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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission File Number: 001-35595

 

GEORGETOWN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

80-0817763

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2 East Main Street, Georgetown, MA

 

01833

(Address of principal executive office)

 

(Zip Code)

 

(978) 352-8600

(Registrant’s telephone number, including area code)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date:  Common Stock, $0.01 par value, 1,827,633 shares outstanding as of November 7, 2014.

 

 

 



Table of Contents

 

Form 10-Q

GEORGETOWN BANCORP, INC.

Table of Contents

 

 

 

Page

Part I. Financial Information

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

Consolidated Statements of Financial Condition at September 30, 2014 (unaudited) and December 31, 2013

1

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

2

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

3

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)

5

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

Item 4:

Controls and Procedures

38

 

 

Part II. Other Information

 

 

 

Item 1:

Legal Proceedings

38

Item 1A:

Risk Factors

38

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3:

Defaults upon Senior Securities

38

Item 4:

Mine Safety Disclosures

38

Item 5:

Other Information

39

Item 6:

Exhibits

39

 

 

 

SIGNATURES

40

 



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 


 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

1,821

 

$

3,290

 

Short-term investments

 

4,829

 

3,005

 

Total cash and cash equivalents

 

6,650

 

6,295

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

19,934

 

18,281

 

Securities held to maturity, at amortized cost

 

869

 

1,050

 

Federal Home Loan Bank stock, at cost

 

2,907

 

2,907

 

Loans held for sale

 

911

 

1,001

 

Loans, net of allowance for loan losses of $2,136,000 at September 30, 2014 and $2,396,000 at December 31, 2013

 

229,126

 

223,912

 

Premises and equipment, net

 

3,792

 

3,669

 

Accrued interest receivable

 

720

 

729

 

Bank-owned life insurance

 

2,973

 

2,898

 

Other assets

 

1,850

 

2,291

 

 

 

 

 

 

 

Total assets

 

$

269,732

 

$

263,033

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Deposits

 

$

183,165

 

$

175,961

 

Short-term Federal Home Loan Bank advances

 

28,750

 

32,825

 

Long-term Federal Home Loan Bank advances

 

24,100

 

22,100

 

Mortgagors’ escrow accounts

 

1,345

 

1,230

 

Accrued expenses and other liabilities

 

2,311

 

1,975

 

Total liabilities

 

239,671

 

234,091

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share: 50,000,000 shares authorized; none outstanding

 

 

 

Common stock, $0.01 par value per share: 100,000,000 shares authorized; 1,827,633 shares issued at September 30, 2014 and 1,831,518 shares issued at December 31, 2013

 

18

 

18

 

Additional paid-in capital

 

19,206

 

19,212

 

Retained earnings

 

12,199

 

11,388

 

Accumulated other comprehensive loss

 

(7

)

(389

)

Unearned compensation - ESOP (88,696 shares unallocated at September 30, 2014 and 94,126 shares unallocated at December 31, 2013)

 

(939

)

(1,001

)

Unearned compensation - Restricted stock (38,400 shares non-vested at September 30, 2014 and 35,751 shares non-vested at December 31, 2013)

 

(416

)

(286

)

Total stockholders’ equity

 

30,061

 

28,942

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

269,732

 

$

263,033

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

 


 

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

2,655

 

$

2,340

 

$

7,908

 

$

6,685

 

Securities

 

147

 

125

 

435

 

263

 

Short-term investments

 

1

 

2

 

3

 

5

 

Total interest and dividend income

 

2,803

 

2,467

 

8,346

 

6,953

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

213

 

146

 

617

 

419

 

Short-term Federal Home Loan Bank advances

 

16

 

14

 

45

 

26

 

Long-term Federal Home Loan Bank advances

 

142

 

129

 

412

 

421

 

Total interest expense

 

371

 

289

 

1,074

 

866

 

 

 

 

 

 

 

 

 

 

 

Net interest and dividend income

 

2,432

 

2,178

 

7,272

 

6,087

 

Provision for loan losses

 

1

 

244

 

1

 

407

 

Net interest and dividend income, after provision for loan losses

 

2,431

 

1,934

 

7,271

 

5,680

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Customer service fees

 

138

 

141

 

417

 

422

 

Mortgage banking income, net

 

56

 

41

 

179

 

696

 

Income from bank-owned life insurance

 

25

 

26

 

75

 

75

 

Net (loss) gain on sale of other real estate owned

 

 

(4

)

8

 

18

 

Other

 

30

 

37

 

96

 

96

 

Total non-interest income

 

249

 

241

 

775

 

1,307

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

1,138

 

1,124

 

3,554

 

3,555

 

Occupancy and equipment expenses

 

236

 

222

 

731

 

664

 

Data processing expenses

 

136

 

117

 

452

 

465

 

Professional fees

 

124

 

102

 

394

 

320

 

Advertising expenses

 

88

 

76

 

263

 

226

 

FDIC insurance

 

42

 

31

 

127

 

106

 

Other general and administrative expenses

 

289

 

252

 

868

 

825

 

Total non-interest expenses

 

2,053

 

1,924

 

6,389

 

6,161

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

627

 

251

 

1,657

 

826

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

237

 

83

 

618

 

299

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

390

 

$

168

 

$

1,039

 

$

527

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

1,737,511

 

1,781,959

 

1,738,950

 

1,818,040

 

Diluted

 

1,742,091

 

1,784,492

 

1,744,004

 

1,823,016

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

0.09

 

$

0.60

 

$

0.29

 

Diluted

 

$

0.22

 

$

0.09

 

$

0.60

 

$

0.29

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 


 

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

390

 

$

168

 

$

1,039

 

$

527

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on securities available for sale

 

(58

)

(29

)

599

 

(686

)

Income tax benefit (provision)

 

18

 

10

 

(217

)

246

 

Other comprehensive (loss) income, net of tax

 

(40

)

(19

)

382

 

(440

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

350

 

$

149

 

$

1,421

 

$

87

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 


 

(unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Unearned

 

Unearned

 

 

 

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Compensation-

 

Compensation-

 

 

 

 

 

Stock

 

Capital

 

Earnings

 

(Loss) Income

 

ESOP

 

Restricted Stock

 

Total

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

$

19

 

$

20,669

 

$

10,958

 

$

183

 

$

(1,084

)

$

(182

)

$

30,563

 

Net income

 

 

 

527

 

 

 

 

527

 

Other comprehensive loss

 

 

 

 

(440

)

 

 

(440

)

Cash dividends paid ($0.12 per share)

 

 

 

(230

)

 

 

 

(230

)

Repurchased stock related to buyback program (79,247 shares)

 

 

(1,091

)

 

 

 

 

(1,091

)

Common stock held by ESOP allocated or committed to be allocated (5,429 shares)

 

 

12

 

 

 

62

 

 

74

 

Restricted stock granted in connection with equity incentive plan (22,000 shares)

 

 

281

 

 

 

 

(281

)

 

Purchased stock related to vested restricted stock (1,933 shares)

 

 

(25

)

 

 

 

 

(25

)

Forfeiture of restricted stock (5,769 shares)

 

 

(60

)

 

 

 

60

 

 

Cash disposition of stock options

 

 

(17

)

 

 

 

 

(17

)

Share based compensation - options

 

 

40

 

 

 

 

 

40

 

Share based compensation - restricted stock

 

 

 

 

 

 

90

 

90

 

Balance at September 30, 2013

 

$

19

 

$

19,809

 

$

11,255

 

$

(257

)

$

(1,022

)

$

(313

)

$

29,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

18

 

$

19,212

 

$

11,388

 

$

(389

)

$

(1,001

)

$

(286

)

$

28,942

 

Net income

 

 

 

1,039

 

 

 

 

1,039

 

Other comprehensive income

 

 

 

 

382

 

 

 

382

 

Cash dividends paid ($0.125 per share)

 

 

 

(228

)

 

 

 

(228

)

Repurchased stock related to buyback program (17,000 shares)

 

 

(252

)

 

 

 

 

(252

)

Common stock held by ESOP allocated or committed to be allocated (5,430 shares)

 

 

22

 

 

 

62

 

 

84

 

Restricted stock granted in connection with equity incentive plan (22,000 shares)

 

 

329

 

 

 

 

(329

)

 

Purchased stock related to vested restricted stock (2,417 shares)

 

 

(36

)

 

 

 

 

(36

)

Forfeiture of restricted stock (8,105 shares)

 

 

(108

)

 

 

 

108

 

 

Exercise of stock options (3,813 shares)

 

 

39

 

 

 

 

 

39

 

Purchased shares from cashless exercise of options (2,175 shares)

 

 

(33

)

 

 

 

 

(33

)

Share based compensation - options

 

 

33

 

 

 

 

 

33

 

Share based compensation - restricted stock

 

 

 

 

 

 

91

 

91

 

Balance at September 30, 2014

 

$

18

 

$

19,206

 

$

12,199

 

$

(7

)

$

(939

)

$

(416

)

$

30,061

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 


 

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

1,039

 

$

527

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

1

 

407

 

Amortization of securities, net

 

95

 

87

 

Net change in deferred loan fees and costs

 

(8

)

76

 

Depreciation and amortization expense

 

247

 

210

 

Decrease (increase) in accrued interest receivable

 

9

 

(65

)

Income from bank-owned life insurance

 

(75

)

(75

)

Stock-based compensation expense

 

208

 

204

 

Gain on sales of loans

 

(139

)

(353

)

Loans originated for sale

 

(14,399

)

(30,706

)

Proceeds from sales of loans, net of repurchases

 

14,628

 

32,653

 

Gain on sale of other real estate owned

 

(8

)

(18

)

Write down of other real estate owned

 

 

5

 

Net change in other assets and liabilities

 

