nbn20151231_10q.htm 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 December 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 No ___

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of February 1, 2016, the registrant had outstanding 8,482,819 shares of voting common stock, $1.00 par value per share and 1,029,110 shares of non-voting common stock, $1.00 par value per share.

 

 
1

Table Of Contents
 

 

Part I.

Financial Information

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Consolidated Balance Sheets

 
    December 31, 2015 and June 30, 2015 3

 

 

 

 

 

 

Consolidated Statements of Income

 
    Three Months Ended December 31, 2015 and 2014  
    Six Months Ended December 31, 2015 and 2014 4
       
   

Consolidated Statements of Comprehensive Income

 
    Three Months Ended December 31, 2015 and 2014  
    Six Months Ended December 31, 2015 and 2014 5
       

 

 

Consolidated Statements of Changes in Stockholders' Equity

 
    Six Months Ended December 31, 2015 and 2014 6

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 
    Six Months Ended December 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

30

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

44

 

 

 

 

 

Item 4.

Controls and Procedures

44
       

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

 

 

Item 1A.

Risk Factors

44

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

44

 

 

 

 

 

Item 4.

Mine Safety Disclosures

45

 

 

 

 

 

Item 5.

Other Information

45

 

 

 

 

 

Item 6.

Exhibits

45

 

 

 
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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 and per share data) 

   

December 31, 2015

   

June 30, 2015

 

Assets

               

Cash and due from banks

  $ 3,485     $ 2,789  

Short-term investments

    62,878       87,061  

Total cash and cash equivalents

    66,363       89,850  
                 

Available-for-sale securities, at fair value

    104,339       101,908  
                 

Residential real estate loans held for sale

    7,592       7,093  

SBA loans held for sale

    -       1,942  

Total loans held for sale

    7,592       9,035  
                 
                 

Loans

               

Commercial real estate

    401,075       348,676  

Residential real estate

    122,427       132,669  

Commercial and industrial

    149,154       123,133  

Consumer

    6,780       7,659  

Total loans

    679,436       612,137  

Less: Allowance for loan losses

    2,129       1,926  

Loans, net

    677,307       610,211  
                 
                 

Premises and equipment, net

    8,461       8,253  

Real estate owned and other possessed collateral, net

    1,238       1,651  

Federal Home Loan Bank stock, at cost

    2,571       4,102  

Intangible assets, net

    1,947       2,209  

Bank owned life insurance

    15,499       15,276  

Other assets

    8,784       8,223  

Total assets

  $ 894,101     $ 850,718  
                 

Liabilities and Stockholders' Equity

               

Deposits

               

Demand

  $ 64,087     $ 60,383  

Savings and interest checking

    101,117       100,134  

Money market

    208,324       168,527  

Time

    353,238       345,715  

Total deposits

    726,766       674,759  
                 

Federal Home Loan Bank advances

    30,131       30,188  

Wholesale repurchase agreements

    -       10,037  

Short-term borrowings

    2,426       2,349  

Junior subordinated debentures issued to affiliated trusts

    8,723       8,626  

Capital lease obligation

    1,252       1,368  

Other liabilities

    10,190       10,664  

Total liabilities

    779,488       737,991  
                 

Commitments and contingencies

    -       -  
                 

Stockholders' equity

               

Preferred stock, $1.00 par value, 1,000,000 shares authorized; no shares issued and outstanding at December 31, 2015 and June 30, 2015

    -       -  

Voting common stock, $1.00 par value, 25,000,000 shares authorized; 8,490,619 and 8,575,144 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively

    8,491       8,575  

Non-voting common stock, $1.00 par value, 3,000,000 shares authorized; 1,029,110 and 1,012,739 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively

    1,029       1,013  

Additional paid-in capital

    84,525       85,506  

Retained earnings

    22,340       18,921  

Accumulated other comprehensive loss

    (1,772 )     (1,288 )

Total stockholders' equity

    114,613       112,727  

Total liabilities and stockholders' equity

  $ 894,101     $ 850,718  

 

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 December 31,

   

Six Months Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 

Interest and dividend income:

                               

Interest and fees on loans

  $ 11,719     $ 10,948     $ 22,509     $ 21,870  

Interest on available-for-sale securities

    236       232       464       475  

Other interest and dividend income

    80       79       176       146  

Total interest and dividend income

    12,035       11,259       23,149       22,491  
                                 

Interest expense:

                               

Deposits

    1,425       1,281       2,789       2,410  

Federal Home Loan Bank advances

    259       265       519       588  

Wholesale repurchase agreements

    -       73       67       145  

Short-term borrowings

    5       7       13       16  

Junior subordinated debentures issued to affiliated trusts

    158       188       312       394  

Obligation under capital lease agreements

    16       19       33       38  

Total interest expense

    1,863       1,833       3,733       3,591  
                                 

Net interest and dividend income before provision for loan losses

    10,172       9,426       19,416       18,900  

Provision for loan losses

    896       113       1,065       433  

Net interest and dividend income after provision for loan losses

    9,276       9,313       18,351       18,467  
                                 

Noninterest income:

                               

Fees for other services to customers

    428       392       836       786  

Gain on sales of residential loans held for sale

    398       447       957       1,029  

Gain on sales of portfolio loans

    679       445       1,354       525  

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

    (14 )     (31 )     (74 )     (54 )

Bank-owned life insurance income

    112       110       224       219  

Other noninterest income

    21       7       29       19  

Total noninterest income

    1,624       1,370       3,326       2,524  
                                 

Noninterest expense:

                               

Salaries and employee benefits

    4,854       4,737       9,110       9,270  

Occupancy and equipment expense

    1,320       1,181       2,610       2,384  

Professional fees

    264       458       694       766  

Data processing fees

    366       347       714       692  

Marketing expense

    66       80       136       148  

Loan acquisition and collection expense

    219       413       663       687  

FDIC insurance premiums

    116       110       229       234  

Intangible asset amortization

    131       166       262       331  

Other noninterest expense

    860       718       1,589       1,437  

Total noninterest expense

    8,196       8,210       16,007       15,949  
                                 

Income before income tax expense

    2,704       2,473       5,670       5,042  

Income tax expense

    960       893       2,059       1,818  

Net income

    1,744       1,580       3,611       3,224  
                                 

Weighted-average shares outstanding:

                               

Basic

    9,559,369       10,132,349       9,560,913       10,155,598  

Diluted

    9,569,585       10,132,349       9,567,138       10,155,598  
                                 

Earnings per common share:

                               

Basic

  $ 0.18     $ 0.16     $ 0.38     $ 0.32  

Diluted

    0.18       0.16       0.38       0.32  
                                 

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. 

 
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NORTHEAST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)  

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 

Net income

  $ 1,744     $ 1,580     $ 3,611     $ 3,224  
                                 

Other comprehensive (loss) income, before tax:

                               

Available-for-sale securities:

                               

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

    (692 )     538       (226 )     263  

Derivatives and hedging activities:

                               

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

    284       (500 )     (554 )     (770 )

Reclassification adjustments for net gains included in net income

    -       (24 )     -       (34 )

Total derivatives and hedging activities

    284       (524 )     (554 )     (804 )

Total other comprehensive (loss) income, before tax

    (408 )     14       (780 )     (541 )

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

    (155 )     4       (296 )     (183 )

Other comprehensive (loss) income, net of tax

    (253 )     10       (484 )     (358 )

Comprehensive income

  $ 1,491     $ 1,590     $ 3,127     $ 2,866  

 

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) 

   

Preferred Stock

   

Voting Common Stock

   

Non-voting Common Stock

   

Additional

Paid-in

   

Retained

   

Accumulated

Other

Comprehensive

   

Total

Stockholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

Balance at June 30, 2014

    -     $ -       9,260,331     $ 9,260       880,963     $ 881     $ 90,914     $ 12,294     $ (1,283 )   $ 112,066  

Net income

    -       -       -       -       -       -       -       3,224       -       3,224  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (358 )     (358 )

Common stock repurchased

    -       -       (448,686 )     (449 )     -       -       (3,653 )     -       -       (4,102 )

Conversion of voting common stock to non- voting common stock

    -       -       -       -       -       -       -       -       -       -  

Dividends on common stock at $0.02 per share

    -       -       -       -       -       -       -       (204 )     -       (204 )

Stock-based compensation

    -       -       -       -       -       -       297       -       -       297  

Issuance of restricted common stock

    -       -       168,000       168       -       -       (168 )     -       -       -  

Forfeiture of restricted common stock

    -       -       (14,221 )     (14 )     -       -       14       -       -       -  

Balance at December 31, 2014

    -     $ -       8,965,424     $ 8,965       880,963     $ 881     $ 87,404     $ 15,314     $ (1,641 )   $ 110,923  
                                                                                 

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

    -       -       -       -       -       -       -       3,611       -       3,611  

Other comprehensive loss, net of tax

    -       -       -       -       -       -       -       -       (484 )     (484 )

Common stock repurchased

    -       -       (125,100 )     (125 )     -       -       (1,204 )     -       -       (1,329 )

Conversion of voting common stock to non- voting common stock

    -       -       (16,371 )     (16 )     16,371       16       -       -       -       -  

Dividends on common stock at $0.02 per share

    -       -       -       -       -       -       -       (192 )     -       (192 )

Stock-based compensation

    -       -       -       -       -       -       280       -       -       280  

Issuance of restricted common stock

    -       -       100,000       100       -       -       (100 )     -       -       -  

Forfeiture of restricted common stock

    -       -       (43,054 )     (43 )     -       -       43       -       -       -  

Balance at December 31, 2015

    -     $ -       8,490,619     $ 8,491       1,029,110     $ 1,029     $ 84,525     $ 22,340     $ (1,772 )   $ 114,613  

 

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) 

   

Six Months Ended December 31,

 
   

2015

   

2014

 

Operating activities:

               

Net income

  $ 3,611     $ 3,224  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

         

Provision for loan losses

    1,065       433  

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

    68       26  

Loss on sale of premises and equipment, net

    6       28  

Accretion of fair value adjustments on loans, net

    (5,600 )     (6,117 )

Accretion of fair value adjustments on deposits, net

    (4 )     (120 )

Accretion of fair value adjustments on borrowings, net

    3       (72 )

Originations of loans held for sale

    (49,640 )     (49,444 )

Net proceeds from sales of loans held for sale

    50,098       57,264  

Gain on sales of residential loans held for sale

    (957 )     (1,029 )

Gain on sales of portfolio loans

    (1,354 )     (525 )

Amortization of intangible assets

    262       331  

Bank-owned life insurance income, net

    (224 )     (219 )

Depreciation of premises and equipment

    824       847  

Stock-based compensation

    280       297  

Amortization of available-for-sale securities, net

    490       519  

Changes in other assets and liabilities:

               

Other assets

    165       (1,665 )

Other liabilities

    (1,027 )     (1,071 )

Net cash (used in) provided by operating activities

    (1,934 )     2,707  

Investing activities:

               

Purchases of available-for-sale securities

    (17,548 )     -  

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

    14,400       5,786  

Loan purchases

    (59,311 )     (39,667 )

Proceeds from sales of portfolio loans

    14,427       3,665  

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

    (15,424 )     (16,778 )

Purchases and disposals of premises and equipment, net

    (1,038 )     (234 )

Redemption of Federal Home Loan Bank stock

    1,531       -  

Proceeds from sales of real estate owned and other repossessed collateral

    959       129  

Net cash used in investing activities

    (62,004 )     (47,099 )

Financing activities:

               

Net increase in deposits

    52,011       57,511  

Net increase (decrease) in short-term borrowings

    77       (209 )

Repurchase of common stock

    (1,329 )     (4,102 )

Dividends paid on common stock

    (192 )     (204 )

Repayments of FHLB advances

    -       (7,500 )

Repayment of wholesale repurchase agreements

    (10,000 )     -  

Repayment of capital lease obligation

    (116 )     (94 )

Net cash provided by financing activities

    40,451       45,402  

Net (decrease) increase in cash and cash equivalents

    (23,487 )     1,010  

Cash and cash equivalents, beginning of period

    89,850       82,259  

Cash and cash equivalents, end of period

  $ 66,363     $ 83,269  
                 

Supplemental schedule of noncash investing and financing activities:

               

Transfers from loans to real estate owned and other repossessed collateral

  $ 614     $ 241  

Transfers from real estate owned and other repossessed collateral to loans

    -       2  

 

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

December 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, 2015 (“Fiscal 2015”) 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 15, 2014 and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company adopted the standard in the current period. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 6: Investments in Qualified Affordable Housing Projects” for further discussion and related effect.

 

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.

 

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 was effective July 1, 2015 and did not 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 did not have a significant impact on the Company’s financial statements.

 

 

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). The amendment affects reporting entities that elect to measure the fair value of an investment using the net asset value per share as a practical expedient. The Company adopted the standard in the current period. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 11: Fair Value Measurements” for further discussion and related effect.

 

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. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.

 

 

 
9

Table Of Contents
 

 

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.

 

   

December 31, 2015

 
   

Amortized

Cost

   

Gross Unrealized

Gains

   

Gross Unrealized

Losses

   

Fair

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 51,572     $ 1     $ (78 )   $ 51,495  

Agency mortgage-backed securities

    48,785       -       (943 )     47,842  

Other investments measured at net asset value

    5,044       -       (42 )     5,002  
    $ 105,401     $ 1     $ (1,063 )   $ 104,339  

 

   

June 30, 2015

 
   

Amortized

Cost

   

Gross Unrealized

Gains

   

Gross Unrealized

Losses

   

Fair

Value

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 48,191     $ 40     $ (1 )   $ 48,230  

Agency mortgage-backed securities

    54,553       2       (877 )     53,678  

Other investments measured at net asset value

    -       -       -       -  
    $ 102,744     $ 42     $ (878 )   $ 101,908  

 

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, 2015 or 2014. At December 31, 2015, investment securities with a fair value of approximately $3.0 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.

