Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2017

 

Commission File Number: 1-14588

 

 

Northeast Bancorp

---

(Exact name of registrant as specified in its charter)

 

Maine		01-0425066
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
500 Canal Street, Lewiston, Maine		04240
(Address of Principal executive offices)		(Zip Code)

 

(207) 786-3245

Registrant's telephone number, including area code

 

  

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑  No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer”, “large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer __ Accelerated filer ☑ Non-accelerated filer __ Smaller Reporting Company __ 

 

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

 

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

 

Emerging growth company  ☐

 

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

  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of May 5, 2017, the registrant had outstanding 7,830,460 shares of voting common stock, $1.00 par value per share and 991,194 shares of non-voting common stock, $1.00 par value per share 

 

 

Part I.	Financial Information
	Item 1.	Financial Statements (unaudited)	3
		Consolidated Balance Sheets March 31, 2017 and June 30, 2016	3
		Consolidated Statements of Income  Three Months Ended March 31, 2017 and 2016 Nine Months Ended March 31, 2017 and 2016	4
		Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2017 and 2016 Nine Months Ended March 31, 2017 and 2016	5
		Consolidated Statements of Changes in Shareholders' Equity Nine Months Ended March 31, 2017 and 2016	6
		Consolidated Statements of Cash Flows Nine Months Ended March 31, 2017 and 2016	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	44
	Item 4.	Controls and Procedures	45
Part II.	Other Information
	Item 1.	Legal Proceedings	46
	Item 1A.	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

 

 

PART 1- FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

 

		March 31, 2017				June 30, 2016
Assets
Cash and due from banks		$	3,559			$	2,459
Short-term investments			143,883				148,698
Total cash and cash equivalents			147,442				151,157
Available-for-sale securities, at fair value			98,865				100,572
Residential real estate loans held for sale			1,424				6,449
SBA loans held for sale			3,210				1,070
Total loans held for sale			4,634				7,519
Loans
Commercial real estate			479,260				426,568
Residential real estate			103,254				113,962
Commercial and industrial			154,343				145,956
Consumer			4,871				5,950
Total loans			741,728				692,436
Less: Allowance for loan losses			3,375				2,350
Loans, net			738,353				690,086
Premises and equipment, net			7,002				7,801
Real estate owned and other repossessed collateral, net			3,761				1,652
Federal Home Loan Bank stock, at cost			1,938				2,408
Intangible assets, net			1,408				1,732
Bank owned life insurance			16,065				15,725
Other assets			7,578				7,501
Total assets		$	1,027,046			$	986,153
Liabilities and Shareholders' Equity
Deposits
Demand		$	72,369			$	66,686
Savings and interest checking			108,507				107,218
Money market			347,658				275,437
Time			320,945				351,091
Total deposits			849,479				800,432
Federal Home Loan Bank advances			20,017				30,075
Subordinated debt			23,544				23,331
Capital lease obligation			938				1,128
Other liabilities			14,393				14,596
Total liabilities			908,371				869,562
Commitments and contingencies			-				-
Shareholders' equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2017 and June 30, 2016			-				-
Voting common stock, $1.00 par value, 25,000,000 shares authorized; 7,824,085 and 8,089,790 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively			7,824				8,089
Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 991,194 and 1,227,683 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively			991				1,228
Additional paid-in capital			77,249				83,020
Retained earnings			34,204				26,160
Accumulated other comprehensive loss			(1,593	)			(1,906	)
Total shareholders' equity			118,675				116,591
Total liabilities and shareholders' equity		$	1,027,046			$	986,153