560

 

(172

)

Net cash provided by operating activities

 

2,158

 

2,780

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Activity in securities available for sale:

 

 

 

 

 

Maturities, prepayments and calls

 

1,408

 

2,200

 

Purchases

 

(2,558

)

(13,820

)

Maturities, prepayments and calls of securities held to maturity

 

182

 

427

 

Redemption of Federal Home Loan Bank stock

 

 

212

 

Loan originations, net

 

(5,207

)

(26,028

)

Proceeds from sale of other real estate owned

 

8

 

440

 

Purchase of premises and equipment

 

(370

)

(187

)

Net cash used in investing activities

 

(6,537

)

(36,756

)

 

(continued)

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

GEORGETOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 


 

(unaudited)

(concluded)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Cash flows from financing activities:

 

 

 

 

 

Net change in deposits

 

7,204

 

7,568

 

Net change in Federal Home Loan Bank advances with maturities of three months or less

 

(4,075

)

34,575

 

Proceeds from Federal Home Loan Bank advances with maturities greater than three months

 

3,000

 

2,000

 

Repayments of Federal Home Loan Bank advances with maturities greater than three months

 

(1,000

)

(7,500

)

Net change in mortgagors’ escrow accounts

 

115

 

214

 

Repurchase of common stock

 

(288

)

(1,116

)

Cash dividends paid on common stock

 

(228

)

(230

)

Exercise of stock options

 

6

 

 

Cash disposition of stock options

 

 

(17

)

Net cash provided by financing activities

 

4,734

 

35,494

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

355

 

1,518

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

6,295

 

6,789

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

6,650

 

$

8,307

 

 

 

 

 

 

 

Supplementary information:

 

 

 

 

 

Interest paid on deposit accounts

 

$

614

 

$

418

 

Interest paid on advances

 

454

 

464

 

Income taxes paid

 

497

 

548

 

Loans transferred to other real estate owned

 

 

244

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

GEORGETOWN BANCORP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(1)           Basis of Presentation

 

The accompanying unaudited financial statements of Georgetown Bancorp, Inc., a Maryland corporation, (the “Company”) were prepared in accordance with the instructions for Form 10-Q and with Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three- and nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for future periods, including the entire fiscal year. These financial statements should be read in conjunction with the financial statements and notes thereto included in the December 31, 2013 Consolidated Financial Statements presented in the Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission on March 28, 2014. The consolidated financial statements include the accounts of Georgetown Bank (the “Bank”) and its wholly owned subsidiary, Georgetown Securities Corporation, which engages in the buying, selling and holding of securities. All significant inter-company balances and transactions have been eliminated in consolidation. These consolidated financial statements consider events that occurred through the date the consolidated financial statements were issued.

 

(2)           Corporate Structure

 

In conjunction with its reorganization into the mutual holding company structure, on January 5, 2005, the Bank (i) converted to a stock savings bank as the successor to the Bank in its mutual form; (ii) organized Georgetown Bancorp, Inc. (“Georgetown Federal”) as a federally-chartered corporation that owned 100% of the common stock of the Bank (in stock form); and (iii) organized Georgetown Bancorp, MHC as a federally-chartered mutual holding company that owned 56.7% of the common stock of Georgetown Federal as of June 30, 2012. On November 28, 2011, the Boards of Directors of Georgetown Federal, Georgetown Bancorp, MHC and the Bank each unanimously adopted a Plan of Conversion and Reorganization of the Mutual Holding Company pursuant to which Georgetown Bancorp, MHC undertook a “second-step” conversion and now ceases to exist. Georgetown Bancorp, MHC reorganized from a two-tier mutual holding company structure to a fully public stock holding company structure effective July 11, 2012, and, as a result, the Bank is now the wholly-owned subsidiary of the Company.

 

7



Table of Contents

 

(3)           Earnings Per Common Share

 

The Company has adopted the Earnings Per Share (“EPS”) guidance included in Accounting Standards Codification (“ASC”) 260-10. As presented below, basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For purposes of computing diluted EPS, the treasury stock method is used.

 

Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.

 

Earnings per common share have been computed based on the following.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

390,000

 

$

168,000

 

$

1,039,000

 

$

527,000

 

 

 

 

 

 

 

 

 

 

 

Basic common shares:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

1,788,880

 

1,843,319

 

1,789,527

 

1,880,981

 

Less: Weighted average unallocated ESOP shares

 

(89,870

)

(97,111

)

(91,680

)

(98,921

)

Add: Weighted average unvested restricted shares with non-forfeitable dividend rights

 

38,501

 

35,751

 

41,103

 

35,980

 

Basic weighted average common shares outstanding

 

1,737,511

 

1,781,959

 

1,738,950

 

1,818,040

 

 

 

 

 

 

 

 

 

 

 

Dilutive potential common shares

 

4,580

 

2,533

 

5,054

 

4,976

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

1,742,091

 

1,784,492

 

1,744,004

 

1,823,016

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.22

 

$

0.09

 

$

0.60

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.22

 

$

0.09

 

$

0.60

 

$

0.29

 

 

Options to purchase 62,594 shares, representing all outstanding options, were included in the computation of diluted earnings per share for the three and nine-month period ended September 30, 2014. Options to purchase 52,924 shares, representing outstanding options that were granted in 2010, 2011, 2012 and 2013, were included in the computation of diluted earnings per share for the three-month period ended September 30, 2013. Options to purchase 33,774 shares, representing outstanding options that were granted in 2010, 2011 and 2012, were included in the computation of diluted earnings per share for the nine-month period ended September 30, 2013. Options to purchase 19,150 shares that were granted in 2013 were not included in the computation of diluted earnings per share for the nine-month period ended September 30, 2013, because to do so would have been antidilutive.

 

(4)           Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323):  Accounting for Investments in Qualified Affordable Housing Projects.”  The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes as follows:

 

1.              For reporting entities that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects, all amendments in this ASU apply.

 

2.              For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this ASU that are related to disclosures apply.

 

The amendments in this ASU 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).  For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323.  The amendments in this ASU should be applied

 

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retrospectively to all periods presented.  A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments.  The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014.  Early adoption is permitted.  The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  The objective of the amendments in this ASU is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additionally, the amendments require interim and annual disclosure of both (i) the amount of foreclosed residential real estate property held by the creditor and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method.   The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  The objective of this ASU is to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards.  The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.  The core principal of the guidance 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.   For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early application is not permitted.  Early application is permitted, but no earlier than an annual reporting period beginning after December 15, 2016, including interim periods within that reporting period.  The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing (Topic 860):  Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.”  The amendments in this ASU require two accounting changes.  First, the amendments in this ASU change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.  Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  This ASU also includes new disclosure requirements.  The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014.   An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.  Earlier application for a public business entity is prohibited.  The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (Topic 718):  Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.”  The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards.  This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  Earlier adoption is permitted.  ASU 2014-12 may be adopted either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter.  If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date.  The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

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In August 2014, the FASB issued ASU 2014-13, “Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.”  This ASU applies to entities that meet the following criteria:

 

1.                    they are required to consolidate a collateralized entity under the Variable Interest Entities guidance;

2.                    they measure all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair value in the consolidated financial statements based on other FASB rules; and

3.                    those changes in fair value are reflected in earnings.

 

Under ASU 2014-13, entities that meet these criteria are provided an alternative under which they can choose to eliminate the difference between the fair value of financial assets and financial liabilities of a consolidated collateralized financing entity.  If that alternative is not elected, then ASU 2014-13 indicates that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured in accordance with ASC 820.  Fair Value Measurement and differences between the fair value of the financial assets and the financial liabilities of that consolidated collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income or loss.  The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  The adoption of this ASU will not have an impact on the Company’s consolidated 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.”  The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:

 

1.                    the loan has a government guarantee that is not separable from the loan before foreclosure;

2.                    at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and

3.                    at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

 

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.  The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014.  The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

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(5)           Securities

 

A summary of securities is as follows.

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(In thousands)

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

2,469

 

$

54

 

$

(15

)

$

2,508

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

17,471

 

124

 

(169

)

17,426

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

19,940

 

$

178

 

$

(184

)

$

19,934

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

869

 

$

81

 

$

 

$

950

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(In thousands)

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

2,505

 

$

4

 

$

(115

)

$

2,394

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

16,381

 

67

 

(561

)

15,887

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

18,886

 

$

71

 

$

(676

)

$

18,281

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

1,050

 

$

86

 

$

 

$

1,136

 

 

All residential mortgage-backed securities have been issued by government-sponsored enterprises.

 

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The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 2014 is as follows. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Available for Sale

 

Held to Maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Over ten years

 

$

2,469

 

$

2,508

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

17,471

 

17,426

 

869

 

950

 

 

 

 

 

 

 

 

 

 

 

 

 

$

19,940

 

$

19,934

 

$

869

 

$

950

 

 

There were no sales of securities for the three and nine months ended September 30, 2014 and 2013.

 

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous loss position, is as follows.

 

 

 

Less Than Twelve Months

 

Twelve Months or Greater

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

 

 

Losses

 

Value

 

Losses

 

Value

 

 

 

(In thousands)

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

 

$

 

$

(15

)

$

1,084

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

(23

)

5,852

 

(146

)

5,489

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

(23

)

$

5,852

 

$

(161

)

$

6,573

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

(115

)

$

1,827

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

(561

)

13,389

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

(676

)

$

15,216

 

$

 

$

 

 

Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”).

 

At September 30, 2014 ten securities classified as available for sale had an unrealized loss with aggregate depreciation of 1.46% from the securities’ amortized cost basis.  The unrealized losses on the Company’s investments in state and municipal bonds and residential mortgage backed securities were primarily caused by changes in interest rates and not by credit quality.  Many of these investments are guaranteed by the U.S. Government or its agencies, and as management has not decided to sell these securities, nor is it likely that the Company will be required to sell these securities, no declines are deemed to be OTTI.