 

   

December 31, 2015

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 42,495     $ (78 )   $ -     $ -     $ 42,495     $ (78 )

Agency mortgage-backed securities

    10,620       (129 )     37,222       (814 )     47,842       (943 )

Other investments measured at net asset value

    5,002       (42 )     -       -       5,002       (42 )
    $ 58,117     $ (249 )   $ 37,222     $ (814 )   $ 95,339     $ (1,063 )

 

   

June 30, 2015

 
   

Less than 12 Months

   

More than 12 Months

   

Total

 
   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

   

Fair

Value

   

Unrealized

Losses

 
   

(Dollars in thousands)

 

U.S. Government agency securities

  $ 2,999     $ (1 )   $ -     $ -     $ 2,999     $ (1 )

Agency mortgage-backed securities

    10,295       (106 )     41,349       (771 )     51,644       (877 )

Other investments measured at net asset value

    -       -       -       -       -       -  
    $ 13,294     $ (107 )   $ 41,349     $ (771 )   $ 54,643     $ (878 )

 

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

 

At December 31, 2015, the Company had sixteen securities in a continuous loss position for greater than twelve months. At December 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 December 31, 2015 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, 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 December 31, 2015.

 

The investment measured at net asset value is a fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies. The underlying composition of the fund is primarily government agencies or other investment-grade investments. The effective duration of the investments is 4.55 years.

 

 

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

Cost

   

Fair

Value

 
   

(Dollars in thousands)

 

Due within one year

  $ 39,082     $ 39,067  

Due after one year through five years

    12,490       12,428  

Due after five years through ten years

    22,966       22,620  

Due after ten years

    25,819       25,222  
Total    $ 100,357     $ 99,337  

 

 
11

Table Of Contents
 

 

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.

 

   

December 31, 2015

   

June 30, 2015

 
   

Originated

   

Purchased

   

Total

   

Originated

   

Purchased

   

Total

 
    (Dollars in thousands)  

Residential real estate

  $ 99,312     $ 2,658     $ 101,970     $ 106,275     $ 2,068     $ 108,343  

Home equity

    20,457       -       20,457       24,326       -       24,326  

Commercial real estate

    177,941       223,134       401,075       148,425       200,251       348,676  

Commercial and industrial

    148,932       222       149,154       122,860       273       123,133  

Consumer

    6,780       -       6,780       7,659       -       7,659  

Total loans

  $ 453,422     $ 226,014     $ 679,436     $ 409,545     $ 202,592     $ 612,137  

 

 

Past Due and Nonaccrual Loans

 

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

 

   

December 31, 2015

 
   

30-59

Days

   

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

   

Non-

Accrual

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

  $ 607     $ 552     $ -     $ 2,199     $ 3,558     $ 95,954     $ 99,312     $ 3,263  

Home equity

    -       -       -       11       11       20,446       20,457       11  

Commercial real estate

    227       188       -       278       693       177,248       177,941       399  

Commercial and industrial

    -       -       -       2       2       148,930       148,932       2  

Consumer

    55       70       -       107       232       6,548       6,780       204  

Total originated portfolio

    889       810       -       2,597       4,296       449,126       453,422       3,879  

Purchased portfolio:

                                                               

Residential real estate

    -       1,186       -       -       1,186       1,472       2,658       -  

Commercial and industrial

    -       -       -       -       -       222       222       -  

Commercial real estate

    8,426       743       -       2,214       11,383       211,751       223,134       2,221  

Total purchased portfolio

    8,426       1,929       -       2,214       12,569       213,445       226,014       2,221  

Total loans

  $ 9,315     $ 2,739     $ -     $ 4,811     $ 16,865     $ 662,571     $ 679,436     $ 6,100  
                                                                 

 

   

June 30, 2015

 
   

30-59

Days

   

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

   

Non-

Accrual

Loans

 
   

(Dollars in thousands)

 

Originated portfolio:

                                                               

Residential real estate

  $ 239     $ 973     $ -     $ 1,393     $ 2,605     $ 103,670     $ 106,275     $ 3,021  

Home equity

    9       -       -       11       20       24,306       24,326       11  

Commercial real estate

    300       -       -       704       1,004       147,421       148,425       994  

Commercial and industrial

    -       -       -       2       2       122,858       122,860       2  

Consumer

    105       29       -       56       190       7,469       7,659       190  

Total originated portfolio

    653       1,002       -       2,166       3,821       405,724       409,545       4,218  

Purchased portfolio:

                                                               

Residential real estate

    -       -       -       -       -       2,068       2,068       -  

Commercial and industrial

    -       -       -       -       -       273       273       -  

Commercial real estate

    86       299       -       2,410       2,795       197,456       200,251       6,532  

Total purchased portfolio

    86       299       -       2,410       2,795       199,797       202,592       6,532  

Total loans

  $ 739     $ 1,301     $ -     $ 4,576     $ 6,616     $ 605,521     $ 612,137     $ 10,750  

  

Allowance for Loan Losses and Impaired Loans

 

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

 

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

 

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

 

Commercial real estate: Loans in this segment are primarily income-producing properties. For owner-occupied properties, the cash flows are derived from an operating business, and the underlying cash flows may be adversely affected by deterioration in the financial condition of the operating business. The underlying cash flows generated by non-owner occupied properties may be adversely affected by increased vacancy rates. Management periodically obtains rent rolls, with which it monitors the cash flows of these loans. Adverse developments in either of these areas will have an adverse effect on the credit quality of this segment. For purposes of the allowance for loan losses, this segment also includes construction loans.

 

 

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

 

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

 

Purchased: Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the Bank’s Loan Acquisition and Servicing Group (“LASG”). Loans acquired by the LASG are, with limited exceptions, performing loans at the date of purchase. Repayment of loans in this segment is largely dependent on cash flow from the successful operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied property. Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the real estate market, such as geographic location or property type. Loans in this segment are evaluated for impairment under ASC 310-30. The Company reviews expected cash flows from purchased loans on a quarterly basis. The effect of a decline in expected cash flows subsequent to the acquisition of the loan is recognized through a specific allocation in the allowance for loan losses.

 

The general component of the allowance for loan losses 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

 

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 and industrial, 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 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, 2015

 
   

Residential

Real Estate

   

Commercial

Real Estate

   

Commercial

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 732     $ 733     $ 134     $ 46     $ 364     $ 56     $ 2,065  

Provision

    147       125       42       (6 )     644       (56 )     896  

Recoveries

    1       -       4       3       -       -       8  

Charge-offs

    (19 )     (14 )     (1 )     (7 )     (799 )     -       (840 )

Ending balance

  $ 861     $ 844     $ 179     $ 36     $ 209     $ -     $ 2,129  
                                                         

 

   

Three Months Ended December 31, 2014

 
   

Residential

Real Estate

   

Commercial

Real Estate

   

Commercial

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 783     $ 340     $ 49     $ 51     $ 271     $ 45     $ 1,539  

Provision

    2       (53 )     5       8       142       9       113  

Recoveries

    11       1       -       3       -       -       15  

Charge-offs

    -       -       -       (3 )     -       -       (3 )

Ending balance

  $ 796     $ 288     $ 54     $ 59     $ 413     $ 54     $ 1,664  

  

   

Six Months Ended December 31, 2015

 
   

Residential

Real Estate

   

Commercial

Real Estate

   

Commercial

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 741     $ 694     $ 117     $ 35     $ 283     $ 56     $ 1,926  

Provision

    126       187       58       25       725       (56 )     1,065  

Recoveries

    13       5       5       5       -       -       28  

Charge-offs

    (19 )     (42 )     (1 )     (29 )     (799 )     -       (890 )

Ending balance

  $ 861     $ 844     $ 179     $ 36     $ 209     $ -     $ 2,129  
                                                         

 

   

Six Months Ended December 31, 2014

 
   

Residential

Real Estate

   

Commercial

Real Estate

   

Commercial

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Beginning balance

  $ 580     $ 358     $ 48     $ 79     $ 267     $ 35     $ 1,367  

Provision

    360       (71 )     6       (27 )     146       19       433  

Recoveries

    16       1       -       13       -       -       30  

Charge-offs

    (160 )     -       -       (6 )     -       -       (166 )

Ending balance

  $ 796     $ 288     $ 54     $ 59     $ 413     $ 54     $ 1,664  

 

 

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

 

   

December 31, 2015

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Allowance for loan losses:

                                                       

Individually evaluated

  $ 557     $ 17     $ -     $ 1     $ -     $ -     $ 575  

Collectively evaluated

    304       827       179       35       -       -       1,345  

ASC 310-30

    -       -       -       -       209       -       209  

Total

  $ 861     $ 844     $ 179     $ 36     $ 209     $ -     $ 2,129  
                                                         

Loans:

                                                       

Individually evaluated

  $ 5,178     $ 1,764     $ 2     $ 420     $ -     $ -     $ 7,364  

Collectively evaluated

    114,591       176,177       148,930       6,360       -       -       446,058  

ASC 310-30

    -       -       -       -       226,014       -       226,014  

Total

  $ 119,769     $ 177,941     $ 148,932     $ 6,780     $ 226,014     $ -     $ 679,436  

 

   

June 30, 2015

 
   

Residential

   

Commercial

   

Commercial

                                 
   

Real Estate

   

Real Estate

   

and Industrial

   

Consumer

   

Purchased

   

Unallocated

   

Total

 
   

(Dollars in thousands)

 

Allowance for loan losses:

                                                       

Individually evaluated

  $ 435     $ 21     $ -     $ -     $ -     $ -     $ 456  

Collectively evaluated

    306       673       117       35       -       56       1,187  

ASC 310-30

    -       -       -       -       283       -       283  

Total

  $ 741     $ 694     $ 117     $ 35     $ 283     $ 56     $ 1,926  
                                                         

Loans:

                                                       

Individually evaluated

  $ 4,095     $ 2,381     $ 2     $ 253     $ -     $ -     $ 6,731  

Collectively evaluated

    126,506       146,044       122,858       7,406       -       -       402,814  

ASC 310-30

    -       -       -       -       202,592       -       202,592  

Total

  $ 130,601     $ 148,425     $ 122,860     $ 7,659     $ 202,592     $ -     $ 612,137  

  

The following table sets forth information regarding impaired loans. Loans accounted for under ASC 310-30 that have performed based on cash flow and accretable yield expectations determined at date of acquisition are not considered impaired assets and have been excluded from the tables below.

 

   

December 31, 2015

    June 30, 2015  
           

Unpaid

                   

Unpaid

         
   

Recorded

   

Principal

   

Related

    Recorded    

Principal

   

Related

 
   

Investment

   

Balance

   

Allowance

    Investment    

Balance

   

Allowance

 
   

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

                                               

Originated:

                                               

Residential real estate

  $ 3,251     $ 3,424     $ -     $ 1,975     $ 2,076     $ -  

Consumer

    379       424       -       253       262       -  

Commercial real estate

    875       872       -       1,505       1,510       -  

Commercial and industrial

    2       2       -       2       2       -  

Purchased:

                                               

Commercial real estate

    5,675       7,126       -       7,673       9,606       -  

Total

    10,182       11,848       -       11,408       13,456       -  
                                                 

Impaired loans with a valuation allowance:

                                               

Originated:

                                               

Residential real estate

    1,927       1,868       557       2,120       2,060       435  

Consumer

    41       41       1       -       -       -  

Commercial real estate

    889       883       17       876       870       21  

Commercial and industrial

    -       -       -       -       -       -  

Purchased:

                                               

Commercial real estate

    218       260       54       1,208       1,644       260  

Total

    3,075       3,052       629       4,204       4,574       716  

Total impaired loans

  $ 13,257     $ 14,900     $ 629     $ 15,612     $ 18,030     $ 716  

 

 

The following tables set forth information regarding interest income recognized on impaired loans.

 

   

Three Months Ended December 31,

 
   

2015

   

2014

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 
   

Investment

   

Recognized

   

Investment

   

Recognized

 
   

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

                               

Originated:

                               

Residential real estate

  $ 3,157     $ 37     $ 1,384     $ 28  

Consumer

    354       8       292       68  

Commercial real estate

    885       7       1,182       30  

Commercial and industrial

    2       -       -       -  

Purchased:

                               

Commercial real estate

    6,844       50       6,901       85  

Total

    11,242       102       9,759       211  
                                 

Impaired loans with a valuation allowance:

                               

Originated:

                               

Residential real estate

    1,968       22       2,080       7  

Consumer

    44       1       121       15  

Commercial real estate

    930       19       1,248       11  

Commercial and industrial

    -       -       -       -  

Purchased:

                               

Commercial real estate

    1,481       3       1,295       21  

Total

    4,423       45       4,744       54  

Total impaired loans

  $ 15,665     $ 147     $ 14,503     $ 265  

   

   

Six Months Ended December 31,

 
   

2015

   

2014

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 
   

Investment

   

Recognized

   

Investment

   

Recognized

 
   

(Dollars in thousands)

 

Impaired loans without a valuation allowance:

                               

Originated:

                               

Residential real estate

  $ 2,613     $ 76     $ 1,188     $ 45  

Consumer

    316       13       297       71  

Commercial real estate

    1,190       14       1,462       37  

Commercial and industrial

    2       -       -       -  

Purchased:

                               

Commercial real estate

    6,674       64       5,820       160  

Total

    10,795       167       8,767       313  
                                 

Impaired loans with a valuation allowance:

                               

Originated:

                               

Residential real estate

    2,024       45       1,682       35  

Consumer

    20       2       126       16  

Commercial real estate

    883       31       1,095       31  

Commercial and industrial

    -       -       -       -  

Purchased:

                               

Commercial real estate

    713       39       1,612       24  

Total

    3,640       117       4,515       106  

Total impaired loans

  $ 14,435     $ 284     $ 13,282     $ 419  

 

 

Credit Quality

 

The Company utilizes a ten-point internal loan rating system for commercial real estate, construction, commercial and industrial, and certain residential loans as follows:

 

Loans rated 1 — 6: Loans in these categories are considered “pass” rated loans. Loans in categories 1-5 are considered to have low to average risk. Loans rated 6 are considered marginally acceptable business credits and have more than average risk.