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Interest and dividend income:
Interest and fees on loans		$	14,417			$	10,904			$	40,132			$	33,413
Interest on available-for-sale securities			261				236				748				700
Other interest and dividend income			282				119				669				295
Total interest and dividend income			14,960				11,259				41,549				34,408
Interest expense:
Deposits			1,855				1,566				5,407				4,356
Federal Home Loan Bank advances			159				255				634				774
Wholesale repurchase agreements			-				-				-				65
Short-term borrowings			-				5				-				19
Subordinated debt			475				164				1,401				476
Obligation under capital lease agreements			12				15				39				49
Total interest expense			2,501				2,005				7,481				5,739
Net interest and dividend income before provision for loan losses			12,459				9,254				34,068				28,669
Provision for loan losses			384				236				1,205				1,301
Net interest and dividend income after provision for loan losses			12,075				9,018				32,863				27,368
Noninterest income:
Fees for other services to customers			516				428				1,405				1,264
Gain on sales of residential loans held for sale			281				335				1,160				1,292
Gain on sales of SBA loans			951				1,205				3,411				2,558
Gain on sale of other loans			365				-				365				-
Gain (loss) recognized on real estate owned and other repossessed collateral, net			20				(54	)			9				(127	)
Bank-owned life insurance income			113				112				341				336
Other noninterest income			62				9				115				39
Total noninterest income			2,308				2,035				6,806				5,362
Noninterest expense:
Salaries and employee benefits			5,203				4,846				15,678				13,956
Occupancy and equipment expense			1,299				1,327				3,781				3,937
Professional fees			370				348				1,265				1,042
Data processing fees			455				394				1,286				1,109
Marketing expense			89				64				272				200
Loan acquisition and collection expense			728				297				1,502				961
FDIC insurance premiums			78				125				224				354
Intangible asset amortization			107				108				324				369
Other noninterest expense			513				903				2,093				2,489
Total noninterest expense			8,842				8,412				26,425				24,417
Income before income tax expense			5,541				2,641				13,244				8,313
Income tax expense			2,080				832				4,932				2,892
Net income		$	3,461			$	1,809			$	8,312			$	5,421
Weighted-average shares outstanding:
Basic			8,830,442				9,456,198				8,923,280				9,526,302
Diluted			8,893,534				9,459,611				8,963,483				9,531,747
Earnings per common share:
Basic		$	0.39			$	0.19			$	0.93			$	0.57
Diluted			0.39				0.19				0.93				0.57
Cash dividends declared per common share		$	0.01			$	0.01			$	0.03			$	0.03

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Net income		$	3,461			$	1,809			$	8,312			$	5,421
Other comprehensive income, before tax:
Available-for-sale securities:
Change in net unrealized gain (loss) on available-for-sale securities			206				867				(1,208	)			641
Derivatives and hedging activities:
Change in accumulated gain (loss) on effective cash flow hedges			59				(982	)			1,692				(1,536	)
Reclassification adjustments included in net income			12				-				26				-
Total derivatives and hedging activities			71				(982	)			1,718				(1,536	)
Total other comprehensive income (loss), before tax			277				(115	)			510				(895	)
Income tax expense (benefit) related to other comprehensive income (loss)			105				(44	)			197				(340	)
Other comprehensive income (loss), net of tax			172				(71	)			313				(555	)
Comprehensive income		$	3,633			$	1,738			$	8,625			$	4,866

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

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

 

		Preferred Stock								Voting Common Stock								Non-voting Common Stock								Additional				Retained				Accumulated Other Comprehensive				Total Shareholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Paid-in Capital				Earnings				Loss				Equity
Balance at June 30, 2015			-			$	-				8,575,144			$	8,575				1,012,739			$	1,013			$	85,506			$	18,921			$	(1,288	)		$	112,727
Net income			-				-				-				-				-				-				-				5,421				-				5,421
Other comprehensive loss, net of tax			-				-				-				-				-				-				-				-				(555	)			(555	)
Common stock repurchased			-				-				(309,500	)			(310	)			-				-				(2,905	)			-				-				(3,215	)
Conversions between voting common stock and non-voting common stock, net			-				-				(214,944	)			(215	)			214,944				215				-				-				-				-
Dividends on common stock at $0.03 per share			-				-				-				-				-				-				-				(287	)			-				(287	)
Stock-based compensation			-				-				-				-				-				-				445				-				-				445
Issuance of restricted common stock			-				-				100,000				100				-				-				(100	)			-				-				-
Cancellation and forfeiture of restricted common stock			-				-				(47,510	)			(47	)			-				-				37				-				-				(10	)
Balance at March 31, 2016			-			$	-				8,103,190			$	8,103				1,227,683			$	1,228			$	82,983			$	24,055			$	(1,843	)		$	114,526
Balance at June 30, 2016			-				-				8,089,790			$	8,089				1,227,683			$	1,228			$	83,020			$	26,160			$	(1,906	)		$	116,591
Net income			-				-				-				-				-				-				-				8,312				-				8,312
Other comprehensive gain, net of tax			-				-				-				-				-				-				-				-				313				313
Common stock repurchased			-				-				(645,238	)			(645	)			-				-				(6,298	)			-				-				(6,943	)
Conversions between voting common stock and non-voting common stock, net			-				-				236,489				237				(236,489	)			(237	)			-				-				-				-
Dividends on common stock at $0.03 per share			-				-				-				-				-				-				-				(268	)			-				(268	)
Stock-based compensation			-				-				-				-				-				-				689				-				-				689
Issuance of restricted common stock			-				-				160,000				160				-				-				(160	)			-				-				-
Cancellation and forfeiture of restricted common stock			-				-				(16,956	)			(17	)			-				-				4				-				-				(13	)
Other tax related APIC adjustment			-				-				-				-				-				-				(6	)			-				-				(6	)
Balance at March 31, 2017			-			$	-				7,824,085			$	7,824				991,194			$	991			$	77,249			$	34,204			$	(1,593	)		$	118,675