 

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(6)           Loans and Servicing

 

Loans

 

A summary of loans is as follows.

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

88,792

 

38.47

%

$

92,450

 

40.93

%

Home equity loans and lines of credit

 

15,884

 

6.88

 

15,399

 

6.82

 

Total residential mortgage loans

 

104,676

 

45.35

 

107,849

 

47.75

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

9,438

 

4.09

 

11,089

 

4.91

 

Multi-family real estate

 

14,894

 

6.45

 

14,462

 

6.40

 

Commercial real estate

 

54,995

 

23.83

 

54,272

 

24.02

 

Commercial business

 

17,769

 

7.70

 

16,681

 

7.39

 

Total commercial loans

 

97,096

 

42.07

 

96,504

 

42.72

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

One- to four-family

 

14,392

 

6.23

 

9,848

 

4.36

 

Multi-family

 

10,015

 

4.34

 

7,304

 

3.24

 

Non-residential

 

4,288

 

1.86

 

3,955

 

1.75

 

Total construction loans

 

28,695

 

12.43

 

21,107

 

9.35

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

347

 

0.15

 

408

 

0.18

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

230,814

 

100.00

%

225,868

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Other items:

 

 

 

 

 

 

 

 

 

Net deferred loan costs

 

448

 

 

 

440

 

 

 

Allowance for loan losses

 

(2,136

)

 

 

(2,396

)

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

229,126

 

 

 

$

223,912

 

 

 

 

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Table of Contents

 

An analysis of the allowance for loan losses at and for the nine months ended September 30, 2014 and 2013 and at December 31, 2013 is below. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

 

Residential

 

Commercial

 

Construction

 

 

 

 

 

 

 

 

 

One- to four-
family

 

Home equity
loans and
lines of credit

 

One- to four-
family
investment
property

 

Multi-family
real estate

 

Commercial
real estate

 

Commercial
business

 

One- to four-

family

 

Multi-family

 

Non-
residential

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

284

 

$

274

 

$

61

 

$

108

 

$

1,056

 

$

291

 

$

133

 

$

66

 

$

63

 

$

15

 

$

45

 

$

2,396

 

Charge-offs

 

 

(14

)

 

 

(248

)

 

 

 

 

(2

)

 

(264

)

Recoveries

 

 

1

 

 

 

 

 

 

 

 

2

 

 

3

 

Provision (benefit)

 

3

 

(21

)

(9

)

4

 

26

 

19

 

(5

)

24

 

5

 

(11

)

(34

)

1

 

Ending Balance

 

$

287

 

$

240

 

$

52

 

$

112

 

$

834

 

$

310

 

$

128

 

$

90

 

$

68

 

$

4

 

$

11

 

$

2,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

378

 

$

254

 

$

62

 

$

40

 

$

668

 

$

159

 

$

149

 

$

34

 

$

25

 

$

11

 

$

 

$

1,780

 

Charge-offs

 

(130

)

 

 

 

 

 

 

 

 

(7

)

 

(137

)

Recoveries

 

43

 

 

 

 

 

 

 

 

 

3

 

 

46

 

(Benefit) provision

 

(4

)

(18

)

10

 

3

 

216

 

49

 

38

 

30

 

78

 

5

 

 

407

 

Ending Balance

 

$

287

 

$

236

 

$

72

 

$

43

 

$

884

 

$

208

 

$

187

 

$

64

 

$

103

 

$

12

 

$

 

$

2,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

7

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

7

 

Collectively evaluated for impairment

 

280

 

240

 

52

 

112

 

834

 

310

 

128

 

90

 

68

 

4

 

11

 

2,129

 

 

 

$

287

 

$

240

 

$

52

 

$

112

 

$

834

 

$

310

 

$

128

 

$

90

 

$

68

 

$

4

 

$

11

 

$

2,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

317

 

$

28

 

$

 

$

 

$

297

 

$

 

$

 

$

 

$

 

$

 

$

 

$

642

 

Collectively evaluated for impairment

 

88,475

 

15,856

 

9,438

 

14,894

 

54,698

 

17,769

 

14,392

 

10,015

 

4,288

 

347

 

 

230,172

 

 

 

$

88,792

 

$

15,884

 

$

9,438

 

$

14,894

 

$

54,995

 

$

17,769

 

$

14,392

 

$

10,015

 

$

4,288

 

$

347

 

$

 

$

230,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

7

 

$

49

 

$

 

$

 

$

277

 

$

 

$

 

$

 

$

 

$

 

$

 

$

333

 

Collectively evaluated for impairment

 

277

 

225

 

61

 

108

 

779

 

291

 

133

 

66

 

63

 

15

 

45

 

2,063

 

 

 

$

284

 

$

274

 

$

61

 

$

108

 

$

1,056

 

$

291

 

$

133

 

$

66

 

$

63

 

$

15

 

$

45

 

$

2,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

321

 

$

428

 

$

 

$

 

$

2,406

 

$

 

$

 

$

 

$

 

$

 

$

 

$

3,155

 

Collectively evaluated for impairment

 

92,129

 

14,971

 

11,089

 

14,462

 

51,866

 

16,681

 

9,848

 

7,304

 

3,955

 

408

 

 

222,713

 

 

 

$

92,450

 

$

15,399

 

$

11,089

 

$

14,462

 

$

54,272

 

$

16,681

 

$

9,848

 

$

7,304

 

$

3,955

 

$

408

 

$

 

$

225,868

 

 

14



Table of Contents

 

The following is a summary of past-due and non-accrual loans at September 30, 2014 and December 31, 2013. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

 

Loans delinquent for:

 

 

 

 

 

 

 

90 days

 

 

 

 

 

 

 

 

 

90 days

 

Total

 

Total

 

Total

 

or more

 

Non-accrual

 

 

 

30 - 59 Days

 

60 - 89 Days

 

or more

 

Past Due

 

Current

 

Loans

 

and accruing

 

Loans

 

 

 

(In thousands)

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

 

$

312

 

$

641

 

$

953

 

$

87,839

 

$

88,792

 

$

 

$

953

 

Home equity loans and lines of credit

 

31

 

 

74

 

105

 

15,779

 

15,884

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

 

 

 

 

9,438

 

9,438

 

 

 

Multi-family real estate

 

 

 

 

 

14,894

 

14,894

 

 

 

Commercial real estate

 

297

 

 

 

297

 

54,698

 

54,995

 

 

 

Commercial business

 

 

 

 

 

17,769

 

17,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

 

 

 

14,392

 

14,392

 

 

 

Multi-family

 

 

 

 

 

10,015

 

10,015

 

 

 

Non-residential

 

 

 

 

 

4,288

 

4,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

12

 

3

 

2

 

17

 

330

 

347

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

340

 

$

315

 

$

717

 

$

1,372

 

$

229,442

 

$

230,814

 

$

 

$

1,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

 

$

245

 

$

 

$

245

 

$

92,205

 

$

92,450

 

$

 

$

 

Home equity loans and lines of credit

 

15

 

 

399

 

414

 

14,985

 

15,399

 

 

399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

 

 

 

 

11,089

 

11,089

 

 

 

Multi-family real estate

 

 

 

 

 

14,462

 

14,462

 

 

 

Commercial real estate

 

 

267

 

 

267

 

54,005

 

54,272

 

 

 

Commercial business

 

 

 

 

 

16,681

 

16,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

 

 

 

9,848

 

9,848

 

 

 

Multi-family

 

 

 

 

 

7,304

 

7,304

 

 

 

Non-residential

 

 

 

 

 

3,955

 

3,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

1

 

 

 

1

 

407

 

408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

16

 

$

512

 

$

399

 

$

927

 

$

224,941

 

$

225,868

 

$

 

$

399

 

 

15



Table of Contents

 

The following is an analysis of impaired loans at September 30, 2014 and December 31, 2013.

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

 

$

 

$

 

$

 

$

 

Home equity loans and lines of credit

 

28

 

28

 

 

29

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

 

 

 

 

 

Multi-family real estate

 

 

 

 

 

 

Commercial real estate

 

297

 

297

 

 

299

 

13

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Non-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired with no related allowance

 

$

325

 

$

325

 

$

 

$

328

 

$

13

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

317

 

$

317

 

$

7

 

$

319

 

$

12

 

Home equity loans and lines of credit

 

 

 

 

159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

 

 

 

 

 

Multi-family real estate

 

 

 

 

 

 

Commercial real estate

 

 

 

 

555

 

8

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Non-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total with an allowance recorded

 

$

317

 

$

317

 

$

7

 

$

1,033

 

$

20

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

 

$

 

$

 

$

 

$

 

Home equity loans and lines of credit

 

29

 

29

 

 

31

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

 

 

 

 

 

Multi-family real estate

 

 

 

 

 

 

Commercial real estate

 

301

 

301

 

 

304

 

18

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Non-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired with no related allowance

 

$

330

 

$

330

 

$

 

$

335

 

$

19

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with a valuation allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

321

 

$

321

 

$

7

 

$

379

 

$

13

 

Home equity loans and lines of credit

 

399

 

399

 

49

 

377

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

 

 

 

 

 

Multi-family real estate

 

 

 

 

 

 

Commercial real estate

 

2,105

 

2,208

 

277

 

2,105

 

104

 

Commercial business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

Non-residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total with an allowance recorded

 

$

2,825

 

$

2,928

 

$

333

 

$

2,861

 

$

119

 

 

16



Table of Contents

 

There were no loan modifications made that resulted in the classification of a troubled debt restructure (“TDR”) during the nine months ended September 30, 2014.  There was one loan modification made that resulted in the classification of a TDR during the nine months ended September 30, 2013. This TDR did not result in a material impact to the allowance for loan losses. The modification consolidated an adjustable rate one- to four-family residential loan and a fixed rate home equity loan into a single fixed rate one- to four-family residential loan. In addition to the consolidation of the loans, an additional $32,000 was advanced to the borrower.