 

Loans rated 7: Loans in this category are considered “special mention.” These loans show signs of potential weakness and are being closely monitored by management.

 

Loans rated 8: Loans in this category are considered “substandard.” Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of the debt.

 

Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in one graded 8 with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

Loans rated 10: Loans in this category are considered “loss” and of such little value that their continuance as loans is not warranted. 

 

On an annual basis, or more often if needed, the Company formally reviews the ratings of all loans subject to risk ratings. Semi-annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. Risk ratings on purchased loans, with and without evidence of credit deterioration at acquisition, are determined relative to the Company’s recorded investment in that loan, which may be significantly lower than the loan’s unpaid principal balance.

 

The following tables present the Company’s loans by risk rating.

  

   

December 31, 2015

 
   

Originated Portfolio

                 
   

Commercial

   

Commercial

           

Purchased

         
   

Real Estate

   

and Industrial

   

Residential(1)

   

Portfolio

   

Total

 
   

(Dollars in thousands)

 

Loans rated 1- 6

  $ 174,270     $ 148,912     $ 8,419     $ 210,635     $ 542,236  

Loans rated 7

    2,770       18       622       11,830       15,240  

Loans rated 8

    901       2       601       3,549       5,053  

Loans rated 9

    -       -       23       -       23  

Loans rated 10

    -       -       -       -       -  
    $ 177,941     $ 148,932     $ 9,665     $ 226,014     $ 562,552  

 

   

June 30, 2015

 
   

Originated Portfolio

                 
   

Commercial

   

Commercial

           

Purchased

         
   

Real Estate

   

and Industrial

   

Residential(1)

   

Portfolio

   

Total

 
   

(Dollars in thousands)

 

Loans rated 1- 6

  $ 142,321     $ 122,829     $ 8,049     $ 190,193     $ 463,392  

Loans rated 7

    4,417       31       634       5,628       10,710  

Loans rated 8

    1,687       -       429       6,771       8,887  

Loans rated 9

    -       -       23       -       23  

Loans rated 10

    -       -       -       -       -  
    $ 148,425     $ 122,860     $ 9,135     $ 202,592     $ 483,012  

 

  (1) Certain of the Company’s loans made for commercial purposes, but secured by residential collateral, are rated under the Company’s risk-rating system.

 

 

Troubled Debt Restructurings

 

The following table shows the Company’s post-modification balance of TDRs by type of modification.

 

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 
   

Number of

   

Recorded

   

Number of

   

Recorded

   

Number of

   

Recorded

   

Number of

    Recorded  
   

Contracts

   

Investment

   

Contracts

   

Investment

   

Contracts

   

Investment

   

Contracts

    Investment  
   

(Dollars in thousands)

 

Extended maturity

    -     $ -       1     $ 356       -     $ -       3     $ 590  

Adjusted interest rate

    -       -       3       157       -       -       4       195  

Rate and maturity

    3       208       -       -       2       36       3       201  

Principal deferment

    -       -       -       -       -       -       1       453  

Court ordered concession

    -       -       -       -       -       -       4       84  
          $ 208       4     $ 513       2     $ 36       15     $ 1,523  

 

The following table shows loans modified in a TDR and the change in the recorded investment subsequent to the modifications occurring.

 

   

Three Months Ended December 31,

 
   

2015

   

2014

 
           

Recorded

   

Recorded

           

Recorded

   

Recorded

 
   

Number of

   

Investment

   

Investment

   

Number of

   

Investment

   

Investment

 
   

Contracts

   

Pre-Modification

   

Post-Modification

   

Contracts

   

Pre-Modification

   

Post-Modification

 
   

(Dollars in thousands)

 

Originated portfolio:

                                               

Residential real estate

    3     $ 208     $ 208       2     $ 125     $ 125  

Home equity

    -       -       -       -       -       -  

Commercial real estate

    -       -       -       -       -       -  

Commercial and industrial

    -       -       -       -       -       -  

Consumer

    -       -       -       1       32       32  

Total originated portfolio

    3       208       208       3       157       157  
                                                 

Purchased portfolio:

                                               

Residential real estate

    -       -       -       -       -       -  

Commercial real estate

    -       -       -       1       356       356  

Total purchased portfolio

    -       -       -       1       356       356  

Total

    3     $ 208     $ 208       4     $ 513     $ 513  

 

   

Six Months Ended December 31,

 
   

2015

   

2014

 
           

Recorded

   

Recorded

           

Recorded

   

Recorded

 
   

Number of

   

Investment

   

Investment

   

Number of

   

Investment

   

Investment

 
   

Contracts

   

Pre-Modification

   

Post-Modification

   

Contracts

   

Pre-Modification

   

Post-Modification

 
   

(Dollars in thousands)

 

Originated portfolio:

                                               

Residential real estate

    3     $ 208     $ 208       11     $ 933     $ 933  

Home equity

    -       -       -       -       -       -  

Commercial real estate

    -       -       -       1       200       200  

Commercial and industrial

    -       -       -       -       -       -  

Consumer

    -       -       -       2       34       34  

Total originated portfolio

    3       208       208       14       1,167       1,167  
                                                 

Purchased portfolio:

                                               

Residential real estate

    -       -       -       -       -       -  

Commercial real estate

    -       -       -       1       356       356  

Total purchased portfolio

    -       -       -       1       356       356  

Total

    3     $ 208     $ 208       15     $ 1,523     $ 1,523  

 

The Company considers TDRs past due 90 days or more to be in payment default. Two loans modified in a TDR in the last twelve months defaulted during the three and six months ended December 31, 2015; the recorded investment of such loans was $216 thousand. As of December 31, 2015, there were no further commitments to lend associated with loans modified in a TDR.

 

 

ASC 310-30 Loans

 

The following tables present a summary of loans accounted for under ASC 310-30 that were acquired by the Company during the period indicated.

 

   

Three Months Ended

December 31, 2015

   

Three Months Ended

December 31, 2014

 
   

(Dollars in thousands)

 

Contractually required payments receivable

  $ 60,153     $ 66,662  

Nonaccretable difference

    (491 )     (1,625 )

Cash flows expected to be collected

    59,662       65,037  

Accretable yield

    (23,807 )     (25,405 )

Fair value of loans acquired

  $ 35,855     $ 39,632  

  

   

Six Months Ended

December 31, 2015

   

Six Months Ended

December 31, 2014

 
   

(Dollars in thousands)

 

Contractually required payments receivable

  $ 91,427     $ 87,770  

Nonaccretable difference

    (782 )     (1,929 )

Cash flows expected to be collected

    90,645       85,841  

Accretable yield

    (31,334 )     (33,365 )

Fair value of loans acquired

  $ 59,311     $ 52,476  

  

Certain of the loans accounted for under ASC 310-30 that were acquired by the Company are not accounted for using the income recognition model because the Company cannot reasonably estimate cash flows expected to be collected. These loans when acquired are placed on non-accrual. The carrying amounts of such loans are as follows.

 

   

As of and for the Three

Months Ended

December 31, 2015

   

As of and for the Six

Months Ended

December 31, 2015

 
   

(Dollars in thousands)

 

Loans acquired during the period

  $ -     $ -  

Loans at end of period

    9,047       9,047  

  

The following tables summarize the activity in the accretable yield for loans accounted for under ASC 310-30.

 

   

Three Months Ended

December 31, 2015

   

Three Months Ended

December 31, 2014

 
   

(Dollars in thousands)

 

Beginning balance

  $ 109,615     $ 108,352  

Acquisitions

    23,807       25,405  

Accretion

    (3,885 )     (4,286 )

Reclassifications from non-accretable difference to accretable yield

    2,764       -  

Disposals and other changes

    (8,208 )     (6,196 )

Ending balance

  $ 124,093     $ 123,275  

  

   

Six Months Ended

December 31, 2015

   

Six Months Ended

December 31, 2014

 
   

(Dollars in thousands)

 

Beginning balance

  $ 111,449     $ 109,040  

Acquisitions

    31,334       33,365  

Accretion

    (7,640 )     (8,729 )

Reclassifications from non-accretable difference to accretable yield

    3,041       10  

Disposals and other changes

    (14,091 )     (10,411 )

Ending balance

  $ 124,093     $ 123,275  

  

The following table provides information related to the unpaid principal balance and carrying amounts of ASC 310-30 loans.

 

   

December 31, 2015

   

June 30, 2015

 
   

(Dollars in thousands)

 

Unpaid principal balance

  $ 253,312     $ 235,716  

Carrying amount

    222,070       199,113  

 

 
20

Table Of Contents
 

 

5. Transfers and Servicing of Financial Assets

 

The Company sells loans in the secondary market and for certain loans, retains the servicing responsibility. Consideration for the sale includes the cash received as well as the related servicing rights asset. The Company receives fees for the services provided.

 

Capitalized servicing rights as of December 31, 2015 totaled $1.4 million, compared to $1.1 million as of June 30, 2015, which are included in other assets in the accompanying consolidated balance sheets.

 

Mortgage loans sold in the quarter ended December 31, 2015 totaled $20.5 million, compared to $25.7 million in the quarter ended December 31, 2014. Mortgage loans sold in the six months ended December 31, 2015 totaled $49.4 million, compared to $56.5 million in the six months ended December 31, 2014. Mortgage loans serviced for others totaled $51.7 million at December 31, 2015 and $54.9 million at June 30, 2015. SBA loans sold during the quarter ended December 31, 2015 totaled $7.5 million, compared to $2.6 million in the quarter ended December 31, 2014. SBA loans sold in the six months ended December 31, 2015 totaled $13.0 million, compared to $3.2 million in the six months ended December 31, 2014. SBA loans serviced for others totaled $63.5 million at December 31, 2015 and $53.5 million at June 30, 2015.

 

Mortgage and SBA loans serviced for others are accounted for as sales and therefore are not included in the accompanying consolidated balance sheets. The risks inherent in mortgage servicing assets and SBA servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.

 

Contractually specified servicing fees were $167 thousand and $133 thousand for the quarters ended December 31, 2015 and 2014, respectively, and were included as a component of loan related fees within non-interest income. Contractually specified servicing fees were $316 thousand and $258 thousand for the six months ended December 31, 2015 and 2014, respectively.  

 

The significant assumptions used in the valuation for mortgage servicing rights as of December 31, 2015 included a weighted average discount rate of 7.5% and a weighted average prepayment speed assumption of 12.4%. For the SBA servicing rights, the significant assumptions used in the valuation included a range of discount rates from 9.1% to 13.2% and a weighted average prepayment speed assumption of 7.2%

 

6. Investments in Qualified Affordable Housing Projects

 

On July 1, 2015, the Company adopted ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, which required retrospective application. Under the proportional amortization method in ASU 2014-01, the initial costs of investment in qualified affordable housing projects are amortized in proportion to tax credits and other tax benefits received, and are recognized as a component of the provision for income taxes in the consolidated statements of income. Prior to the implementation of ASU 2014-01, the Company’s investments in qualified affordable housing projects were amortized and included as a component of non-interest income in the consolidated statements of income. Further information regarding the Company's investments in affordable housing projects follows:

 

   

December 31, 2015

   

June 30, 2015

 
   

(Dollars in thousands)

 

Investments in affordable housing projects included in other assets

  $ 493     $ 508  

  

Included in the effective tax rate for the three and six months ended December 31, 2015 and 2014 is the effect of the following:

  

   

Three Months Ended

December 31, 2015

   

Three Months Ended

December 31, 2014

 
   

(Dollars in thousands)

 

Investment amortization included in income tax expense

  $ 23     $ 23  

Tax credit recognized as income tax benefit

    118       118  

  

   

Six Months Ended

December 31, 2015

   

Six Months Ended

December 31, 2014

 
   

(Dollars in thousands)

 

Investment amortization included in income tax expense

  $ 115     $ 115  

Tax credit recognized as income tax benefit

    118       118  

  

ASU 2014-01 was applied retrospectively to all periods presented. The cumulative effect on retained earnings and other assets was $112 thousand at July 1, 2015.