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

		Nine Months Ended March 31,
		2017				2016
Operating activities:
Net income		$	8,312			$	5,421
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,205				1,301
(Gain) loss on sale and impairment of real estate owned and other repossessed collateral, net			(90	)			121
Loss on sale and disposal of premises and equipment, net			82				6
Accretion of fair value adjustments on loans, net			(8,702	)			(7,348	)
Accretion of fair value adjustments on deposits, net			(5	)			(5	)
Accretion of fair value adjustments on borrowings, net			72				23
Amortization of subordinated debt issuance costs			83				-
Originations of loans held for sale			(89,237	)			(66,929	)
Net proceeds from sales of loans held for sale			98,027				97,758
Gain on sales of residential loans held for sale			(1,160	)			(1,292	)
Gain on sales of SBA and other loans held for sale			(3,776	)			(2,558	)
Amortization of intangible assets			324				369
Bank-owned life insurance income, net			(341	)			(336	)
Depreciation of premises and equipment			1,138				1,230
Stock-based compensation			689				445
Amortization of available-for-sale securities, net			810				754
Changes in other assets and liabilities:
Other assets			(1,245	)			(378	)
Other liabilities			1,515				197
Net cash provided by operating activities			7,701				28,779
Investing activities:
Purchases of available-for-sale securities			(19,526	)			(20,566	)
Proceeds from maturities and principal payments on available-for-sale securities			19,214				31,870
Proceeds from sale of other loans			18,624				-
Loan purchases			(67,747	)			(81,245	)
Loan originations, principal collections, and purchased loan paydowns, net			5,658				(24,095	)
Purchases and disposals of premises and equipment, net			(421	)			(1,084	)
Redemption of Federal Home Loan Bank stock			470				1,531
Proceeds from sales of real estate owned and other repossessed collateral			680				1,503
Net cash used in investing activities			(43,048	)			(92,086	)
Financing activities:
Net increase in deposits			49,052				78,195
Net increase in short-term borrowings			-				404
Repurchase of common stock			(6,943	)			(3,215	)
Taxes paid for retirement of common stock and other tax related APIC adjustment			(19	)			(10	)
Dividends paid on common stock			(268	)			(287	)
Repayment of wholesale repurchase agreements			-				(10,000	)
Repayment of Federal Home Loan Bank advances			(10,000	)			-
Repayment of capital lease obligation			(190	)			(178	)
Net cash provided by financing activities			31,632				64,909
Net (decrease) increase in cash and cash equivalents			(3,715	)			1,602
Cash and cash equivalents, beginning of period			151,157				89,850
Cash and cash equivalents, end of period		$	147,442			$	91,452
Supplemental schedule of noncash investing activities:
Transfers from loans to real estate owned and other repossessed collateral, net		$	2,699			$	663

 

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

 

 

NORTHEAST BANCORP AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2017

 

1. Basis of Presentation

 

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

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the interim periods presented. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2016 (“Fiscal 2016”) included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

2. Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015-14, Revenue from Contracts with Customers (Topic 606) (“ASU 2015-14”) was issued in August 2015 which defers adoption to annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however, the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current US GAAP. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within the fiscal year. Early adoption is permitted for only one of the six amendments. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.

 

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

 

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

 

 

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

 

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

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”). This update clarifies and provides guidance on several cash receipt and cash payment classification issues, including debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 

In March 2017, the FASB issued ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20) (“ASU 2017-08”). This update amends the amortization period for certain purchased callable debt securities held at a premium, and shortens the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

 

 

3. Securities Available-for-Sale

 

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

 

		March 31, 2017
		Amortized				Gross Unrealized				Gross Unrealized				Fair
		Cost				Gains				Losses				Value
		(Dollars in thousands)
U.S. Government agency securities		$	57,540			$	2			$	(204	)		$	57,338
Agency mortgage-backed securities			35,653				-				(685	)			34,968
Other investments measured at net asset value			6,683				-				(124	)			6,559
		$	99,876			$	2			$	(1,013	)		$	98,865

 

		June 30, 2016
		Amortized				Gross Unrealized				Gross Unrealized				Fair
		Cost				Gains				Losses				Value
		(Dollars in thousands)
U.S. Government agency securities		$	51,948			$	98			$	-			$	52,046
Agency mortgage-backed securities			43,330				90				(52	)			43,368
Other investments measured at net asset value			5,097				61				-				5,158
		$	100,375			$	249			$	(52	)		$	100,572

 

 

 

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on sale. There were no securities sold during the three and nine months ended March 31, 2017 or 2016. At March 31, 2017, no investment securities were pledged as collateral to secure outstanding borrowings.