 

At September 30, 2014 and December 31, 2013, there were no TDRs in default of their modified terms.

 

17



Table of Contents

 

The following table represents the Company’s loans by risk rating at September 30, 2014 and December 31, 2013. For additional information please refer to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

 

Residential

 

Commercial

 

Construction

 

 

 

 

 

 

 

One- to four-
family

 

Home equity
loans and
lines of credit

 

One- to four-
family
investment
property

 

Multi-family
real estate

 

Commercial
real estate

 

Commercial
business

 

One- to four-
family

 

Multi-family

 

Non-
residential

 

Consumer

 

Total

 

 

 

(In thousands)

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not formally rated

 

$

87,522

 

$

15,810

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

345

 

$

103,677

 

Pass

 

 

 

9,438

 

14,894

 

54,995

 

17,769

 

14,392

 

10,015

 

4,288

 

 

125,791

 

Special mention

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

1,270

 

74

 

 

 

 

 

 

 

 

2

 

1,346

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

88,792

 

$

15,884

 

$

9,438

 

$

14,894

 

$

54,995

 

$

17,769

 

$

14,392

 

$

10,015

 

$

4,288

 

$

347

 

$

230,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not formally rated

 

$

92,129

 

$

15,000

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

408

 

$

107,537

 

Pass

 

 

 

11,089

 

14,462

 

51,900

 

16,681

 

9,848

 

7,304

 

3,955

 

 

115,239

 

Special mention

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

321

 

399

 

 

 

2,372

 

 

 

 

 

 

3,092

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

92,450

 

$

15,399

 

$

11,089

 

$

14,462

 

$

54,272

 

$

16,681

 

$

9,848

 

$

7,304

 

$

3,955

 

$

408

 

$

225,868

 

 

18



Table of Contents

 

Credit Quality Information

 

The Bank utilizes a nine grade internal loan rating system for all commercial and construction loans as follows:

 

Loans rated 1 - 5:  Loans in these categories are considered “pass” rated loans with low to average risk.

 

Loans rated 6:  Loans in this category are considered “special mention.” These loans have risk profiles that are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 7:  Loans in this category are considered “substandard.” These loans have a well defined weakness that jeopardizes the liquidation of the debt and is inadequately protected by the current sound worth and paying capacity of the borrower or pledged collateral. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

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

 

Loans rated 9:  Loans in this category are considered a “loss.” The loan has been determined to be uncollectible and the chance of loss is inevitable. Loans in this category will be charged-off.

 

On an annual basis, or more often if needed, the Bank formally reviews the ratings on all commercial and construction loans.  For residential real estate and consumer loans, the Bank initially assesses credit quality based on the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s payment activity; however, these loans are not formally risk-rated.

 

Loans serviced for others and mortgage servicing rights

 

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $113.8 million and $117.7 million at September 30, 2014 and December 31, 2013, respectively.

 

The risks inherent in the mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of servicing rights was $1.4 million at September 30, 2014 and December 31, 2013, and was determined using the moving average 10-year, U.S. Treasury rate plus 5.0%, adjusted to reflect the current credit spreads and conditions in the market as a discount rate. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association and an independent third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the independent third party valuation specialist.

 

The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity-related valuation allowances.

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

 

 

 

 

 

 

Mortgage servicing rights:

 

 

 

 

 

Balance at beginning of period

 

$

1,084

 

$

910

 

Additions

 

62

 

440

 

Amortization

 

(266

)

(254

)

Balance at end of period

 

880

 

1,096

 

 

 

 

 

 

 

Valuation allowances:

 

 

 

 

 

Balance at beginning of period

 

26

 

20

 

Additions

 

 

58

 

Recoveries

 

(24

)

(15

)

Balance at end of period

 

2

 

63

 

 

 

 

 

 

 

Mortgage servicing assets, net

 

$

878

 

$

1,033

 

 

 

 

 

 

 

Fair value of mortgage servicing assets

 

$

1,364

 

$

1,286

 

 

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Table of Contents

 

(7)           Secured Borrowings and Collateral

 

Federal Home Loan Bank advances

 

At September 30, 2014, all Federal Home Loan Bank (“FHLB”) of Boston advances were secured by a blanket security agreement on qualified collateral, principally first mortgage loans on owner-occupied residential property in the amount of $78.1 million, and mortgage-backed securities with a fair value of $18.4 million.

 

(8)          Fair Value Measurements

 

The Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value as follows:

 

Level l - Valuation is based on quoted prices in active markets for identical assets or liabilities. Level l assets and liabilities generally include debt and equity securities that are traded in an active exchange market. At September 30, 2014, the Company had no assets or liabilities valued using Level 1 measurements.

 

Level 2 - Valuation is based on observable inputs other than Level l 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 for substantially the full term of the assets or liabilities.

 

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

All of the Company’s securities that are measured at fair value are included in Level 2 and are based on pricing models from independent, third party pricing services that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data. There are no liabilities measured at fair value. All of the Company’s impaired loans and other real estate owned that are measured at fair value are included in Level 3 and are based on the appraised value of the underlying collateral considering discounting factors, if deemed appropriate, and adjusted for selling costs. These appraised values may be discounted based on management’s historical knowledge, expertise or changes in market conditions from time of valuation. The Company did not have any significant transfers of assets or liabilities to or from Levels 1 and 2 of the fair value hierarchy during the nine month period ended September 30, 2014.

 

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Table of Contents

 

Assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 are summarized below.

 

 

 

 

 

 

 

 

 

Assets

 

 

 

Level 1

 

Level 2

 

Level 3

 

at Fair Value

 

 

 

(In thousands)

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

 

$

2,508

 

$

 

$

2,508

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

 

17,426

 

 

17,426

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

 

$

19,934

 

$

 

$

19,934

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

 

$

2,394

 

$

 

$

2,394

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

 

15,887

 

 

15,887

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

 

$

18,281

 

$

 

$

18,281

 

 

The Company may also be required, from time to time, to measure certain other financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. Assets measured at fair value on a non-recurring basis at September 30, 2014 and December 31, 2013 are summarized below. The fair value adjustments relate to the amount of write-down recorded or related allowance recorded as of September 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

Assets

 

Adjustments

 

 

 

Level 1

 

Level 2

 

Level 3

 

at Fair Value

 

to Fair Value

 

 

 

(In thousands)

 

At September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

310

 

$

310

 

$

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

2,492

 

$

2,492

 

$

(333

)

 

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Table of Contents

 

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

 

Cash and cash equivalents: The carrying amounts of cash and short-term investments approximate fair values.

 

Securities: Fair values for the Company’s debt securities are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

 

Federal Home Loan Bank stock: Fair value is based on redemption provisions of the FHLB of Boston. The FHLB stock has no quoted market value.

 

Loans held for sale: Fair value is based on committed secondary market prices.

 

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

Capitalized mortgage servicing rights: Fair value is based on a quarterly, independent third-party valuation model that calculates the present value of estimated future net servicing income. The model utilizes a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association and a third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the independent third party valuation specialist. The discount rate is the moving average 10-year, U.S. Treasury rate plus 5.0% and adjusted to reflect the current credit spreads and conditions in the market. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances and all are obtained from independent market sources.

 

Deposits: The fair values for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

Short-term FHLB advances: The fair value of short-term FHLB advances approximates carrying value, as they generally mature within 90 days.

 

Long-term FHLB advances: The fair value for long-term FHLB advances is estimated using discounted cash flow analyses based on current market borrowing rates for similar types of borrowing arrangements.

 

Accrued interest: The carrying amounts of accrued interest approximate fair value.

 

Off-balance-sheet 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. At September 30, 2014 and December 31, 2013, the fair value of commitments outstanding is not significant since fees charged are not material.

 

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Table of Contents

 

The estimated fair values and related carrying amounts of the Company’s financial instruments at September 30, 2014 and December 31, 2013 are as follows.

 

 

 

September 30, 2014

 

 

 

Carrying

 

Fair Value

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,650

 

$

6,650

 

$

 

$

 

$

6,650

 

Securities available for sale

 

19,934

 

 

19,934

 

 

19,934

 

Securities held to maturity

 

869

 

 

950

 

 

950

 

FHLB stock

 

2,907

 

2,907

 

 

 

2,907

 

Loans held for sale

 

911

 

919

 

 

 

919

 

Loans, net

 

229,126

 

 

 

228,169

 

228,169

 

Accrued interest receivable

 

720

 

720

 

 

 

720

 

Capitalized mortgage servicing rights

 

878

 

 

1,364

 

 

1,364

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

183,165

 

$

 

$

183,640

 

$

 

$

183,640

 

Short-term FHLB advances

 

28,750

 

28,750

 

 

 

28,750

 

Long-term FHLB advances

 

24,100

 

 

24,358

 

 

24,358

 

Mortgagors’ escrow accounts

 

1,345

 

1,345

 

 

 

1,345

 

Accrued interest payable

 

51

 

51

 

 

 

51

 

 

 

 

December 31, 2013

 

 

 

Carrying

 

Fair Value

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,295

 

$

6,295

 

$

 

$

 

$

6,295

 

Securities available for sale

 

18,281

 

 

18,281

 

 

18,281

 

Securities held to maturity

 

1,050

 

 

1,136

 

 

1,136

 

FHLB stock

 

2,907

 

2,907

 

 

 

2,907

 

Loans held for sale

 

1,001

 

1,019

 

 

 

1,019

 

Loans, net

 

223,912

 

 

 

223,659

 

223,659

 

Accrued interest receivable

 

729

 

729

 

 

 

729

 

Capitalized mortgage servicing rights

 

1,058

 

 

1,361

 

 

1,361

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

175,961

 

$

 

$

176,405

 

$

 

$

176,405

 

Short-term FHLB advances

 

32,825

 

32,825

 

 

 

32,825

 

Long-term FHLB advances

 

22,100

 

 

22,405

 

 

22,405

 

Mortgagors’ escrow accounts

 

1,230

 

1,230

 

 

 

1,230

 

Accrued interest payable

 

45

 

45

 

 

 

45

 

 

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Table of Contents

 

(9)          Equity Incentive Plan

 

At September 30, 2014, the Company had two equity incentive plans, the 2009 Equity Plan and the 2014 Equity Plan. The 2009 plan was described more fully in Note 12 of the consolidated financial statements and notes thereto for the year ended December 31, 2013. The 2014 Equity Plan was approved by stockholders at the annual meeting on May 20, 2014 and was more fully described in the proxy statement for the annual meeting. No shares have been issued from the 2014 Equity Plan.