 

 
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7. Earnings Per Share (EPS)

 

EPS is computed by dividing net income allocated to common shareholders by the weighted average common shares outstanding (including participating securities). The Company’s only participating securities are unvested restricted stock awards that contain non-forfeitable rights to dividends. The following table shows the weighted average number of shares outstanding for the periods indicated. Shares issuable relative to stock options granted have been reflected as an increase in the shares outstanding used to calculate diluted EPS, after applying the treasury stock method. The number of shares outstanding for basic and diluted EPS is presented as follows:

 

   

Three months Ended December 31,

   

Six months Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 
   

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

 

Net income

  $ 1,744     $ 1,580     $ 3,611     $ 3,224  
                                 

Weighted average shares used in calculation of basic EPS

    9,559,369       10,132,349       9,560,913       10,155,598  

Incremental shares from assumed exercise of dilutive securities

    10,216       -       6,225       -  

Weighted average shares used in calculation of diluted EPS

    9,569,585       10,132,349       9,567,138       10,155,598  
                                 
                                 

Basic earnings per common share

  $ 0.18     $ 0.16     $ 0.38     $ 0.32  

Diluted earnings per common share

  $ 0.18     $ 0.16     $ 0.38     $ 0.32  

  

For the three and six months ended December 31, 2015, the following stock options were excluded from the calculation of diluted EPS due to the exercise price of these options exceeding the average market price of the Company’s common stock for the period. These options, which were not dilutive at that date, may potentially dilute EPS in the future.

  

   

Three Months Ended December 31,

   

Six Months Ended December 31,

 
   

2015

   

2014

   

2015

   

2014

 

Stock options

    714,545       1,086,599       714,545       1,105,694  

 

 
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8. Derivatives and Hedging Activities

 

The Company has stand-alone derivative financial instruments in the form of interest rate caps that derive their value from a fee paid and are adjusted to fair value based on index and strike rate, and swap agreements that derive their value from the underlying interest rate. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure arises in the event of nonperformance by the counterparties to these agreements, and is limited to the net difference between the calculated amounts to be received and paid, if any. Such differences, which represent the fair value of the derivative instruments, are reflected on the Company’s balance sheet as derivative assets and derivative liabilities. The Company seeks to manage the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail to meet their obligations.

 

The Company currently holds derivative instruments that contain credit-risk related features that are in a net liability position, which may require that collateral be assigned to dealer banks. At December 31, 2015, the Company had posted cash collateral totaling $2.0 million with dealer banks related to derivative instruments in a net liability position.

 

The Company does not offset fair value amounts recognized for derivative instruments. The Company does not net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement.

 

Risk Management Policies – Derivative Instruments

 

The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the reduction in net income volatility within an assumed range of interest rates.

 

Interest Rate Risk Management – Cash Flow Hedging Instruments

 

The Company uses variable rate debt as a source of funds for use in the Company’s lending and investment activities and other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate interest payments.

 

Information pertaining to outstanding interest rate caps and swap agreements used to hedge variable rate debt is as follows.

  

 

December 31, 2015

 

Notional Amount

  Inception Date

 

Termination Date

 

Index

 

Receive Rate

   

Pay Rate

   

Strike Rate

   

Unrealized Gain (Loss)

   

Fair Value

 

Balance Sheet Location

 

(Dollars in thousands)

 

Interest rate swaps:

                                               
  $ 5,000   July 2013

 

July 2033

 

3 Mo. LIBOR

    0.54 %     3.38 %  

n/a

      (703 )     (703 )

Other Liabilities

    5,000   July 2013

 

July 2028

 

3 Mo. LIBOR

    0.54 %     3.23 %  

n/a

      (531 )     (531 )

Other Liabilities

    5,000   July 2013

 

July 2023

 

3 Mo. LIBOR

    0.54 %     2.77 %  

n/a

      (290 )     (290 )

Other Liabilities

 

Interest rate caps:

                                               
    6,000   October 2014

 

September 2019

 

3 Mo. LIBOR

 

n/a

   

n/a

      2.50 %     (140 )     36  

Other Assets

    10,000   March 2015

 

February 2020

 

3 Mo. LIBOR

 

n/a

   

n/a

      2.50 %     (132 )     84  

Other Assets

  $ 31,000                                       $ (1,796 )   $ (1,404 )  

 

 

June 30, 2015

 

Notional Amount

 

Inception Date

  Termination Date

 

Index

 

Receive Rate

   

Pay Rate

   

Strike Rate

   

Unrealized Loss

   

Fair Value

 

Balance Sheet Location

 

(Dollars in thousands)

 

Interest rate swaps:

                                               
  $ 5,000  

July 2013

  July 2033

 

3 Mo. LIBOR

    0.28 %     3.38 %  

n/a

    $ (472 )   $ (472 )

Other Liabilities

    5,000  

July 2013

  July 2028

 

3 Mo. LIBOR

    0.28 %     3.23 %  

n/a

    $ (368 )   $ (368 )

Other Liabilities

    5,000  

July 2013

  July 2023

 

3 Mo. LIBOR

    0.28 %     2.77 %  

n/a

    $ (208 )   $ (208 )

Other Liabilities

 

Interest rate caps:

                                               
    6,000  

October 2014

  September 2019

 

3 Mo. LIBOR

 

n/a

   

n/a

      2.50 %     (114 )     63  

Other Assets

    10,000  

March 2015

  February 2020

 

3 Mo. LIBOR

 

n/a

   

n/a

      2.50 %     (80 )     136  

Other Assets

  $ 31,000                                       $ (1,242 )   $ (849 )  

  

During the three and six months ended December 31, 2015 and 2014, no interest rate cap or swap agreements were terminated prior to maturity. Changes in the fair value of interest rate caps and swaps designated as hedging instruments of the variability of cash flows associated with variable rate debt are reported in other comprehensive income. These amounts subsequently are reclassified into interest expense as a yield adjustment in the same period in which the related interest on the debt affects earnings. Risk management results for the three and six months ended December 31, 2015 and 2014 related to the balance sheet hedging of variable rate debt indicates that the hedges were effective. 

 

 
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9. Other Comprehensive Income

 

The components of other comprehensive income (loss) are as follows:

 

   

Three Months Ended December 31,

 
   

2015

   

2014

 
   

Pre-tax

   

Tax Expense

   

After-tax

   

Pre-tax

   

Tax Expense

   

After-tax

 
   

Amount

   

(Benefit)

   

Amount

   

Amount

   

(Benefit)

   

Amount

 
   

(Dollars in thousands)

 

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

  $ (692 )   $ (263 )   $ (429 )   $ 538     $ 183     $ 355  

Reclassification adjustment for net gains included in net income

    -       -       -       -       -       -  

Total available-for-sale securities

    (692 )     (263 )     (429 )     538       183       355  

Change in accumulated loss on effective cash flow hedges

    284       108       176       (500 )     (171 )     (329 )

Reclassification adjustment for net gains included in net income

    -       -       -       (24 )     (8 )     (16 )

Total derivatives and hedging activities

    284       108       176       (524 )     (179 )     (345 )

Total other comprehensive income (loss)

  $ (408 )   $ (155 )   $ (253 )   $ 14     $ 4     $ 10  

 

   

Six Months Ended December 31,

 
   

2015

   

2014

 
   

Pre-tax

   

Tax Expense

   

After-tax

   

Pre-tax

   

Tax Expense

   

After-tax

 
   

Amount

   

(Benefit)

   

Amount

   

Amount

   

(Benefit)

   

Amount

 
   

(Dollars in thousands)

 

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

  $ (226 )   $ (85 )   $ (141 )   $ 263     $ 90     $ 173  

Reclassification adjustment for net gains included in net income

    -       -       -       -       -       -  

Total available-for-sale securities

    (226 )     (85 )     (141 )     263       90       173  

Change in accumulated loss on effective cash flow hedges

    (554 )     (211 )     (343 )     (770 )     (261 )     (509 )

Reclassification adjustment for net gains included in net income

    -       -       -       (34 )     (12 )     (22 )

Total derivatives and hedging activities

    (554 )     (211 )     (343 )     (804 )     (273 )     (531 )

Total other comprehensive income (loss)

  $ (780 )   $ (296 )   $ (484 )   $ (541 )   $ (183 )   $ (358 )

 
Accumulated other comprehensive loss is comprised of the following:

 

   

December 31, 2015

   

June 30, 2015

 
   

(Dollars in thousands)

 

Unrealized loss on available-for-sale securities

  $ (1,062 )   $ (836 )

Tax effect

    403       318  

Net-of-tax amount

    (659 )     (518 )

Unrealized loss on cash flow hedges

    (1,796 )     (1,242 )

Tax effect

    683       472  

Net-of-tax amount

    (1,113 )     (770 )

Accumulated other comprehensive loss

  $ (1,772 )   $ (1,288 )

 

 
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10. Commitments and Contingencies

 

Commitments

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, and commitments to fund investments. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Financial instruments with contract amounts which represent credit risk are as follows:

 

   

December 31, 2015

   

June 30, 2015

 
   

(Dollars in thousands)

 

Commitments to grant loans

  $ 34,696     $ 24,966  

Unfunded commitments under lines of credit

    53,608       39,414  

Standby letters of credit

    60       60  

Commitment to fund investment

    2,500       -  

   

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company has recorded an allowance for possible losses on commitments and unfunded loans totaling $55 thousand recorded in other liabilities at both December 31, 2015 and June 30, 2015.

 

The Company committed $2.5 million to a fund that acquires CRA qualified investments in loans for the Company’s portfolio. The Fund Manager will call the funds from the Company when an investment is successfully acquired. Through the three and six months ended December 31, 2015, the fund has not called any funds from the Company.

 

Contingencies

 

The Company and its subsidiary are parties to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims will not be material to the Company’s consolidated financial position or results of operations.

 

 
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11. Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another. When market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same.

 

ASC 820 defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

 

 

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 — Valuations based on significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

  

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

Valuation techniques - There have been no changes in the valuation techniques used during the current period.

 

Transfers- There were no transfers of assets and liabilities measured at fair value on a recurring or nonrecurring basis during the current period.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

 

Available-for-sale securities - Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include publicly-traded common and preferred stocks. If quoted prices are not available, then fair values are estimated by using pricing models ( i.e., matrix pricing) and market interest rates and credit assumptions or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency and government sponsored agency mortgage-backed securities, as well as certain preferred and trust preferred stocks. Level 3 securities are securities for which significant unobservable inputs are utilized.

 

Certain investments are measured at fair value using the net asset value per share as a practical expedient. The fund seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies. The Company’s investments can be redeemed daily at the closing net asset value per share. In accordance with ASU 2015-07, these investments have not been included in the fair value hierarchy.

 

Derivative financial instruments - The valuation of the Company’s interest rate swaps and caps are determined using widely accepted valuation techniques including discounted cash flow analyses on the expected cash flows of derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including forward interest rate curves and implied volatilities. Unobservable inputs, such as credit valuation adjustments are insignificant to the overall valuation of the Company’s derivative financial instruments. Accordingly, the Company has determined that its interest rate derivatives fall within Level 2 of the fair value hierarchy.

 

The fair value of derivative loan commitments and forward loan sale agreements are estimated using the anticipated market price based on pricing indications provided from syndicate banks. These commitments and agreements are categorized as Level 2. The fair value of such instruments was nominal at each date presented.

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

 

Collateral Dependent Impaired Loans- Valuations of impaired loans measured at fair value are determined by a review of collateral values. Certain inputs used in appraisals are not always observable, and therefore impaired loans are generally categorized as Level 3 within the fair value hierarchy.

  

Real Estate Owned and Other Repossessed collateral - The fair values of real estate owned and other repossessed collateral are estimated based upon appraised values less estimated costs to sell. Certain inputs used in appraisals are not always observable, and therefore may be categorized as Level 3 within the fair value hierarchy. When inputs used in appraisals are primarily observable, they are classified as Level 2.

 

 Loan servicing rights— The fair value of the SBA and mortgage servicing rights is based on a valuation model that calculates the present value of estimated future net servicing income. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Certain inputs are not observable, and therefore loan servicing rights are generally categorized as Level 3 within the fair value hierarchy.

 

Fair Value of other Financial Instruments:

 

Cash and cash equivalents - The fair value of cash, due from banks, interest bearing deposits and FHLB overnight deposits approximates their relative book values, as these financial instruments have short maturities.

 

FHLB stock - The carrying value of FHLB stock approximates fair value based on redemption provisions of the FHLB.

 

Loans- Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic conditions, lending conditions and the effects of estimated prepayments.

 

Loans held for sale - The fair value of loans held-for-sale is estimated based on bid quotations received from loan dealers.

 

Interest receivable - The fair value of this financial instrument approximates the book value as this financial instrument has a short maturity. It is the Company’s policy to stop accruing interest on loans past due by more than 90 days. Therefore, this financial instrument has been adjusted for estimated credit loss.

 

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand. The fair values of time deposits are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company’s net assets could increase.

 

Borrowings - The fair value of the Company’s borrowings with the FHLB is estimated by discounting the cash flows through maturity or the next re-pricing date based on current rates available to the Company for borrowings with similar maturities. The fair value of the Company’s short-term borrowings, capital lease obligations, wholesale repurchase agreements and other borrowings is estimated by discounting the cash flows through maturity based on current rates available to the Company for borrowings with similar maturities.

 

Off-Balance Sheet Credit-Related Instruments -Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of such instruments was nominal at each date presented.

 

 

Assets and liabilities measured at fair value on a recurring basis are summarized below. 

 

   

December 31, 2015

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Assets

 

(Dollars in thousands)

 

Securities available-for-sale:

                               

U.S. Government agency securities

  $ 51,495     $ -     $ 51,495     $ -  

Agency mortgage-backed securities

    47,842       -       47,842       -  

Other investments measured at net asset value(1)

    5,002       -       5,002       -  

Other assets – interest rate caps

    120       -       120       -  

Liabilities

                               

Other liabilities – interest rate swaps

  $ 1,524     $ -     $ 1,524     $ -  

 

   

June 30, 2015

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 

Assets

 

(Dollars in thousands)

 

Securities available-for-sale:

                               

U.S. Government agency securities

  $ 48,230     $ -     $ 48,230     $ -  

Agency mortgage-backed securities

    53,678       -       53,678       -  

Other investments measured at net asset value(1)

    -       -       -       -  

Other assets – interest rate caps

    199       -       199       -  

Liabilities

                               

Other liabilities – interest rate swap

  $ 1,048     $ -     $ 1,048     $ -  

 

 

(1)

In accordance with ASU 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amount presented in the table are intended to permit reconciliation of the fair value amount to the consolidated financial statements.

