purchased loan’s “nonaccretable difference.” Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase to the loan’s effective yield through a reclassification of some, or all, of the nonaccretable difference to accretable yield. The effect of subsequent credit-related declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses.

Loans are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when in management’s judgment the collectability of interest or principal of the loan has been significantly impaired. Loans accounted for under ASC 310-30 are placed on nonaccrual when it is not possible to reach a reasonable expectation of the timing and amount of cash flows to be collected on the loan. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. Interest on nonaccrual loans is accounted for on a cash-basis or using the cost-recovery method when collectability is doubtful. A loan is returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a reasonable period of time.

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”), and therefore by definition is an impaired loan. Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. For loans accounted for under ASC 310-30, the Company evaluates whether it has granted a concession by comparing the restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition. As a result, if an ASC 310-30 loan is modified to be consistent with, or better than, the Company’s expectations at acquisition, the loan would not qualify as a TDR. Nonaccrual loans that are restructured generally remain on nonaccrual status for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a nonaccrual loan. With limited exceptions, loans classified as TDRs remain classified as such until the loan is paid off.

The composition of the Company’s loan portfolio is as follows on the dates indicated.

	March 31, 2015						June 30, 2014
	Originated		Purchased		Total		Originated		Purchased		Total
	(Dollars in thousands)
Residential real estate	$	110,314	$	2,143	$	112,457	$	116,972	$	3,687	$	120,659
Home equity	24,321		—		24,321		27,975		—		27,975
Commercial real estate	134,483		193,284		327,767		116,617		199,481		316,098
Commercial business	106,015		256		106,271		41,518		282		41,800
Consumer	8,377		—		8,377		9,884		—		9,884
Total loans	$	383,510	$	195,683	$	579,193	$	312,966	$	203,450	$	516,416

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Past Due and Nonaccrual Loans

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

	March 31, 2015
					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	$	370	$	394	$	—	$	1,140	$	1,904	$	108,410	$	110,314	$	3,163
Home equity	—		—		—		11		11		24,310		24,321		11
Commercial real estate	435		197		—		904		1,536		132,947		134,483		1,201
Commercial business	2		—		—		—		2		106,013		106,015		—
Consumer	194		86		—		63		343		8,034		8,377		225
Total originated portfolio	1,001		677		—		2,118		3,796		379,714		383,510		4,600
Purchased portfolio:
Residential real estate	—		—		—		—		—		2,143		2,143		—
Commercial business	—		—		—		—		—		256		256		—
Commercial real estate	5,868		—		—		5,204		11,072		182,212		193,284		5,850
Total purchased portfolio	5,868		—		—		5,204		11,072		184,611		195,683		5,850
Total loans	$	6,869	$	677	$	—	$	7,322	$	14,868	$	564,325	$	579,193	$	10,450

	June 30, 2014
					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	$	222	$	728	$	—	$	1,573	$	2,523	$	114,449	$	116,972	$	1,743
Home equity	109		7		—		120		236		27,739		27,975		160
Commercial real estate	126		136		—		629		891		115,726		116,617		1,162
Commercial business	—		—		—		—		—		41,518		41,518		5
Consumer	188		24		—		49		261		9,623		9,884		139
Total originated portfolio	645		895		—		2,371		3,911		309,055		312,966		3,209
Purchased portfolio:
Residential real estate	—		—		—		—		—		3,687		3,687		—
Commercial business	—		—		—		—		—		282		282		—
Commercial real estate	—		—		—		1,995		1,995		197,486		199,481		4,116
Total purchased portfolio	—		—		—		1,995		1,995		201,455		203,450		4,116
Total loans	$	645	$	895	$	—	$	4,366	$	5,906	$	510,510	$	516,416	$	7,325

Allowance for Loan Losses and Impaired Loans

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. For residential and consumer loans, a charge-off is recorded no later than the point at which a loan is 180 days past due if the loan balance exceeds the fair value of the collateral, less costs to sell. For commercial loans, a charge-off is recorded on a case-by-case basis when all or a portion of the loan is deemed to be uncollectible. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses consists of general, specific, and unallocated reserves and reflects management’s estimate of probable loan losses inherent in the loan portfolio at the balance sheet date. Management uses a consistent and systematic process and methodology to evaluate the appropriateness of the allowance for loan losses on a quarterly basis. The calculation of the allowance for loan losses is segregated by portfolio segments, which include: commercial real estate, commercial business, consumer, residential real estate, and purchased loans. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate: All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, particularly unemployment rates and housing prices, has a significant effect on the credit quality in this segment. For purposes of the Company’s allowance for loan loss calculation, home equity loans and lines of credit are included in residential real estate.