 

The following table presents the activity for the 2009 Equity Plan for the nine months ended September 30, 2014.

 

 

 

Stock Options

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price

 

 

 

 

 

 

 

Outstanding at beginning of year

 

52,924

 

$

11.12

 

Granted

 

22,000

 

$

14.98

 

Exercised

 

(3,813

)

$

10.39

 

Forfeited

 

(8,517

)

$

13.79

 

 

 

 

 

 

 

Outstanding at end of period

 

62,594

 

$

12.16

 

 

 

 

 

 

 

Exercisable at end of period

 

24,613

 

 

 

 

Options Outstanding

 

Options Exercisable

 

Number

 

Weighted-Average

 

Weighted

 

Number

 

Weighted

 

Outstanding

 

Remaining

 

Average

 

Exercisable

 

Average

 

as of 09/30/2014

 

Contractual Life

 

Exercise Price

 

as of 09/30/2014

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

9,612

 

5.40 Years

 

$

9.33

 

8,459

 

$

9.33

 

10,551

 

6.40 Years

 

$

9.55

 

8,030

 

$

9.55

 

9,196

 

7.40 Years

 

$

9.58

 

4,513

 

$

9.58

 

15,550

 

8.40 Years

 

$

14.00

 

3,611

 

$

14.00

 

17,685

 

9.40 Years

 

$

14.98

 

 

$

 

62,594

 

7.74 Years

 

$

12.16

 

24,613

 

$

10.13

 

 

 

 

Non-vested

 

 

 

Restricted Stock

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date
Value

 

 

 

 

 

 

 

Outstanding at beginning of year

 

35,751

 

$

10.83

 

Granted

 

22,000

 

$

14.98

 

Vested

 

(11,246

)

$

10.21

 

Forfeited

 

(8,105

)

$

13.27

 

Outstanding at end of period

 

38,400

 

$

12.87

 

 

As of September 30, 2014, unrecognized share-based compensation expense related to non-vested options amounted to $161,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $416,000. The unrecognized expense related to the non-vested options and non-vested restricted stock will be recognized over a weighted average period of 3.2 and 3.3 years, respectively.

 

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Table of Contents

 

For the nine months ended September 30, 2014, the Company recognized compensation expense for stock options of $33,000 with a related tax benefit of $6,000. The related tax benefit applies only to non-qualified stock options. For the nine months ended September 30, 2014, the Company recognized compensation expense for restricted stock awards of $91,000 with a related tax benefit of $36,000.

 

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

 

This document may contain certain forward-looking statements, such as statements of the Company’s or the Bank’s plans, objectives, expectations, estimates and intentions. Forward-looking statements may be identified by the use of words such as “expects,” “subject,” and “believe,” “will,” “intends,” “will be” or “would”. These statements are subject to change based on various important factors (some of which are beyond the Company’s or the Bank’s control) and actual results may differ materially. Accordingly, readers should not place undue reliance on any forward-looking statements, which reflect management’s analysis of factors only as of the date of which they are given. These factors include general economic conditions, trends in interest rates, the ability of our borrowers to repay their loans, the ability of the Company or the Bank to effectively manage its growth, and results of regulatory examinations, among other factors. The foregoing list of important factors is not exclusive. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including Current Reports on Form 8-K.

 

Except as required by applicable law and regulation, the Company does not undertake — and specifically disclaims any obligation — to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

Overview

 

The Company’s results of operations depend primarily on net interest and dividend income, which is the difference between the interest and dividend income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits and advances. The Company also generates non-interest income, primarily from fees and service charges and mortgage banking income. The Company’s non-interest expense primarily consists of employee compensation and benefits, occupancy and equipment expense, advertising, data processing, professional fees and other operating expenses.

 

We continued to maintain strong asset quality, as non-performing assets to total assets was 0.38% at September 30, 2014, increasing from 0.15% at December 31, 2013. Net income for the nine months ended September 30, 2014 increased $512,000, or 97.2% compared to the same period in 2013. The increase in net income was driven by the expansion of our net interest margin and no provision for loan losses, partially offset by a decrease in non-interest income. Net interest and dividend income increased primarily due to an increase in loans outstanding. Non-interest income decreased $532,000, or 40.7% primarily due to a decline in mortgage banking income. Mortgage banking income has declined, as the volume of residential loan sales has been negatively affected by a soft real estate market and lower loan refinancing volumes. The Company continues to focus on generating commercial loans, core deposit growth and increasing operating efficiencies, which we believe will build long-term stockholder value. To support the continued growth of our commercial loans, we opened a Loan Production Office (LPO) in southern New Hampshire during September 2014.

 

Critical Accounting Policies

 

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses and the valuation of our deferred tax assets.

 

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a monthly basis by management and is based upon management’s monthly review of the collectability of the loans in light of known and inherent risks in the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Additionally, as part of the evaluation of the level of the allowance for loan losses, on a quarterly basis management analyzes several qualitative loan portfolio risk factors including, but not limited to, charge-off history, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance for loan losses consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance for loan losses is established when the discounted cash flows or the fair value of the existing collateral (less costs to sell) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses.

 

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Table of Contents

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

 

We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.

 

Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.

 

Loans secured by commercial real estate, multi-family and one- to four-family investment properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate, including multi-family and one- to four-family investment properties, are often dependent on successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

 

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

 

Construction and development financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value that is insufficient to assure full repayment.

 

Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

 

Total assets increased $6.7 million, or 2.5%, to $269.7 million at September 30, 2014 from $263.0 million at December 31, 2013. The increase was primarily from increases in loans and securities available for sale.

 

Cash and cash equivalents increased $355 thousand, or 5.6%, to $6.7 million at September 30, 2014 from $6.3 million at December 31, 2013.

 

Loans, net (excluding loans held for sale) increased $5.2 million, or 2.3%, to $229.1 million at September 30, 2014 from $223.9 million at December 31, 2013, due primarily to an increase in construction loans, partially offset by a decrease in residential mortgage loans. Despite the current competitive market, we have decided to maintain our historically high underwriting standards instead of relaxing these standards and we have not reduced loan rates below levels at which we could not operate profitably.  Construction loans increased $7.6 million, or 36.0%, to $28.7 million at September 30, 2014 from $21.1 million at December 31, 2013, primarily due to a $4.5 million, or 46.1% increase in one- to-four family construction loans and a $2.7 million, or 37.1% increase in multi-family construction loans. The majority of our construction loans remain collateralized by residential real estate (85.1% at September 30, 2014 and 81.3% at December 31, 2013).  One- to four-family investment property loans decreased $1.7 million, or 14.9%, to $9.4 million at September 30, 2014 from $11.1 million at December 31, 2013. Multi-family real estate loans increased $432,000 or 3.0% to $14.9 million at September 30, 2014 from $14.5 million at December 31, 2013. Commercial real estate loans increased $723,000 or 1.3% to $55.0 million at September 30, 2014 from $54.3 million at December 31, 2013. One- to four-family residential mortgage loans decreased $3.7 million, or 4.0%, to $88.8 million at September 30, 2014 from $92.5 million at December 31, 2013. Home equity loans increased $485,000, or 3.1%, to $15.9 million at September 30, 2014 from $15.4 million at December 31, 2013.

 

Our total securities portfolio increased $1.5 million, or 7.6%, to $20.8 million at September 30, 2014 from $19.3 million at December 31, 2013, as we invested cash flows in available for sale securities, primarily mortgage-backed securities.

 

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Table of Contents

 

Deposits increased $7.2 million, or 4.1%, to $183.2 million at September 30, 2014 from $176.0 million at December 31, 2013. The increase was primarily due to increases in money market accounts and demand deposits, partially offset by a decrease in certificates of deposits and NOW accounts. Money market accounts increased $8.5 million or 19.7% and demand deposits increased $2.8 million, or 11.2%. Certificates of deposit decreased $2.5 million, or 4.0%, as a decline of $3.6 million, or 9.8% in retail certificates of deposit were partially offset by an increase in funds gathered through the use of deposit listing services of $1.0 million, or 3.7%. NOW accounts decreased $1.2 million, or 4.0%.  Management continues to focus on the generation of core checking accounts.

 

Total FHLB advances decreased $2.1 million, or 3.8% to $52.9 million at September 30, 2014 compared to $54.9 million at December 31, 2013. Short-term advances decreased $4.1 million and long-term advances increased $2.0 million during the nine months ended September 30, 2014.  Management continues to maintain short-term advances, as it is taking advantage of the current yield curve and the expectations that short-term rates will not increase in the near-term.