  

Assets measured at fair value on a nonrecurring basis are summarized below.

 

   

December 31, 2015

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Collateral dependent impaired loans

  $ 596     $ -     $ -     $ 596  

Real estate owned and other repossessed collateral

    1,238       -       -       1,238  

Loan servicing rights

    1,365       -       -       1,365  

 

   

June 30, 2015

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Collateral dependent impaired loans

  $ 932     $ -     $ -     $ 932  

Real estate owned and other repossessed collateral

    1,651       -       -       1,651  

Loan servicing rights

    1,123       -       -       1,123  

  

The table below presents quantitative information about significant unobservable inputs (Level 3) for assets measured at fair value on a nonrecurring basis at the dates indicated.

 

   

Fair Value

   
   

December 31,
2015

   

June 30,
2015

 

Valuation Technique

   

(Dollars in thousands)

   

Collateral dependent impaired loans

  $ 596     $ 932  

Appraisal of collateral(1)

Real estate owned and other repossessed collateral

    1,238       1,651  

Appraisal of collateral(1)

Loan servicing rights

    1,365       1,123  

Discounted cash flow(2)

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral. The Company may also use another available source of collateral assessment to determine a reasonable estimate of the fair value of the collateral. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments was 6% to 60%.

(2) Fair value is determined using a discounted cash flow model. The unobservable inputs include anticipated rate of loan prepayments and discount rates. The range of prepayment assumptions used was 7.2% to 12.4%. For discount rates, the range was 7.5% to 13.2%.

 

 

The following table presents the estimated fair value of the Company's financial instruments.

 

   

Carrying

   

Fair Value Measurements at December 31, 2015

 
   

Amount

   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 66,363     $ 66,363     $ 66,363     $ -     $ -  

Available-for-sale securities

    99,337       99,337       -       99,337       -  

Other investments measured at net asset value(1)

    5,002       5,002       -       -       -  

Federal Home Loan Bank stock

    2,571       2,571       -       2,571       -  

Loans held for sale

    7,592       7,592       -       7,592       -  

Loans, net

    677,307       678,030       -       -       678,030  

Accrued interest receivable

    1,478       1,478       -       1,478       -  

Interest rate caps

    120       120       -       120       -  
                                         

Financial liabilities:

                                       

Deposits

    726,766       727,135       -       727,135       -  

FHLB advances

    30,131       30,579       -       30,579       -  

Short-term borrowings

    2,426       2,426       -       2,426       -  

Capital lease obligation

    1,252       1,333       -       1,333       -  

Subordinated debentures

    8,723       9,258       -       -       9,258  

Interest rate swaps

    1,524       1,524       -       1,524       -  

  

   

Carrying

   

Fair Value Measurements at June 30, 2015

 
   

Amount

   

Total

   

Level 1

   

Level 2

   

Level 3

 
   

(Dollars in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 89,850     $ 89,850     $ 89,850     $ -     $ -  

Available-for-sale securities

    101,908       101,908       -       101,908       -  

Other investments measured at net asset value(1)

    -       -       -       -       -  

Federal Home Loan Bank stock

    4,102       4,102       -       4,102       -  

Loans held for sale

    9,035       9,035       -       9,035       -  

Loans, net

    610,211       613,896       -       -       613,896  

Accrued interest receivable

    1,335       1,335       -       1,335       -  

Interest rate caps

    199       199       -       199       -  
                                         

Financial liabilities:

                                       

Deposits

    674,759       675,285       -       675,285       -  

FHLB advances

    30,188       30,867       -       30,867       -  

Wholesale repurchase agreements

    10,037       10,098       -       10,098       -  

Short-term borrowings

    2,349       2,349       -       2,349       -  

Capital lease obligation

    1,368       1,448       -       1,448       -  

Subordinated debentures

    8,626       8,471       -       -       8,471  

Interest rate swaps

    1,048       1,048       -       1,048       -  

 

 

(1)

In accordance with ASU 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amount presented in the table are intended to permit reconciliation of the fair value amount to the consolidated financial statements.

 

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

 

The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in Northeast Bancorp’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the Securities and Exchange Commission.

 

A Note about Forward Looking Statements

 

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to the Company’s financial condition, prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy, simulation of changes in interest rates, capital spending and finance sources and revenue sources. These statements relate to expectations concerning matters that are not historical facts. Accordingly, statements that are based on management’s projections, estimates, assumptions, and judgments constitute forward-looking statements. These forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology such as “believe”, “expect”, “estimate”, “anticipate”, “continue”, “plan”, “approximately”, “intend”, “objective”, “goal”, “project”, or other similar terms or variations on those terms, or the future or conditional verbs such as “will”, “may”, “should”, “could”, and “would”. Although the Company believes that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, the Company cannot give you any assurance that its expectations will, in fact, occur or that its estimates or assumptions will be correct. The Company cautions you that actual results could differ materially from those expressed or implied by such forward-looking statements as a result of, among other factors, changes in interest rates and real estate values; competitive pressures from other financial institutions; weakness in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay the Company’s loans; changes in loan defaults and charge-off rates; changes in the value of securities and other assets, adequacy of loan loss reserves, or deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; the risk that the Company may not be successful in the implementation of its business strategy; the risk of compromises or breaches of the company's security systems; the risk that intangibles recorded in the Company’s financial statements will become impaired; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015 as updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this report and the Company does not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

 

Description of Business and Strategy

 

Business Overview

Northeast Bancorp (“we,” “our,” “us,” “Northeast” or the “Company”), incorporated under Maine law in 1987, is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), the Company is subject to regulation and supervision by the Federal Reserve. The Company’s primary subsidiary and principal asset is its wholly-owned banking subsidiary, Northeast Bank (the “Bank” or “Northeast Bank”), a Maine state-chartered bank originally organized in 1872. As a Federal Deposit Insurance Corporation (“FDIC”) insured Maine-chartered bank, the Bank is subject to regulation and supervision by the Maine Bureau of Financial Institutions (the “Bureau”) and the FDIC.

 

On December 29, 2010, the merger of the Company and FHB Formation LLC, a Delaware limited liability company (“FHB”), was consummated. As a result of the merger, the surviving company received a capital contribution of $16.2 million (in addition to the approximately $13.1 million in cash consideration paid to former shareholders), and the former members of FHB collectively acquired approximately 60% of the Company’s outstanding common stock. The Company applied the acquisition method of accounting, as described in Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”) to the merger, which represents an acquisition by FHB of Northeast, with Northeast as the surviving company. 

 

In connection with the transaction, as part of the regulatory approval process, the Company and the Bank made certain commitments to the Federal Reserve, the most significant of which are (i) to maintain a Tier 1 leverage ratio of at least 10%, (ii) to maintain a total risk-based capital ratio of at least 15%, (iii) to limit purchased loans to 40% of total loans, (iv) to fund 100% of the Company’s loans with core deposits (defined as non-maturity deposits and non-brokered insured time deposits), and (v) to hold commercial real estate loans (including owner-occupied commercial real estate) to within 300% of total risk-based capital. On June 28, 2013, the Federal Reserve approved the amendment to exclude owner-occupied commercial real estate loans from the commitment to hold commercial real estate loans to within 300% of total risk-based capital. All other commitments made to the Federal Reserve in connection with the merger remain unchanged. The Company and the Bank are currently in compliance with all commitments to the Federal Reserve. The Company’s compliance ratios at December 31, 2015 follow:

 

Condition

 

Ratios as of

December 31, 2015

 

(i) Tier 1 leverage capital ratio

    14.31 %

(ii) Total capital ratio

    18.43 %

(iii) Ratio of purchased loans to total loans, including loans held for sale

    32.90 %

(iv) Ratio of loans to core deposits (1)

    94.37 %

(v) Ratio of commercial real estate loans to total risk-based capital (2)

    204.91 %

 

(1) Core deposits include all non-maturity deposits and maturity deposits less than $250 thousand

(2) For purposes of calculating this ratio, commercial real estate includes all non-owner occupied commercial real estate loans defined as such by regulatory guidance, including all land development and construction loans.

 

 
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As of December 31, 2015, the Company, on a consolidated basis, had total assets of $894.1 million, total deposits of $726.8 million, and shareholders’ equity of $114.6 million. The Company gathers retail deposits through its banking offices in Maine and the Bank's online affinity deposit program, ableBanking; originates loans through the Bank’s Community Banking Division; originates Small Business Administration (“SBA”) loans through the Bank’s SBA National group (“SBA National”); and purchases and originates commercial loans through the Bank’s Loan Acquisition and Servicing Group (“LASG”). The Community Banking Division, with ten full-service branches and two loan production offices, operates from the Bank’s headquarters in Lewiston, Maine. LASG, ableBanking, and SBA National operate from the Company's offices in Boston, Massachusetts.

 

Unless the context otherwise requires, references herein to the Company include the Company and its subsidiary on a consolidated basis.

 

Strategy

 

The Company’s goal is to prudently grow its franchise, while maintaining sound operations and risk management, by implementing the following strategies:

 

Continuing our community banking tradition. With a history that dates to 1872, our Community Banking Division maintains its focus on sales and service, with the goal of attracting and retaining deposits, and serving the lending needs of retail and commercial customers within our core markets.

 

Growing LASG’s national originated and purchased loan business. We purchase commercial real estate loans nationally, at prices that on average have produced yields significantly higher than those available on our originated loan portfolio. We also originate loans nationally, taking advantage of our core expertise in underwriting and servicing national credits.

 

Growing our national SBA origination business. We originate loans on a national basis to small businesses, primarily through the SBA 7(a) program, which provides the partial guarantee of the SBA.

 

Generating deposits to fund our business. We offer a full line of deposit products through our ten-branch network located in the Community Banking Division’s market. ableBanking is a direct savings platform providing an additional channel to raise core deposits to fund our asset strategy.

 

Critical Accounting Policies

 

Critical accounting policies are those that involve significant judgments and assessments by management, and which could potentially result in materially different results under different assumptions and conditions. The reader is encouraged to review each of the policies included in Form 10-K for the year ended June 30, 2015 to gain a better understanding of how Northeast’s financial performance is measured and reported. There has been no material change in critical accounting policies during the three months ended December 31, 2015.

 

Overview

 

Net income was $1.7 million, or $0.18 per diluted common share, for the quarter ended December 31, 2015, compared to $1.6 million, or $0.16 per diluted common share, for the quarter ended December 31, 2014.

 

Net income was $3.6 million, or $0.38 per diluted common share, for the six months ended December 31, 2015, compared to $3.2 million, or $0.32 per diluted common share, for the six months ended December 31, 2014.

 

Net interest and dividend income before provision increased by $746 thousand, or 7.9%, to $10.2 million for the quarter ended December 31, 2015 compared to the quarter ended December 31, 2014. The increase is primarily due to higher loan volume and interest income in the originated loan portfolio.

 

Noninterest income increased by $254 thousand for the quarter ended December 31, 2015, compared to the quarter ended December 31, 2014, principally due to an increase in gains realized on sale of portfolio loans. The recent quarter includes gains realized on sale of SBA loans of $679 thousand, compared to $445 thousand in the quarter ended December 31, 2014.

 

 
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Noninterest expense decreased by $14 thousand for the quarter ended December 31, 2015, compared to the quarter ended December 31, 2014, principally due to the following:

 

a decrease of $194 thousand in loan acquisition and collections expense related to lower collection expense on purchased loans;

 

a decrease of $194 thousand in professional fees, primarily due to fees for temporary consulting services recognized in the three months ended December 31, 2014;

 

an increase of $117 thousand in salaries and employee benefits primarily due to the accelerated vesting of the former Chief Operating Officer’s shares and an increase in headcount during the three months ended December 31, 2015; and

 

an increase of $139 thousand in occupancy and equipment expense, due to increases in rent and IT-related equipment expense.

  

Financial Condition

 

Overview

 

Total assets increased by $43.4 million, or 5.1%, to $894.1 million at December 31, 2015, compared to June 30, 2015. The principal components of the change in the balance sheet were as follows:

  

 

The loan portfolio – excluding loans held for sale – grew by $67.3 million, or 11.0%, compared to June 30, 2015, principally on the strength of $60.9 million of net growth in commercial loans purchased or originated by the LASG, net growth of $13.2 million in originations by SBA National and net growth of $4.8 million in commercial originations by the Bank’s Community Banking Division. This net growth was offset by a $11.6 million decrease in the Bank’s Community Banking Division residential and consumer loan portfolio.

 

Loans generated by the LASG totaled $75.4 million for the quarter ended December 31, 2015. The growth in LASG loans consisted of $35.9 million of purchased loans, at an average price of 89.3% of unpaid principal balance, and $39.5 million of originated loans. SBA loans closed during the quarter totaled $16.3 million, of which $14.5 million were fully funded in the quarter. In addition, the Company sold $7.5 million of the guaranteed portion of SBA loans in the secondary market, of which $4.7 million were originated in the current quarter and $2.8 million were originated in the prior quarter. Residential loan production sold in the secondary market totaled $20.5 million for the quarter.

 

As noted above in the “Business Overview” section, the Company made certain commitments to the Board of Governors of the Federal Reserve System in connection with the merger of FHB Formation LLC with and into the Company in December 2010. The Company’s loan purchase and commercial real estate loan availability under these conditions follow.

