Northeast Bancorp (NBN) SEC Quarterly Report (10-Q) for Q4 2015

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		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

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		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

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		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

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		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

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		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

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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.

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3. Securities Available-for-Sale

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

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.

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.

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4. Loans, Allowance for Loan Losses and Credit Quality

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

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

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

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

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

Past Due and Nonaccrual Loans

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

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:

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Levels and trends in delinquencies and nonperforming loans

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Trends in the volume and nature of loans

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Trends in credit terms and policies, including underwriting standards, procedures and practices, and the experience and ability of lending management and staff

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Trends in portfolio concentration

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National and local economic trends and conditions

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Effects of changes or trends in internal risk ratings

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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.

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

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.

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

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.

(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.

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

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.

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.

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

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