 

Stockholders’ equity increased $1.1 million or 3.9% to $30.1 million at September 30, 2014. The increase resulted primarily from net income of $1.0 million for the nine months ended September 30, 2014 and other comprehensive income, partially offset by the shares repurchased as part of an announced buyback program and dividend payments. The other comprehensive income, net of taxes, of $382,000 reflects the change in net unrealized gains/losses on securities available for sale from a net unrealized loss of $389,000 at December 31, 2013 to a net unrealized loss of $7,000 at September 30, 2014. There were 21,592 shares repurchased at a cost of $321,000 during the nine months ended September 30, 2014. Dividend payments totaled $228,000 for the nine months ended September 30, 2014.

 

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Table of Contents

 

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan as of the dates indicated.

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Residential loans:

 

 

 

 

 

 

 

 

 

One- to four-family

 

$

88,792

 

38.47

%

$

92,450

 

40.93

%

Home equity loans and lines of credit

 

15,884

 

6.88

 

15,399

 

6.82

 

Total residential mortgage loans

 

104,676

 

45.35

 

107,849

 

47.75

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

One- to four-family investment property

 

9,438

 

4.09

 

11,089

 

4.91

 

Multi-family real estate

 

14,894

 

6.45

 

14,462

 

6.40

 

Commercial real estate

 

54,995

 

23.83

 

54,272

 

24.02

 

Commercial business

 

17,769

 

7.70

 

16,681

 

7.39

 

Total commercial loans

 

97,096

 

42.07

 

96,504

 

42.72

 

 

 

 

 

 

 

 

 

 

 

Construction loans:

 

 

 

 

 

 

 

 

 

One- to four-family

 

14,392

 

6.23

 

9,848

 

4.36

 

Multi-family

 

10,015

 

4.34

 

7,304

 

3.24

 

Non-residential

 

4,288

 

1.86

 

3,955

 

1.75

 

Total construction loans

 

28,695

 

12.43

 

21,107

 

9.35

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

347

 

0.15

 

408

 

0.18

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

230,814

 

100.00

%

225,868

 

100.00

%

 

 

 

 

 

 

 

 

 

 

Other items:

 

 

 

 

 

 

 

 

 

Net deferred loan costs

 

448

 

 

 

440

 

 

 

Allowance for loan losses

 

(2,136

)

 

 

(2,396

)

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

 

$

229,126

 

 

 

$

223,912

 

 

 

 

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Table of Contents

 

Asset Quality. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Delinquent loans that are 90 days or more past due and/or on non-accrual status are generally considered non-performing assets.

 

 

 

At September 30,

 

At December 31,

 

 

 

2014

 

2013

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Non-accrual loans:

 

 

 

 

 

Residential mortgage loans

 

$

1,027

 

$

399

 

Commercial loans

 

 

 

Construction loans

 

 

 

Consumer

 

2

 

 

 

 

 

 

 

 

Total non-accrual loans

 

1,029

 

399

 

 

 

 

 

 

 

Non-performing restructured loans

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

1,029

 

399

 

 

 

 

 

 

 

Other real estate owned

 

 

 

 

 

 

 

 

 

Total non-performing assets

 

$

1,029

 

$

399

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

Non-performing loans to total loans

 

0.45

%

0.18

%

Non-performing assets to total assets

 

0.38

%

0.15

%

Allowance for loan losses to non-performing loans

 

207.58

%

600.50

%

 

Total delinquent loans increased $445,000, from $927,000 at December 31, 2013 to $1.4 million at September 30, 2014, primarily in residential one- to four-family loans.

 

Non-performing assets increased $630,000 to $1.0 million at September 30, 2014 compared to $399,000 at December 31, 2013. The increase was related to two one- to four-family residential loans and one home equity line of credit. Total non-performing assets represented 0.38% of total assets at September 30, 2014 and 0.15% of total assets at December 31, 2013.

 

Loans classified as substandard decreased $1.7 million to $1.3 million at September 30, 2014 from $3.1 million at December 31, 2013. The decrease in substandard loans was primarily due to the sale of our mortgage on one commercial real estate loan, which had previously been fully reserved for. All of these credits continue to be managed in an effort to minimize loss to the Bank.

 

The allowance for loan losses decreased $260,000 to $2.1 million at September 30, 2014 due to the charge-off activity during the nine months ended September 30, 2014. Loan charge-offs were $264,000 and recoveries were $3,000 for the nine months ended September 30, 2014, as compared to loan charge-offs of $137,000 and loan recoveries of $46,000 for the same period in 2013. The allowance represented 0.92% of total loans at September 30, 2014 and 1.06% of total loans at December 31, 2013. At these levels, the allowance for loan losses as a percentage of non-performing loans was 207.58% at September 30, 2014 and 600.50% at December 31, 2013.

 

Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013

 

General. Net income increased $222,000, or 132.1%, to $390,000 for the three months ended September 30, 2014, compared to net income of $168,000 for the three months ended September 30, 2013. The increase was primarily due to an increase in net interest and dividend income and a decrease in the provision for loan losses, partially offset by an increase in non-interest expenses.

 

Interest and Dividend Income. Interest and dividend income increased $336,000, or 13.6%, to $2.8 million for the three months ended September 30, 2014, due to increases in interest income on loans and interest income on investment securities. Interest income on loans increased $315,000, or 13.5%, to $2.7 million for the three months ended September 30, 2014, due to a $29.3 million, or 14.5%, increase in the average balance of loans, partially offset by a five basis point decrease in yield to 4.59% for the three months ended September 30, 2014 from 4.64% for the three months ended September 30, 2013.

 

Interest and dividend income on investment securities increased $22,000, or 17.6%, to $147,000 for the three months ended September 30, 2014 from $125,000 for the three months ended September 30, 2013, due to a $1.1 million, or 4.8% increase in the average balance of investment securities for the three months ended September 30, 2014 and by a 26 basis point increase in yield to 2.56% for the three months ended September 30, 2014 from 2.30% for the three months ended September 30, 2013. The increase in investment securities was in residential mortgage-backed securities and state and municipal obligations.

 

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Table of Contents

 

Interest Expense. Interest expense increased $82,000, or 28.4%, to $371,000 for the three months ended September 30, 2014 from $289,000 for the three months ended September 30, 2013. Interest expense on deposits increased $67,000, or 45.9%, to $213,000 for the three months ended September 30, 2014 from $146,000 for the three months ended September 30, 2013, due to an increase in the average balance of interest-bearing deposits of $22.5 million, or 17.1%, to $154.4 million for the three months ended September 30, 2014 from $131.8 million for the three months ended September 30, 2013 and by an increase in the average rate we paid on interest-bearing deposits to 0.55% for the three months ended September 30, 2014 compared to 0.44% for the three months ended September 30, 2013.  The increase in the average balance of interest-bearing deposits is due primarily to an increase in certificate of deposit accounts obtained through a listing service. The average balance of these deposits for the three months ended September 30, 2014 totaled $27.5 million and the associated interest expense totaled $73,000.  The average balance of these deposits for the three months ended September 30, 2013 totaled $5.9 million and the associated interest expense totaled $11,000.

 

Interest expense on FHLB advances increased $15,000, or 10.5%, to $158,000 for the three months ended September 30, 2014 from $143,000 for the three months ended September 30, 2013. The increase was due to the average balance, which increased $4.9 million, or 9.8%, to $54.3 million for the three months ended September 30, 2014 from $49.4 million for the three months ended September 30, 2013. The increase in average balances was due primarily to long-term advances, whose average balances increased $5.1 million, or 26.3%, to $24.3 million for the three months ended September 30, 2014 from $19.2 million for the same period in 2013. The average rate we paid on FHLB advances was 1.16% for the three months ended September 30, 2014 and was unchanged compared to the three months ended September 30, 2013.

 

Net Interest and Dividend Income. Net interest and dividend income increased $254,000, or 11.7%, to $2.4 million for the three months ended September 30, 2014 compared to $2.2 million for the three months ended September 30, 2013. The increase in net interest income was primarily the result of a $3.8 million, or 8.2%, increase in net average interest-earning assets to $49.8 million for the three months ended September 30, 2014, from $46.1 million for the same period in 2013, partially offset by a seven basis point decrease in net interest margin to 3.78% for the three months ended September 30, 2014 compared to the same period in 2013. Our net interest margin may compress in the future due to competitive pricing in our market area.

 

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses quarterly, management analyzes several qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. After an evaluation of these factors, we recorded a $1,000 provision for loan losses for the three months ended September 30, 2014 compared to $244,000 for the three months ended September 30, 2013. We recorded $37,000 in loan charge-offs and no loan recoveries during the three months ended September 30, 2014. The allowance for loan losses was $2.1 million, or 0.92% of total loans and 207.58% of non-performing loans at September 30, 2014, compared to an allowance for loan losses of $2.4 million, or 1.06% of total loans and 600.50% of non-performing loans at December 31, 2013. For additional information please refer to Note 6 (Loans and Servicing).

 

Non-interest Income. Non-interest income increased $8,000, or 3.3%, to $249,000 for the three months ended September 30, 2014 from $241,000 for the three months ended September 30, 2013, primarily due to an increase in mortgage banking income. Mortgage banking income increased $15,000, or 36.6%, to $56,000 for the three months ended September 30, 2014 from $41,000 for the three months ended September 30, 2013.

 

Non-interest Expense. Non-interest expense increased $129,000, or 6.7%, to $2.1 million for the three months ended September 30, 2014 compared to the same period in 2013. Salaries and benefits expense increased $14,000, or 1.2%. Occupancy and equipment expense increased $14,000, or 6.3% primarily due to depreciation expense associated with a new commercial loan software system. Professional fees increased $22,000, or 21.6% primarily due to the implementation of a sub-servicing function for residential loans. Other general and administrative expenses increased $37,000, or 14.7% and included $25,000 in recruitment expense related to the hiring of the Chief Operating Officer.