   

Basis for

Regulatory Condition

 

Condition

 

Availability at December 31, 2015

       

(Dollars in millions)

Total Loans

 

Purchased loans may not exceed 40% of total loans

 

$

        81.3

Regulatory Capital

 

Non-owner occupied commercial real estate loans may not exceed 300% of total capital

 

$

120.0

  

An overview of the Bank’s LASG portfolio follows:

  

    LASG Portfolio  
    Three Months Ended December 31,  
    2015     2014  
    Purchased     Originated    

Secured Loans to

Broker-Dealers

    Total LASG     Purchased     Originated     Secured Loans to Broker-Dealers     Total LASG  
    (Dollars in thousands)  
Loans purchased or originated during the period:                                                                

Unpaid principal balance

  $ 40,145     $ 39,512     $ -     $ 79,657     $ 46,307     $ 28,579     $ -     $ 74,886  

Net investment basis

    35,855       39,512       -       75,367       39,667       28,579       -       68,246  
                                                                 

Loan returns during the period:

                                                               

Yield

    12.74 %     5.69 %     0.50 %     8.55 %     13.27 %     6.67 %     0.46 %     10.17 %

Total Return (1)

    12.74 %     5.69 %     0.50 %     8.55 %     13.72 %     7.68 %     0.46 %     10.67 %

 

 
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    Six Months Ended December 31,  
    2015     2014  
    Purchased     Originated    

Secured Loans to

Broker-Dealers

    Total LASG     Purchased     Originated     Secured Loans to Broker-Dealers     Total LASG  
    (Dollars in thousands)  

Loans purchased or originated during the period:

                                                               

Unpaid principal balance

  $ 63,728     $ 50,907     $ -     $ 114,635     $ 62,425     $ 32,915     $ 36,000     $ 131,340  

Net investment basis

    59,311       50,907       -       110,218       52,834       32,915       36,000       121,749  
                                                                 

Loan returns during the period:

                                                               

Yield

    12.41 %     5.68 %     0.50 %     8.40 %     13.02 %     7.74 %     0.49 %     10.53 %

Total Return (1)

    12.43 %     5.68 %     0.50 %     8.41 %     13.24 %     8.54 %     0.49 %     10.85 %
                                                                 
                                                                 

Total loans as of period end:

                                                               

Unpaid principal balance

  $ 258,049     $ 155,646     $ 60,000     $ 473,695     $ 262,445     $ 78,620     $ 48,000     $ 389,065  

Net investment basis

    226,014       155,728       60,002       441,744       220,391       78,563       48,000       346,954  

 

(1) The total return on purchased loans represents scheduled accretion, accelerated accretion, gains on asset sales, and other noninterest income recorded during the period divided by the average invested balance, on an annualized basis.

  

Assets

 

Cash, Short-term Investments and Securities

 

Cash and short-term investments were $66.4 million as of December 31, 2015, a decrease of $23.5 million, or 26.1%, from $89.9 million at June 30, 2015. The decrease is primarily due to loan purchases for the quarter, offset by growth in the Bank’s deposit balances.

 

Available-for-sale securities totaled $104.3 million as of December 31, 2015 as compared to $101.9 million as of June 30, 2015, representing an increase of $2.4 million, or 2.4%. Included in available-for-sale securities are securities issued by government agencies and government-sponsored enterprises, as well as an investment of approximately $5.0 million in a CRA qualified fund that seeks to invest in securities either issued or guaranteed by the U.S. government or its agencies. At December 31, 2015, securities with a fair value of $3.0 million were pledged for outstanding borrowings.

  

Loans

 

The Company’s loan portfolio (excluding loans held-for-sale) by lending division follows:

   

    December 31, 2015  
    Community Banking Division    

LASG

   

SBA National

   

Total

   

Percent of Total

 
                                         
   

(Dollars in thousands)

 

Originated loans:

                                       

Residential real estate

  $ 99,177     $ -     $ 135     $ 99,312       14.62 %

Home equity

    20,457       -       -       20,457       3.01 %

Commercial real estate: non-owner occupied

    49,523       61,805       665       111,993       16.48 %

Commercial real estate: owner occupied

    22,077       23,892       19,979       65,948       9.71 %

Commercial and industrial

    13,853       130,033       5,046       148,932       21.92 %

Consumer

    6,780       -       -       6,780       1.00 %

Subtotal

    211,867       215,730       25,825       453,422       66.74 %

Purchased loans:

                                       

Residential real estate

    -       2,658       -       2,658       0.39 %

Commercial real estate: non-owner occupied

    -       147,835       -       147,835       21.76 %

Commercial real estate: owner occupied

    -       75,299       -       75,299       11.08 %

Commercial and industrial

    -       222       -       222       0.03 %

Subtotal

    -       226,014       -       226,014       33.26 %

Total

  $ 211,867     $ 441,744     $ 25,825     $ 679,436       100.00 %

 

 
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June 30, 2015

 
    Community Banking Division    

LASG

   

SBA National

   

Total

   

Percent of Total

 
                                         
   

(Dollars in thousands)

 

Originated loans:

                                       

Residential real estate

  $ 106,138     $ 137     $ -     $ 106,275       17.36 %

Home equity

    24,326       -       -       24,326       3.97 %

Commercial real estate: non-owner occupied

    48,933       53,051       3,865       105,849       17.29 %

Commercial real estate: owner occupied

    21,657       16,507       4,461       42,625       6.96 %

Commercial and industrial

    11,597       108,577       2,637       122,811       20.06 %

Consumer

    7,659       -       -       7,659       1.25 %

Subtotal

    220,310       178,272       10,963       409,545       66.90 %

Purchased loans:

                                       

Residential real estate

    -       2,068       -       2,068       0.34 %

Commercial real estate: non-owner occupied

    -       128,182       -       128,182       20.94 %

Commercial real estate: owner occupied

    -       72,069       -       72,069       11.77 %

Commercial and industrial

    -       273       -       273       0.04 %

Subtotal

    -       202,592       -       202,592       33.10 %

Total

  $ 220,310     $ 380,864     $ 10,963     $ 612,137       100.00 %

  

Classification of Assets

 

Loans are classified as non-performing when 90 days past due, unless a loan is well-secured and in the process of collection. Loans less than 90 days past due, for which collection of principal or interest is considered doubtful, also may be designated as non-performing. In both situations, accrual of interest ceases. The Company typically maintains such loans as non-performing until the respective borrowers have demonstrated a sustained period of payment performance.

 

In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications, the loan is classified as a troubled debt restructuring (“TDR”). Concessionary modifications may include adjustments to interest rates, extensions of maturity, or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. 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.

  

Other nonperforming assets include other real estate owned (“OREO”) and other personal property securing loans repossessed by the Bank. The real estate and personal property collateral for commercial and consumer loans is written down to its estimated realizable value upon repossession. Revenues and expenses are recognized in the period when received or incurred on OREO and in substance foreclosures. Gains and losses on disposition are recognized in noninterest income.

  

The following table details the Company's nonperforming assets and other credit quality indicators as of December 31, 2015 and June 30, 2015. Management believes that, based on their carrying amounts, nonperforming assets are well secured based on the estimated fair value of underlying collateral.

  

   

Non-Performing Assets at December 31, 2015

 
   

Originated

   

Purchased

   

Total

 
   

(Dollars in thousands)

 

Loans:

                       

Residential real estate

  $ 3,263     $ -     $ 3,263  

Home equity

    11       -       11  

Commercial real estate

    399       2,221       2,620  

Commercial and industrial

    2       -       2  

Consumer

    204       -       204  

Subtotal

    3,879       2,221       6,100  

Real estate owned and other repossessed collateral

    1,238       -       1,238  

Total

  $ 5,117     $ 2,221     $ 7,338  
                         

Ratio of nonperforming loans to total loans

              0.90 %

Ratio of nonperforming assets to total assets

      0.82 %

Ratio of loans past due to total loans

              2.48 %

Nonperforming loans that are current

            $ 982  

Commercial loans risk rated substandard or worse

    $ 5,076  

Troubled debt restructurings:

                 

On accrual status

                  $ 6,811  

On nonaccrual status

                  $ 1,587  

 

 
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Non-Performing Assets at June 30, 2015

 
   

Originated

   

Purchased

   

Total

 
   

(Dollars in thousands)

 

Loans:

                       

Residential real estate

  $ 3,021     $ -     $ 3,021  

Home equity

    11       -       11  

Commercial real estate

    994       6,532       7,526  

Commercial and industrial

    2       -       2  

Consumer

    190       -       190  

Subtotal

    4,218       6,532       10,750  

Real estate owned and other repossessed collateral

    1,651       -       1,651  

Total

  $ 5,869     $ 6,532     $ 12,401  
                         

Ratio of nonperforming loans to total loans

              1.76 %

Ratio of nonperforming assets to total assets

              1.46 %

Ratio of loans past due to total loans

              1.08 %

Nonperforming loans that are current

            $ 5,357  

Commercial loans risk rated substandard or worse

    $ 8,910  

Troubled debt restructurings:

                 

On accrual status

                  $ 6,365  

Nonaccrual status

                  $ 2,131  

 

At December 31, 2015, nonperforming assets totaled $7.3 million, or 0.82% of total assets, as compared to $12.4 million, or 1.5% of total assets, at June 30, 2015.

 

Allowance for Loan Losses

 

In connection with the application of the acquisition method of accounting for the merger on December 29, 2010, the allowance for loan losses was reduced to zero when the loan portfolio was marked to its then current fair value. Since that date, the Company has provided for an allowance for loan losses as new loans are originated or in the event that credit exposure in the pre-merger loan portfolio or other acquired loans exceeds the exposure estimated when initial fair values were determined.

 

The Company’s allowance for loan losses was $2.1 million as of December 31, 2015, which represents an increase of $203 thousand from $1.9 million as of June 30, 2015. The increase during the period was principally due to two loans which were provided for in the current quarter and an increased volume of newly originated loans, offset by charge-offs.

 

The following table details ratios related to the allowance for loan losses for the periods indicated.

 

 

December 31, 2015

 

June 30, 2015

 

December 31, 2014

Allowance for loan losses to nonperforming loans

34.90%

 

17.92%

 

13.58%

Allowance for loan losses to total loans

0.31%

 

 0.31%

 

 0.29%

Last twelve months of net-charge offs to average loans

0.15%

 

 0.03%

 

 0.08%

 

While management believes that it uses the best information available to make its determinations with respect to the allowance, there can be no assurance that the Company will not have to increase its provision for loan losses in the future as a result of changing economic conditions, adverse markets for real estate or other factors.

 

Other Assets

 

The cash surrender value of the Company’s bank-owned life insurance (“BOLI”) assets increased $224 thousand, or 1.5% to $15.5 million at December 31, 2015, compared to $15.3 million at June 30, 2015. Increases in cash surrender value are recognized in other income and are not subject to income taxes. Borrowing on, or surrendering a policy, may subject the Company to income tax expense on the increase in cash surrender value. For these reasons, management considers BOLI an illiquid asset. BOLI represented 12.3% of the Company’s total capital at December 31, 2015.

 

Intangible assets totaled $1.9 million and $2.2 million at December 31, 2015 and June 30, 2015, respectively. The $262 thousand decrease was the result of core deposit intangible asset amortization during the period.

 

Deposits, Borrowed Funds, Liquidity, Capital, and Stock Repurchases

 

Deposits

 

The Company’s principal source of funding is its core deposit accounts. At December 31, 2015, non-maturity accounts, and certificates of deposit with balances less than $250 thousand represented 99.9% of total deposits.

 

 
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Total deposits increased $52.0 million to $726.8 million as of December 31, 2015 from $674.8 million as of June 30, 2015. The increase, which funded growth in the Company’s loan portfolio, was centered mainly in money market accounts attracted through the Bank’s community bank division. The composition of total deposits at December 31, 2015 and June 30, 2015 follows.

 

   

December 31, 2015

   

June 30, 2015

 
   

Amount

   

Percent of Total

   

Amount

   

Percent of Total

 
   

(Dollars in thousands)

 

Demand deposits

  $ 64,087       8.82 %   $ 60,383       8.95 %

NOW accounts

    65,078       8.95 %     64,289       9.53 %

Regular and other savings

    36,040       4.96 %     35,845       5.31 %

Money market deposits

    208,324       28.66 %     168,527       24.98 %

Total non-certificate accounts

    373,529       51.40 %     329,044       48.76 %

Term certificates less than $250 thousand

    352,236       48.47 %     345,146       51.15 %

Term certificates of $250 thousand or more

    1,002       0.14 %     569       0.08 %

Total certificate accounts

    353,238       48.60 %     345,715       51.24 %

Total deposits

  $ 726,767       100.00 %   $ 674,759       100.00 %

  

Borrowed Funds

 

Advances from the FHLB were $30.1 million at December 31, 2015, as compared to $30.2 million at June 30, 2015. At December 31, 2015, the Company had pledged investment securities with a fair value of $3.0 million, as well as certain residential real estate loans, commercial real estate loans, and FHLB deposits free of liens or pledges to secure outstanding advances and available additional borrowing capacity. 

 

During the first quarter, the Company’s wholesale repurchase agreements paid off at maturity, representing a $10.0 million decrease from June 30, 2015.

 

Short-term borrowings, consisting of sweep accounts and repurchase agreements, were $2.4 million and $2.3 million as of December 31, 2015 and June 30, 2015, respectively.