 

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

 

		March 31, 2017
		Less than 12 Months								More than 12 Months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(Dollars in thousands)
U.S. Government agency securities		$	54,336			$	(204	)		$	-			$	-			$	54,336			$	(204	)
Agency mortgage-backed securities			21,051				(334	)			13,917				(351	)			34,968				(685	)
Other investments measured at net asset value			5,059				(124	)			-				-				5,059				(124	)
		$	80,446			$	(662	)		$	13,917			$	(351	)		$	94,363			$	(1,013	)

 

		June 30, 2016
		Less than 12 Months								More than 12 Months								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(Dollars in thousands)
U.S. Government agency securities		$	-			$	-			$	-			$	-			$	-			$	-
Agency mortgage-backed securities			-				-				25,350				(52	)			25,350				(52	)
Other investments measured at net asset value			-				-				-				-				-				-
		$	-			$	-			$	25,350			$	(52	)		$	25,350			$	(52	)

 

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

 

At March 31, 2017, the Company had seven securities in a continuous loss position for greater than twelve months. At March 31, 2017, all of the Company’s available-for-sale securities were issued or guaranteed by either government agencies or government-sponsored enterprises. The decline in fair value of the Company’s available-for-sale securities at March 31, 2017 is attributable to changes in interest rates.

 

In addition to considering current trends and economic conditions that may affect the quality of individual securities within the Company’s investment portfolio, management of the Company also considers the Company’s ability and intent to hold such securities to maturity or recovery of cost. At March 31, 2017, the Company does not intend to sell and it is not more likely than not that the Company will be required to sell the investment securities before recovery of its amortized cost. As such, management does not believe any of the Company’s available-for-sale securities are other-than-temporarily impaired at March 31, 2017.

 

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

 

 

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

 

		Amortized				Fair
		Cost				Value
		(Dollars in thousands)
Due within one year		$	15,173			$	15,153
Due after one year through five years			43,438				43,250
Due after five years through ten years			14,316				14,118
Due after ten years			20,266				19,785
Total		$	93,193			$	92,306

 

 

4. Loans, Allowance for Loan Losses and Credit Quality

 

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

 

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

 

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

 

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

 

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

 

 

		March 31, 2017												June 30, 2016
		Originated				Purchased				Total				Originated				Purchased				Total
		(Dollars in thousands)
Residential real estate		$	85,487			$	3,026			$	88,513			$	93,391			$	2,559			$	95,950
Home equity			14,741				-				14,741				18,012				-				18,012
Commercial real estate			246,841				232,419				479,260				189,616				236,952				426,568
Commercial and industrial			153,192				1,151				154,343				145,758				198				145,956
Consumer			4,871				-				4,871				5,950				-				5,950
Total loans		$	505,132			$	236,596			$	741,728			$	452,727			$	239,709			$	692,436

 

 

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

 

 

Past Due and Nonaccrual Loans

 

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

 

		March 31, 2017
										Past Due				Past Due
										90 Days or				90 Days or				Total												Non-
		30-59				60-89				More-Still				More-				Past				Total				Total				Accrual
		Days				Days				Accruing				Nonaccrual				Due				Current				Loans				Loans
		(Dollars in thousands)
Originated portfolio:
Residential real estate		$	1,199			$	430			$	-			$	1,170			$	2,799			$	82,688			$	85,487			$	3,265
Home equity			147				-				-				48				195				14,546				14,741				48
Commercial real estate			940				29				-				136				1,105				245,736				246,841				420
Commercial and industrial			-				-				-				2,468				2,468				150,724				153,192				2,636
Consumer			35				104				-				21				160				4,711				4,871				65
Total originated portfolio			2,321				563				-				3,843				6,727				498,405				505,132				6,434
Purchased portfolio:
Residential real estate			1,057				16				-				-				1,073				1,953				3,026				1,073
Commercial and industrial			118				7				-				27				152				999				1,151				68
Commercial real estate			9,679				5,875				-				626				16,180				216,239				232,419				7,247
Total purchased portfolio			10,854				5,898				-				653				17,405				219,191				236,596				8,388
Total loans		$	13,175			$	6,461			$	-			$	4,496			$	24,132			$	717,596			$	741,728			$	14,822

 

		June 30, 2016
										Past Due				Past Due
										90 Days or				90 Days or				Total												Non-
		30-59				60-89				More-Still				More-				Past				Total				Total				Accrual
		Days				Days				Accruing				Nonaccrual				Due				Current				Loans				Loans
		(Dollars in thousands)
Originated portfolio:
Residential real estate		$	302			$	910			$	-			$	1,555			$	2,767			$	90,624			$	93,391			$	2,613
Home equity			146				-				-				48				194				17,818				18,012				48
Commercial real estate			132				-