 

Income Tax Expense. The income before income taxes of $627,000 resulted in income tax expense of $237,000 for the three months ended September 30, 2014, compared to income before income taxes of $251,000 resulting in an income tax expense of $83,000 for the three months ended September 30, 2013. The effective income tax rate was 37.8% for the three months ended September 30, 2014 compared to 33.1% for the three months ended September 30, 2013. The increase in the effective tax rate for the three months ended September 30, 2014 was primarily due to the relationship of non-taxable income to the quarterly pre-tax income being lower compared to the three months ended September 30, 2013.

 

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Table of Contents

 

Average Balance Sheet. The following table sets forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average yields on its interest-earning assets and the average costs of its interest-bearing liabilities. Average yields are calculated by dividing the interest and dividend income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.

 

 

 

Three Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

 

Outstanding

 

 

 

Yield/

 

Outstanding

 

 

 

Yield/

 

 

 

Balance

 

Interest (1)

 

Rate (1)

 

Balance

 

Interest (1)

 

Rate (1)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

$

231,193

 

$

2,655

 

4.59

%

$

201,890

 

$

2,340

 

4.64

%

Investment securities (1)

 

24,138

 

155

 

2.56

%

23,036

 

132

 

2.30

%

Short-term investments

 

3,161

 

1

 

0.13

%

2,385

 

2

 

0.34

%

Total interest-earning assets

 

258,492

 

2,811

 

4.35

%

227,311

 

2,474

 

4.35

%

Non-interest-earning assets

 

9,233

 

 

 

 

9,469

 

 

 

 

Total assets

 

$

267,725

 

2,811

 

 

 

$

236,780

 

2,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

14,197

 

1

 

0.03

%

$

12,683

 

1

 

0.03

%

NOW accounts

 

28,174

 

12

 

0.17

%

29,713

 

12

 

0.16

%

Money market accounts

 

49,497

 

32

 

0.26

%

44,299

 

7

 

0.06

%

Certificates of deposit

 

62,512

 

168

 

1.07

%

45,152

 

126

 

1.12

%

Total interest-bearing deposits

 

154,380

 

213

 

0.55

%

131,847

 

146

 

0.44

%

FHLB advances

 

54,268

 

158

 

1.16

%

49,413

 

143

 

1.16

%

Total interest-bearing liabilities

 

208,648

 

371

 

0.71

%

181,260

 

289

 

0.64

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

26,602

 

 

 

 

 

22,859

 

 

 

 

 

Other non-interest-bearing liabilities

 

3,135

 

 

 

 

 

3,166

 

 

 

 

 

Total liabilities

 

238,385

 

 

 

 

 

207,285

 

 

 

 

 

Stockholders’ equity

 

29,340

 

 

 

 

 

29,495

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

267,725

 

 

 

 

 

$

236,780

 

 

 

 

 

Net interest-earning assets (4)

 

$

49,844

 

 

 

 

 

$

46,051

 

 

 

 

 

Fully tax-equivalent net interest income

 

 

 

2,440

 

 

 

 

 

2,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: tax-equivalent adjustments

 

 

 

(8

)

 

 

 

 

(7

)

 

 

Net interest income

 

 

 

$

2,432

 

 

 

 

 

$

2,178

 

 

 

Net interest rate spread (1)(3)

 

 

 

 

 

3.64

%

 

 

 

 

3.71

%

Net interest margin (1)(5)

 

 

 

 

 

3.78

%

 

 

 

 

3.85

%

Average of interest-earning assets to interest-bearing liabilities

 

 

 

 

 

123.89

%

 

 

 

 

125.41

%

 


(1)         Interest and yield on investment securities, interest rate spread and net interest margin, are presented on a tax-equivalent basis. Tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of income.  For the three months ended September 30, 2014 and 2013 the yield on investment securities before tax-equivalent adjustments was 2.44% and 2.17%, respectively, and the yield on total interest-earning assets was 4.34% for both periods. Net interest rate spread before tax-equivalent adjustments for the three months ended September 30, 2014 and 2013 was 3.63% and 3.70%, respectively, while net interest margin before tax-equivalent adjustments was 3.76% and 3.83%, respectively.

(2)         Includes loans held for sale.

(3)         Net interest rate spread represents the difference between the tax-equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)         Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5)         Net interest margin represents net interest income (tax-equivalent basis) divided by average total interest-earning assets.

 

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Table of Contents

 

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest and dividend income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

 

 

For the Three Months Ended September 30, 2014

 

 

 

Compared to the Three Months Ended

 

 

 

September 30, 2013

 

 

 

Increase (Decrease) Due to

 

 

 

 

 

Volume

 

Rate

 

Net

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

Loans

 

$

340

 

$

(25

)

$

315

 

Investment securities (1)

 

7

 

16

 

23

 

Short-term investments

 

1

 

(2

)

(1

)

 

 

 

 

 

 

 

 

Total interest-earning assets

 

348

 

(11

)

337

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

Savings deposits

 

 

 

 

NOW accounts

 

(1

)

1

 

 

Money market accounts

 

1

 

24

 

25

 

Certificates of deposit

 

48

 

(6

)

42

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

48

 

19

 

67

 

 

 

 

 

 

 

 

 

FHLB advances

 

14

 

1

 

15

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

62

 

20

 

82

 

 

 

 

 

 

 

 

 

Change in net interest income

 

$

286

 

$

(31

)

$

255

 

 


(1)         Municipal securities income and net interest income are presented on a tax-equivalent basis using a tax rate of 34% resulting in an adjustment of $8,000 and $7,000 for the three months ended September 30, 2014 and 2013, respectively.

 

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Table of Contents

 

Comparison of Operating Results for the Nine Months Ended September 30, 2014 and 2013

 

General. Net income increased $512,000, or 97.2%, to $1.0 million for the nine months ended September 30, 2014, compared to net income of $527,000 for the nine months ended September 30, 2013. The increase was primarily due to an increase in net interest and dividend income and a decrease in the provision for loan losses, partially offset by a decrease in mortgage banking income and an increase in non-interest expenses.

 

Interest and Dividend Income. Interest and dividend income increased $1.4 million, or 20.0%, to $8.3 million for the nine months ended September 30, 2014, due to increases in interest income on loans and interest income on investment securities. Interest income on loans increased $1.2 million, or 18.3%, to $7.9 million for the nine months ended September 30, 2014, due to a $37.8 million, or 19.7%, increase in the average balance of loans, partially offset by a five basis point decrease in yield to 4.59% for the nine months ended September 30, 2014 from 4.64% for the nine months ended September 30, 2013.

 

Interest and dividend income on investment securities increased $172,000, or 65.4%, to $435,000 for the nine months ended September 30, 2014 from $263,000 for the nine months ended September 30, 2013, due to a $6.0 million, or 35.0% increase in the average balance of investment securities for the nine months ended September 30, 2014 and by a 52 basis point increase in yield to 2.63% for the nine months ended September 30, 2014 from 2.11% for the nine months ended September 30, 2013. The increase in investment securities was in residential mortgage-backed securities and state and municipal obligations.

 

Interest Expense. Interest expense increased $208,000, or 24.0%, to $1.1 million for the nine months ended September 30, 2014 from $866,000 for the nine months ended September 30, 2013. Interest expense on deposits increased $198,000, or 47.3%, to $617,000 for the nine months ended September 30, 2014 from $419,000 for the nine months ended September 30, 2013, due to an increase in the average balance of interest-bearing deposits of $25.9 million, or 20.2%, to $154.6 million for the nine months ended September 30, 2014 from $128.6 million for the nine months ended September 30, 2013 and by an increase in the average rate we paid on interest-bearing deposits to 0.53% for the nine months ended September 30, 2014 compared to 0.43% for the nine months ended September 30, 2013. The increase in the average balance of interest-bearing deposits is due primarily to an increase in certificate of deposit accounts obtained through a listing service. The average balance of these deposits for the nine months ended September 30, 2014 totaled $28.2 million and the associated interest expense totaled $212,000.  The average balance of these deposits for the nine months ended September 30, 2013 totaled $2.0 million and the associated interest expense totaled $11,000.

 

Interest expense on FHLB advances increased $10,000, or 2.2%, to $457,000 for the nine months ended September 30, 2014 from $447,000 for the nine months ended September 30, 2013. The increase was primarily due to an increase in the average balance of FHLB advances, which increased $16.2 million, or 42.4%, to $54.5 million for the nine months ended September 30, 2014 from $38.3 million for the nine months ended September 30, 2013, partially offset by a 44 basis point decrease in the average rate we paid on FHLB advances to 1.12% for the nine months ended September 30, 2014 compared to 1.56% for the nine months ended September 30, 2013.  The increase in average balances was due primarily to short-term advances, whose average balances increased $12.8 million, or 71.1%, to $30.8 million for the nine months ended September 30, 2014 from $18.0 million for the same period in 2013.

 

Net Interest and Dividend Income. Net interest and dividend income increased $1.2 million, or 19.5%, to $7.3 million for the nine months ended September 30, 2014 compared to $6.1 million for the nine months ended September 30, 2013. The increase in net interest income was primarily the result of a $2.7 million, or 6.1%, increase in net average interest-earning assets to $47.4 million for the nine months ended September 30, 2014, from $44.7 million for the same period in 2013, partially offset by a five basis point decrease in net interest margin to 3.79% for the nine months ended September 30, 2014 compared to the same period in 2013. Our net interest margin may compress in the future due to competitive pricing in our market area.