 

Liquidity

 

The following table is a summary of unused borrowing capacity of the Company at December 31, 2015, in addition to traditional retail deposit products (dollars in thousands):

 

Brokered time deposits

  $ 223,525  

Subject to policy limitation of 25% of total assets

Federal Home Loan Bank of Boston

    32,702  

Unused advance capacity subject to eligible and qualified collateral

Federal Discount Window Borrower-in-Custody

    2,074  

Unused credit line subject to the pledge of loans

Other available lines

    17,500    

Total unused borrowing capacity

    275,801    

 

Retail deposits and other core deposit sources including deposit listing services are used by the Bank to manage its overall liquidity position. While we currently do not seek wholesale funding such as FHLB advances and brokered deposits, the ability to raise them remains an important part of our liquidity contingency planning. While we closely monitor and forecast our liquidity position, it is affected by asset growth, deposit withdrawals and meeting other contractual obligations and commitments. The accuracy of our forecast assumptions may increase or decrease our overall available liquidity. To utilize the FHLB advance capacity, the purchase of additional capital stock in the Federal Home Loan Bank of Boston may be required.

 

At December 31, 2015, the Company had $377.1 million of immediately accessible liquidity, defined as cash that the Bank reasonably believes could be raised within seven days through collateralized borrowings, brokered deposits or security sales. This position represented 42.1% of total assets. The Company also had $66.4 million of cash and cash equivalents at December 31, 2015.

 

Management believes that there are adequate funding sources to meet its liquidity needs for the foreseeable future. Primary funding sources are the repayment of principal and interest on loans, the renewal of time deposits, the potential for growth in the deposit base, and the credit availability from the FHLB. Management does not believe that the terms and conditions that will be present at the renewal of these funding sources will significantly impact the Company’s operations, due to its management of the maturities of its assets and liabilities.

 

Capital

 

The carrying amount and unpaid principal balance of junior subordinated debentures totaled $8.7 million and $16.5 million, respectively, as of December 31, 2015. This debt represents qualifying Tier 1 capital for the Company, up to a maximum of 25% of total Tier 1 capital. At December 31, 2015, the carrying amounts of the junior subordinated notes, net of the Company’s $496 thousand investment in the affiliated trusts, qualified as Tier 1 capital.

 

 
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At December 31, 2015, shareholders’ equity was $114.6 million, an increase of $1.9 million, or 1.7% from June 30, 2015. Book value per outstanding common share was $12.04 at December 31, 2015 and $11.76 at June 30, 2015. Tier 1 capital to total average assets of the Company was 14.31% as of December 31, 2015 and 14.49% at June 30, 2015.

 

Under the capital rules, risk-based capital ratios are calculated by dividing Tier 1 and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several risk-weight categories, based primarily on relative risk. The rules require banks and bank holding companies to maintain a minimum common equity Tier 1 capital ratio of 4.5%, a minimum Tier 1 capital ratio of 6%, a total capital ratio of 8% and a leverage ratio of 4%. Additionally, subject to a transition schedule, the capital rules require a bank holding company to establish a capital conservation buffer of Tier 1 capital in an amount above the minimum risk-based capital requirements for "adequately capitalized" institutions equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.

 

A bank holding company, such as the Company, is considered "well capitalized" if the bank holding company (i) has a total risk based capital ratio of at least 10%, (ii) has a Tier 1 risk-based capital ratio of at least 6%, and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Under the FDIC's prompt corrective action rules, such as the Bank, an insured state nonmember bank is considered "well capitalized" if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.

 

The Company and the Banks are considered "well capitalized" under all regulatory definitions. The Company's and the Bank's regulatory capital ratios are set forth below.

 

                          Minimum To Be Well  
                   

Minimum Capital

   

 Capitalized Under Prompt

 
   

Actual

    Requirements    

Correction Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 
   

(Dollars in thousands)

 

December 31, 2015:

                                               

Common equity tier 1 capital to risk weighted assets:

                                               

Company

  $ 123,999       18.11 %   $ 30,817    

>4.5%

    $ N/A       N/A  

Bank

    112,380       16.39 %     30,854    

>4.5%

      44,567    

>6.5%

 
                                                 

Total capital to risk weighted assets:

                                               

Company

    126,183       18.43 %     54,786    

>8.0%

      N/A       N/A  

Bank

    115,460       16.84 %     54,852    

>8.0%

      68,564    

>10.0%

 
                                                 

Tier 1 capital to risk weighted assets:

                                               

Company

    123,999       18.11 %     27,393    

>4.0%

      N/A       N/A  

Bank

    112,380       16.39 %     27,426    

>4.0%

      41,139    

>6.0%

 
                                                 

Tier 1 capital to average assets:

                                               

Company

    123,999       14.31 %     34,670    

>4.0%

      N/A       N/A  

Bank

    112,380       12.97 %     34,658    

>4.0%

      43,322    

>5.0%

 
                                                 

June 30, 2015:

                                               

Common equity tier 1 capital to risk weighted assets:

                                               

Company

  $ 121,224       19.82 %   $ 27,523    

>4.5%

    $ N/A       N/A  

Bank

    107,477       17.55 %     27,558    

>4.5%

      39,806    

>6.5%

 
                                                 

Total capital to risk weighted assets:

                                               

Company

    123,187       20.14 %     48,932    

>8.0%

      N/A       N/A  

Bank

    111,228       18.16 %     48,999    

>8.0%

      61,249    

>10.0%

 
                                                 

Tier 1 capital to risk weighted assets:

                                               

Company

    121,224       19.82 %     24,465    

>4.0%

      N/A       N/A  

Bank

    107,477       17.55 %     24,496    

>4.0%

      36,744    

>6.0%

 
                                                 

Tier 1 capital to average assets:

                                               

Company

    121,224       14.49 %     33,464    

>4.0%

      N/A       N/A  

Bank

    107,477       12.86 %     33,421    

>4.0%

      41,776    

>5.0%

 

 

 
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Table Of Contents
 

 

Stock Repurchases

 

On April 23, 2014, the Company announced that its Board of Directors authorized the Company to purchase up to 870,000 shares of its common stock, representing 8.3% of the Company’s outstanding common shares and approximately $8.4 million based on the Company’s closing stock price on April 22, 2014.

 

On April 30, 2015, the Board of Directors voted to amend the existing stock repurchase program to authorize the Company to purchase an additional 500,000 shares of its common stock, representing 5.1% of the Company’s outstanding common shares or approximately $4.7 million based on the Company’s closing price on April 29, 2015. The amended stock repurchase program will expire on April 30, 2017.

 

As of December 31, 2015, 1,126,962 shares had been repurchased under this plan at a weighted average price of $9.60.

  

Off-balance Sheet Financial Instruments

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the condensed consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. 

 

See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements – Note 10: Commitments and Contingencies” for further discussion.

 

Results of Operations

 

General

 

Net income increased by $164 thousand to $1.7 million for the quarter ended December 31, 2015, compared to $1.6 million for the quarter ended December 31, 2014. Net income increased by $387 thousand to $3.6 million for the six months ended December 31, 2015, compared to $3.2 million for the six months ended December 31, 2014. When compared to the prior year, increases in net income for both the three and six months ended December 31, 2015 resulted principally from positive balance sheet growth due to increased volume, and higher gains on sales of SBA loans.

 

The following table details the “total return” on purchased loans, which includes transactional interest income of $2.6 million for the quarter ended December 31, 2015, consistent with transactional income in the quarter ended December 31, 2014. Transactional interest income for the six months ended December 31, 2015 was $4.8 million, an increase of $182 thousand from the six months ended December 31, 2014 principally due to higher payoffs in the first two quarters of fiscal 2015.

 

   

Total Return on Purchased Loans

 
   

Three Months Ended December 31,

 
   

2015

   

2014

 
   

Income

   

Return (1)

   

Income

   

Return (1)

 
   

(Dollars in thousands)

 

Regularly scheduled interest and accretion

  $ 4,122       7.80 %   $ 4,376       8.31 %

Transactional income:

                               

Gain (loss) on loan sales

    -       0.00 %     194       0.37 %

Gain on sale of real estate owned

    -       0.00 %     40       0.08 %

Other noninterest income

    -       0.00 %     -       0.00 %

Accelerated accretion and loan fees

    2,612       4.94 %     2,613       4.96 %

Total transactional income

    2,612       4.94 %     2,847       5.41 %

Total

  $ 6,734       12.74 %   $ 7,223       13.72 %

 

   

Six Months Ended December 31,

 
   

2015

   

2014

 
   

Income

   

Return (1)

   

Income

   

Return (1)

 
   

(Dollars in thousands)

 

Regularly scheduled interest and accretion

  $ 8,009       7.75 %   $ 8,873       8.55 %

Transactional income:

                               

Gain (loss) on loan sales

    -       0.00 %     190       0.18 %

Gain on sale of real estate owned

    22       0.02 %     40       0.04 %

Other noninterest income

    (1 )     0.00 %     -       0.00 %

Accelerated accretion and loan fees

    4,820       4.66 %     4,638       4.47 %

Total transactional income

    4,841       4.68 %     4,868       4.69 %

Total

  $ 12,850       12.43 %   $ 13,741       13.24 %

 

 
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Table Of Contents
 

Net Interest Income

 

Three Months Ended December 31, 2015 and 2014

 

Net interest and dividend income before provision for the three months ended December 31, 2015 and 2014 was $10.2 million and $9.4 million, respectively. The increase of $746 thousand was largely attributable to higher loan volume and interest income in the originated loan portfolio. The following table summarizes interest income and related yields recognized on the Company’s loans for the three months ended December 31, 2015 and 2014. 

 

   

Interest Income and Yield on Loans

 
   

Three Months Ended December 31,

 
   

2015

   

2014

 
   

Average

   

Interest

           

Average

   

Interest

         
   

Balance

   

Income

   

Yield

   

Balance

   

Income

   

Yield

 
   

(Dollars in thousands)

 

Community Banking Division

  $ 240,507     $ 2,932       4.84 %   $ 236,127     $ 2,899       4.87 %

LASG:

                                               

Originated

    137,959       1,978       5.69 %     59,863       1,007       6.67 %

Purchased

    209,605       6,734       12.74 %     208,935       6,989       13.27 %

Secured Loans to Broker-Dealers

    60,004       75       0.50 %     45,304       53       0.46 %

Total LASG

    407,568       8,787       8.55 %     314,102       8,049       10.17 %

Total

  $ 648,075     $ 11,719       7.17 %   $ 550,229     $ 10,948       7.89 %

   

The Company’s interest rate spread increased by two basis points and net interest margin remained consistent for the quarter ended December 31, 2015 compared to the quarter ended December 31, 2014. The slight increase was principally volume driven with an increase in interest-earning assets of $59.8 million and an increase in interest-earning deposits of $64.2 million. The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the three months ended December 31, 2015 and 2014. 

 

   

Three Months Ended December 31,

 
   

2015

   

2014

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Income/

   

Yield/

   

Average

   

Income/

   

Yield/

 
   

Balance

   

Expense

   

Rate

   

Balance

   

Expense

   

Rate

 

 

  (Dollars in thousands)  

Assets:

                                               

Interest-earning assets:

                                               

Investment securities (1)

  $ 105,502     $ 236       0.89%     $ 109,498     $ 232       0.84%  

Loans (2) (3)

    648,075       11,719       7.17%       550,229       10,948       7.89%  

Federal Home Loan Bank stock

    2,588       34       5.21%       4,102       15       1.45%  

Short-term investments (4)

    72,299       46       0.25%       104,822       64       0.24%  

Total interest-earning assets

    828,464       12,035       5.76%       768,651       11,259       5.81%  

Cash and due from banks

    3,353                       2,637                  

Other non-interest earning assets

    35,558                       32,500                  

Total assets

  $ 867,375                     $ 803,788                  
                                                 

Liabilities & Stockholders' Equity:

                                               

Interest-bearing liabilities:

                                               

NOW accounts

  $ 65,617     $ 42       0.25%     $ 62,259     $ 40       0.25%  

Money market accounts

    199,766       429       0.85%       127,394       241       0.75%  

Savings accounts

    35,269       11       0.12%       33,648       12       0.14%  

Time deposits

    334,925       943       1.12%       348,118       988       1.13%  

Total interest-bearing deposits

    635,577       1,425       0.89%       571,419       1,281       0.89%  

Short-term borrowings

    2,002       5       0.99%       2,869       7       0.97%  

Borrowed funds

    30,145       259       3.41%       45,587       338       2.94%  

Junior subordinated debentures

    8,699       158       7.21%       8,508       188       8.77%  
Capital lease obligations     1,272       16       4.99%       1,480       19       5.09%  

Total interest-bearing liabilities

    677,695       1,863       1.09%       629,863       1,833       1.15%  
                                                 

Non-interest bearing liabilities:

                                               

Demand deposits and escrow accounts

    69,464                       55,131                  

Other liabilities

    6,302                       5,650                  

Total liabilities

    753,461                       690,644                  

Stockholders' equity

    113,914                       113,144                  

Total liabilities and stockholders' equity

  $ 867,375                     $ 803,788                  
                                                 

Net interest income

          $ 10,172                     $ 9,426          
                                                 

Interest rate spread

                    4.67%                       4.66%  

Net interest margin (5)

                    4.87%                       4.87%  

 

(1) Interest income and yield are stated on a fully tax-equivalent basis using a 34% tax rate.

(2) Includes loans held for sale.

(3) Nonaccrual loans are included in the computation of average, but unpaid interest has not been included for purposes of determining interest income.

(4) Short term investments include FHLB overnight deposits and other interest-bearing deposits.