Commercial real estate: Loans in this segment are primarily income-producing properties. For owner-occupied properties, the cash flows are derived from an operating business, and the underlying cash flows may be adversely affected by deterioration in the financial condition of the operating business. The underlying cash flows generated by non-owner occupied properties may be adversely affected by increased vacancy rates. Management periodically obtains rent rolls, with which it monitors the cash flows

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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 business: Loans in this segment are made to businesses and are generally secured by the assets of the business. Repayment is expected from the cash flows of the business. Weakness in national or regional economic conditions, and a corresponding weakness in consumer or business spending, will have an adverse effect on the credit quality of this segment.

Consumer: Loans in this segment are generally secured, and repayment is dependent on the credit quality of the individual borrower. Repayment of consumer loans is generally based on the earnings of individual borrowers, which may be adversely impacted by regional labor market conditions.

Purchased: Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the Bank’s Loan Acquisition and Servicing Group (“LASG”). Loans acquired by the LASG are, with limited exceptions, performing loans at the date of purchase. Loans in this segment acquired with specific material credit deterioration since origination are identified as purchased credit-impaired. 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 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 and nonperforming loans

· 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

· Other effects resulting from trends in the valuation of underlying collateral

There were no significant changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three and nine months ended March 31, 2015 or 2014.

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 for commercial business and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment based on the group’s historical loss experience adjusted for qualitative factors. Accordingly, the Company does not separately identify individual consumer and residential loans for individual impairment and disclosure. However, all TDRs are individually reviewed for impairment.

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 estimated 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.

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The following table sets forth activity in the Company’s allowance for loan losses.

	Three Months Ended March 31, 2015
	Residential			Commercial		Commercial
	Real Estate			Real Estate		Business			Consumer			Purchased			Unallocated		Total
	(Dollars in thousands)
Beginning balance	$	796		$	288	$	54		$	59		$	413		$	54	$	1,664
Provision	(38		)	187		(45		)	(13		)	(87		)	40		44
Recoveries	1			—		35			4			—			—		40
Charge-offs	—			—		(1		)	(6		)	—			—		(7		)
Ending balance	$	759		$	475	$	43		$	44		$	326		$	94	$	1,741

	Three Months Ended March 31, 2014
	Residential			Commercial		Commercial
	Real Estate			Real Estate		Business			Consumer			Purchased			Unallocated			Total
	(Dollars in thousands)
Beginning balance	$	649		$	321	$	52		$	112		$	207		$	9		$	1,350
Provision	151			—		41			25			(28		)	(9		)	180
Recoveries	1			1		1			5			—			—			8
Charge-offs	(123		)	—		(43		)	(27		)	—			—			(193		)
Ending balance	$	678		$	322	$	51		$	115		$	179		$	—		$	1,345

	Nine Months Ended March 31, 2015
	Residential			Commercial		Commercial
	Real Estate			Real Estate		Business			Consumer			Purchased		Unallocated		Total
	(Dollars in thousands)
Beginning balance	$	580		$	358	$	48		$	79		$	267	$	35	$	1,367
Provision	322			116		(39		)	(40		)	59		59		477
Recoveries	17			1		35			17			—		—		70
Charge-offs	(160		)	—		(1		)	(12		)	—		—		(173		)
Ending balance	$	759		$	475	$	43		$	44		$	326	$	94	$	1,741

Nine Months Ended March 31, 2014

Residential

Commercial

Real Estate

Business

Consumer

Purchased

Unallocated

Total

(Dollars in thousands)

Beginning balance

594