(5) Net interest margin is calculated as net interest income divided by total interest-earning assets. 

 
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The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) change attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

 

   

Three Months Ended December 31, 2015 compared to 2014

 
   

Change Due to Volume

   

Change Due to Rate

   

Total Change

 
   

(Dollars in thousands)

 

Interest earning assets:

                       

Investment securities

  $ (8 )   $ 12     $ 4  

Loans

    1,825       (1,054 )     771  

Regulatory stock

    (8 )     27       19  

Short-term investments

    (21 )     3       (18 )

Total interest-earning assets

    1,788       (1,012 )     776  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

    119       25       144  

Short-term borrowings

    (2 )     -       (2 )

Borrowed funds

    (127 )     48       (79 )

Junior subordinated debentures

    4       (34 )     (30 )
Capital lease obligations     (3 )     -       (3 )

Total interest-bearing liabilities

    (9 )     39       30  

Total change in net interest income

  $ 1,797     $ (1,051 )   $ 746  

  

Six Months Ended December 31, 2015 and 2014

 

Net interest and dividend income before provision for the six months ended December 31, 2015 and 2014 was $19.4 million and $18.9 million, respectively. The increase of $516 thousand was largely attributable to higher loan volume and interest income in the originated loan portfolio. The following table summarizes interest income and related yields recognized on the Company’s loans for the six months ended December 31, 2015 and 2014.

 

   

Interest Income and Yield on Loans

 
   

Six Months Ended December 31,

 
   

2015

   

2014

 
   

Average

   

Interest

           

Average

   

Interest

         
   

Balance

   

Income

   

Yield

   

Balance

   

Income

   

Yield

 
   

(Dollars in thousands)

 

Community Banking Division

  $ 239,689     $ 5,857       4.85%     $ 238,646     $ 5,960       4.95%  

LASG:

                                               

Originated

    128,267       3,673       5.68%       59,277       2,314       7.74%  

Purchased

    204,995       12,829       12.41%       205,896       13,511       13.02%  

Secured Loans to Broker-Dealers

    60,006       150       0.50%       34,474       85       0.49%  

Total LASG

    393,268       16,652       8.40%       299,647       15,910       10.53%  

Total

  $ 632,957     $ 22,509       7.05%     $ 538,293     $ 21,870       8.06%  

  

 
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The Company’s interest rate spread and net interest margin decreased by 33 basis points and 36 basis points, respectively, for the six months ended December 31, 2015 compared to the six months ended December 31, 2014. These decreases were principally the result of lower total return on purchased loans. The following sets forth the average balance sheets, interest income and interest expense, and average yields and costs for the six months ended December 31, 2015 and 2014.

 

   

Six Months Ended December 31,

 
   

2015

   

2014

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Income/

   

Yield/

   

Average

   

Income/

   

Yield/

 
   

Balance

   

Expense

   

Rate

   

Balance

   

Expense

   

Rate

 

 

           
    (Dollars in thousands)  

Assets:

                                               

Interest-earning assets:

                                               

Investment securities (1)

  $ 103,872     $ 464       0.89%     $ 110,874     $ 475       0.85%  

Loans (2) (3)

    632,957       22,509       7.05%       538,293       21,870       8.06%  

Federal Home Loan Bank stock

    3,345       68       4.03%       4,102       31       1.50%  

Short-term investments (4)

    85,974       108       0.25%       93,792       115       0.24%  

Total interest-earning assets

    826,148       23,149       5.56%       747,061       22,491       5.97%  

Cash and due from banks

    3,190                       2,674                  

Other non-interest earning assets

    35,986                       33,326                  

Total assets

  $ 865,324                     $ 783,061                  
                                                 

Liabilities & Stockholders' Equity:

                                               

Interest-bearing liabilities:

                                               

NOW accounts

  $ 67,617     $ 88       0.26%     $ 62,934     $ 81       0.26%  

Money market accounts

    185,166       782       0.84%       106,844       365       0.68%  

Savings accounts

    35,816       23       0.13%       34,004       23       0.13%  

Time deposits

    342,896       1,896       1.10%       344,243       1,941       1.12%  

Total interest-bearing deposits

    631,495       2,789       0.88%       548,025       2,410       0.87%  

Short-term borrowings

    1,976       13       1.31%       3,095       16       1.03%  

Borrowed funds

    34,734       586       3.35%       49,283       733       2.95%  

Junior subordinated debentures

    8,674       312       7.14%       8,484       394       9.21%  
Capital lease obligations     1,302       33       5.03%       1,504       38       5.01%  

Total interest-bearing liabilities

    678,181       3,733       1.09%       610,391       3,591       1.17%  
                                                 

Non-interest bearing liabilities:

                                               

Demand deposits and escrow accounts

    66,736                       54,187                  

Other liabilities

    6,868                       5,716                  

Total liabilities

    751,785                       670,294                  

Stockholders' equity

    113,539                       112,767                  

Total liabilities and stockholders' equity

  $ 865,324                     $ 783,061                  
                                                 

Net interest income

          $ 19,416                     $ 18,900          
                                                 

Interest rate spread

                    4.47%                       4.80%  

Net interest margin (5)

                    4.66%                       5.02%  

 

(1) Interest income and yield are stated on a fully tax-equivalent basis using a 34% tax rate.

(2) Includes loans held for sale.

(3) Nonaccrual loans are included in the computation of average, but unpaid interest has not been included for purposes of determining interest income.

(4) Short term investments include FHLB overnight deposits and other interest-bearing deposits.

(5) Net interest margin is calculated as net interest income divided by total interest-earning assets.

 

 
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The following table presents the extent to which changes in volume and interest rates of interest earning assets and interest bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior period rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior period volume) and (iii) changes attributable to a combination of changes in rate and volume (change in rates multiplied by the changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate

 

   

Six Months Ended December 31, 2015 compared to 2014

 
   

Change Due to

Volume

   

Change Due to

Rate

   

Total

Change

 
   

(Dollars in thousands)

 

Interest earning assets:

                       

Investment securities

  $ (31 )   $ 20     $ (11 )

Loans

    3,566       (2,927 )     639  

Regulatory stock

    (7 )     44       37  

Short-term investments

    (10 )     3       (7 )

Total interest-earning assets

    3,518       (2,860 )     658  
                         

Interest-bearing liabilities:

                       

Interest-bearing deposits

    325       54       379  

Short-term borrowings

    (7 )     4       (3 )

Borrowed funds

    (236 )     89       (147 )

Junior subordinated debentures

    9       (91 )     (82 )
Capital lease obligations     (5 )     -       (5 )

Total interest-bearing liabilities

    86       56       142  

Total change in net interest income

  $ 3,432     $ (2,916 )   $ 516  

 

Provision for Loan Losses

 

Quarterly, the Company determines the amount of the allowance for loan losses that is appropriate to provide for losses inherent in the Company’s loan portfolios, with the provision for loan losses determined by the net change in the allowance for loan losses. For loans acquired with deteriorated credit quality, a provision for loan a loss is recorded when estimates of future cash flows are lower than had been previously expected. See Part I. Item I. “Notes to Unaudited Consolidated Financial Statements — Note 4: Loans, Allowance for Loan losses and Credit Quality” for further discussion.

 

The provision for loan losses for periods subsequent to the merger with FHB Formation LLC reflects the impact of adjusting loans to their then fair values, as well as the elimination of the allowance for loan losses in accordance with the acquisition method of accounting. Subsequent to the merger, the provision for loan losses has been recorded based on estimates of inherent losses in newly originated loans and for incremental reserves required for pre-merger loans based on estimates of deteriorated credit quality post-merger.

 

Three Months Ended December 31, 2015 and 2014

 

The provision for loan losses for the quarter ended December 31, 2015 and 2014 was $896 thousand and $113 thousand, respectively. The increase in the Company’s loan loss provision resulted principally due to two loans which were provided for in the current quarter and increased volume of newly originated loans, offset by charge-offs.

 

Six Months Ended December 31, 2015 and 2014

 

The provision for loan losses for the six months ended December 31, 2015 and 2014 was $1.1 million and $433 thousand, respectively. The increase in the Company’s loan loss provision resulted principally due from two loans which were provided for in the current quarter and increased volume of newly originated loans, offset by charge-offs.

 

Noninterest Income

 

Three Months Ended December 31, 2015 and 2014

 

Noninterest income increased by $254 thousand for the current quarter, compared to the quarter ended December 31, 2014, principally due to an increase of $234 thousand in gains realized on sale of portfolio loans. The recent quarter includes gains realized on sale of SBA loans of $679 thousand, compared to $445 thousand in the quarter ended December 31, 2014.

 

Six Months Ended December 31, 2015 and 2014

 

Noninterest income increased by $802 thousand for the six months ended December 31, 2015, compared to the six months ended December 31, 2014, principally due to an increase of $829 thousand in gains realized on sale of portfolio loans. The recent period includes gains realized on sale of SBA loans of $1.4 million, compared to $525 thousand in the six months ended December 31, 2014.

 

 

 
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Noninterest Expense

 

Three Months Ended December 31, 2015 and 2014

 

Noninterest expense decreased by $14 thousand for the current quarter, compared to the quarter ended December 31, 2014, principally due to the following:

 

a decrease of $194 thousand in loan acquisition and collections expense related to lower collection expense on purchased loans;

 

a decrease of $194 thousand in professional fees, primarily due to fees for temporary consulting services recognized in the three months ended December 31, 2014;

 

an increase of $117 thousand in salaries and employee benefits primarily due to the accelerated vesting of the former Chief Operating Officer’s shares and an increase in headcount during the three months ended December 31, 2015; and

 

an increase of $139 thousand in occupancy and equipment expense, due to increases in rent and IT-related equipment expense.

 

Six Months Ended December 31, 2015 and 2014

 

Noninterest expense increased by $58 thousand for the six months ended December 31, 2015, compared to the six months ended December 31, 2014, principally due to the following:

 

 

An increase of $226 thousand in occupancy and equipment expense, due to increases in rent and IT-related equipment expense; and

 

A decrease of $160 thousand in salaries and employee benefits principally due to the benefit recognized upon the forfeiture of stock awards. This decrease is partially offset by an increase in employee head count and the accelerated vesting of the former Chief Operating Officer’s shares.

 

Income Taxes

 

Three Months Ended December 31, 2015 and 2014

 

The Company’s effective tax rate for the quarter ended December 31, 2015 was 35.5%, compared to 36.1% for the quarter ended December 31, 2014, primarily due to the adoption of ASU 2014-01 in the current period.

 

Six Months Ended December 31, 2015 and 2014

 

The Company’s income tax expense was $2.1 million or an effective rate of 36.3%, for the six months ended December 31, 2015, as compared to $1.8 million, or an effective rate of 36.1%, for the six months ended December 31, 2014, primarily due to the adoption of ASU 2014-01 in the current period.

 

 
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Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures

 

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer (the Company’s principal executive officer and principal financial officer, respectively), as appropriate to allow for timely decisions regarding timely disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost/benefit relationship of possible controls and procedures.

 

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Based on this evaluation of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of December 31, 2015.

 

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2015 that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

None.

 

 

Item 1A.

Risk Factors

 

Not required for smaller reporting companies.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table sets forth information with respect to purchases made by the Company of its common stock during the three months ended December 31, 2015.

Period

 

Period

 

Total Number of

Shares Purchased (1)

   

Average Price Per

share

   

Total Number of

Shares Purchased

as Part of Publicly

Announced

Programs

   

Maximum

Number of Shares

that May Yet Be

Purchased Under

the Program

 

Oct. 1 – Oct. 31

    6,800       10.92       1,061,162       308,838  

Nov. 1 – Nov. 30

    55,600       10.78       1,116,762       253,238  

Dec. 1 - Dec. 31

    10,200       10.48       1,126,962       243,038  

 

 

(1)   Based on trade date, not settlement date

 

 

Item 3.

Defaults Upon Senior Securities

 

None.

 

 

 
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Item 4.

Mine Safety Disclosures

 

Not applicable.

   

Item 5.

Other Information

 

None.

 

 

Item 6.

Exhibits

 

 

Exhibits No.

Description

 

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *

 

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *

 

32.1

Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **

 

32.2

Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **

 

101

The following materials from Northeast Bancorp’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2015 and June 30, 2015; (ii) Consolidated Statements of Income for the three and six months ended December 31, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2015 and 2014; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the six months ended December 31, 2015 and 2014; (v) Consolidated Statements of Cash Flows for the six months ended December 31, 2015 and 2014; and (v) Notes to Unaudited Consolidated Financial Statements.

 

* Filed herewith

** Furnished herewith

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: February 12, 2016

 

NORTHEAST BANCORP

 

By:

/s/ Richard Wayne

 

 

  Richard Wayne

 

 

  President and Chief Executive Officer

 

 

 

 

By:

/s/ Brian Shaughnessy

 

 

  Brian Shaughnessy

 

 

  Chief Financial Officer

 

 

 
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NORTHEAST BANCORP

Index to Exhibits

 

 

Exhibits No.

Description

 

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *

 

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). *

 

32.1

Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **

 

32.2

Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). **

 

101

The following materials from Northeast Bancorp’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015 formatted in XBRL: (i) Consolidated Balance Sheets at December 31, 2015 and June 30, 2015; (ii) Consolidated Statements of Income for the three and six months ended December 31, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2015 and 2014; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the six months ended December 31, 2015 and 2014; (v) Consolidated Statements of Cash Flows for the six months ended December 31, 2015 and 2014; and (v) Notes to Unaudited Consolidated Financial Statements.

 

* Filed herewith

** Furnished herewith

 

 

47