 

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses quarterly, management analyzes several qualitative loan portfolio risk factors including but not limited to, charge-off history over a relevant period, changes in management or underwriting policies, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower and results of internal and external loan reviews. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. After an evaluation of these factors, we recorded a $1,000 provision for loan losses for the nine months ended September 30, 2014 compared to $407,000 for the nine months ended September 30, 2013. We recorded $264,000 in loan charge-offs and $3,000 in loan recoveries during the nine months ended September 30, 2014. The allowance for loan losses was $2.1 million, or 0.92% of total loans and 207.58% of non-performing loans at September 30, 2014, compared to an allowance for loan losses of $2.4 million, or 1.06% of total loans and 600.50% of non-performing loans at December 31, 2013. For additional information please refer to Note 6 (Loans and Servicing).

 

Non-interest Income. Non-interest income decreased $532,000, or 40.7%, to $775,000 for the nine months ended September 30, 2014 from $1.3 million for the nine months ended September 30, 2013, primarily due to a decrease in mortgage banking income. Mortgage banking income decreased $517,000 or 74.3%, to $179,000 for the nine months ended September 30, 2014 from $696,000 for the nine months ended September 30, 2013. Loan sale volume decreased $16.8 million, or 52.1%, to $15.5 million for the nine months ended September 30, 2014 from $32.3 million for the nine months ended September 30, 2013.  The percentage gain on the loans sold decreased 93 basis points to 1.52% for the

 

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nine months ended September 30, 2014 from 2.45% for the same period in 2013.  The loan sale volume was negatively affected by a decline in loan refinancing volume.  As a result of a FNMA industry wide audit program, we were required to repurchase four loans previously sold to FNMA during 2013. The reduction in income associated with the repurchases was $34,000 during the nine months ended September 30, 2014.  As the audit process continues we may be subject to additional repurchases in the future. Other non-interest income included $77,000 of fees associated with commercial lines of credit facilities for the nine months ended September 30, 2014 compared to $78,000 for the nine months ended September 30, 2013.

 

Non-interest Expense. Non-interest expense increased $228,000, or 3.7%, to $6.4 million for the nine months ended September 30, 2014 compared to the same period in 2013. Occupancy and equipment expense increased $67,000, or 10.1% primarily due to depreciation expense associated with a new commercial loan software system. Data processing expenses decreased $13,000 or 2.8% due to the reduction of one-time implementation fees incurred during the nine months ended September 30, 2014 compared to the same period in 2013. Professional fees increased $74,000, or 23.1% primarily due to the implementation of a sub-servicing function for residential loans.

 

Income Tax Expense. The income before income taxes of $1.7 million resulted in income tax expense of $618,000 for the nine months ended September 30, 2014, compared to income before income taxes of $826,000 resulting in an income tax expense of $299,000 for the nine months ended September 30, 2013. The effective income tax rate was 37.3% for the nine months ended September 30, 2014 compared to 36.2% for the nine months ended September 30, 2013. The increase in the effective tax rate for the nine months ended September 30, 2014 was primarily due to the relationship of non-taxable income to pre-tax income being lower compared to the nine months ended September 30, 2013.

 

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Average Balance Sheet. The following table sets forth certain information regarding the Company’s average balance sheet for the periods indicated, including the average yields on its interest-earning assets and the average costs of its interest-bearing liabilities. Average yields are calculated by dividing the interest and dividend income produced by the average balance of interest-earning assets. Average costs are calculated by dividing the interest expense produced by the average balance of interest-bearing liabilities. The average balances for the period are derived from average balances that are calculated daily. The average yields and costs include fees that are considered adjustments to such average yields and costs.

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

 

Outstanding

 

 

 

Yield/

 

Outstanding

 

 

 

Yield/

 

 

 

Balance

 

Interest (1)

 

Rate (1)

 

Balance

 

Interest (1)

 

Rate (1)

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (2)

 

$

229,827

 

$

7,908

 

4.59

%

$

191,979

 

$

6,685

 

4.64

%

Investment securities (1)

 

23,246

 

458

 

2.63

%

17,213

 

272

 

2.11

%

Short-term investments

 

3,375

 

3

 

0.12

%

2,345

 

5

 

0.28

%

Total interest-earning assets

 

256,448

 

8,369

 

4.35

%

211,537

 

6,962

 

4.39

%

Non-interest-earning assets

 

9,213

 

 

 

 

8,878

 

 

 

 

Total assets

 

$

265,661

 

8,369

 

 

 

$

220,415

 

6,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

14,110

 

2

 

0.02

%

$

12,441

 

2

 

0.02

%

NOW accounts

 

29,863

 

41

 

0.18

%

28,469

 

35

 

0.16

%

Money market accounts

 

46,112

 

63

 

0.18

%

45,556

 

21

 

0.06

%

Certificates of deposit

 

64,473

 

511

 

1.06

%

42,152

 

361

 

1.14

%

Total interest-bearing deposits

 

154,558

 

617

 

0.53

%

128,618

 

419

 

0.43

%

FHLB advances

 

54,478

 

457

 

1.12

%

38,252

 

447

 

1.56

%

Total interest-bearing liabilities

 

209,036

 

1,074

 

0.69

%

166,870

 

866

 

0.69

%

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

24,551

 

 

 

 

 

20,713

 

 

 

 

 

Other non-interest-bearing liabilities

 

3,053

 

 

 

 

 

2,823

 

 

 

 

 

Total liabilities

 

236,640

 

 

 

 

 

190,406

 

 

 

 

 

Stockholders’ equity

 

29,021

 

 

 

 

 

30,009

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

265,661

 

 

 

 

 

$

220,415

 

 

 

 

 

Net interest-earning assets (4)

 

$

47,412

 

 

 

 

 

$

44,667

 

 

 

 

 

Fully tax-equivalent net interest income

 

 

 

7,295

 

 

 

 

 

6,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: tax-equivalent adjustments

 

 

 

(23

)

 

 

 

 

(9

)

 

 

Net interest income

 

 

 

$

7,272

 

 

 

 

 

$

6,087

 

 

 

Net interest rate spread (1)(3)

 

 

 

 

 

3.66

%

 

 

 

 

3.70

%

Net interest margin (1)(5)

 

 

 

 

 

3.79

%

 

 

 

 

3.84

%

Average of interest-earning assets to interest-bearing liabilities

 

 

 

 

 

122.68

%

 

 

 

 

126.77

%

 


(1)         Interest and yield on investment securities, interest rate spread and net interest margin, are presented on a tax-equivalent basis. Tax-equivalent adjustments are deducted from tax-equivalent net interest income to agree to amounts reported in the consolidated statements of income.  For the nine months ended September 30, 2014 and 2013 the yield on investment securities before tax-equivalent adjustments was 2.50% and 2.04%, respectively, and the yield on total interest-earning assets was 4.34% and 4.38%, respectively. Net interest rate spread before tax-equivalent adjustments for the nine months ended September 30, 2014 and 2013 was 3.65% and 3.69%, respectively, while net interest margin before tax-equivalent adjustments was 3.78% and 3.84%, respectively.

(2)         Includes loans held for sale.

(3)         Net interest rate spread represents the difference between the tax-equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)         Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5)         Net interest margin represents net interest income (tax-equivalent basis) divided by average total interest-earning assets.

 

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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest and dividend income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

 

 

For the Nine Months Ended September 30, 2014

 

 

 

Compared to the Nine Months Ended

 

 

 

September 30, 2013

 

 

 

Increase (Decrease) Due to

 

 

 

 

 

Volume

 

Rate

 

Net

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

Loans

 

$

1,318

 

$

(95

)

$

1,223

 

Investment securities (1)

 

96

 

90

 

186

 

Short-term investments

 

2

 

(4

)

(2

)

 

 

 

 

 

 

 

 

Total interest-earning assets

 

1,416

 

(9

)

1,407

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

Savings deposits

 

 

 

 

NOW accounts

 

2

 

4

 

6

 

Money market accounts

 

 

42

 

42

 

Certificates of deposit

 

191

 

(41

)

150

 

 

 

 

 

 

 

 

 

Total interest-bearing deposits

 

193

 

5

 

198

 

 

 

 

 

 

 

 

 

FHLB advances

 

190

 

(180

)

10

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

383

 

(175

)

208

 

 

 

 

 

 

 

 

 

Change in net interest income

 

$

1,033

 

$

166

 

$

1,199

 

 


(1)         Municipal securities income and net interest income are presented on a tax-equivalent basis using a tax rate of 34% resulting in an adjustment of $23,000 and $9,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

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Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of residential loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

We regularly adjust our investments in liquid assets based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities. The excess cash and cash equivalent balances are expected to be used to fund increases in loans and securities.

 

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2014, cash and cash equivalents totaled $6.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $19.9 million at September 30, 2014. Our policies also allow for access to the wholesale funds market for up to 50.0% of total assets, or $134.9 million. At September 30, 2014, we had $52.9 million in FHLB advances outstanding, $27.1 million in certificates of deposit obtained through a listing service and $1.2 million in brokered certificates of deposit, allowing the Company access to an additional $53.7 million in wholesale funds based on policy guidelines.

 

At September 30, 2014 we had $7.1 million in loan commitments outstanding. In addition to commitments to originate loans, we had $38.0 million in unadvanced funds to borrowers. Related to our secondary market activities, we had $1.7 million of forward loan sale commitments at September 30, 2014. These forward loan sale commitments were used to offset the interest rate risk associated with mortgage loans, which have had their interest rate locked by our customers.

 

Certificates of deposit due within one year of September 30, 2014 totaled $22.2 million, or 12.1% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit or other wholesale funding options. Depending on market conditions, we may be required to pay higher rates on such deposits or other advances than we currently pay on the certificates of deposit due on or before September 30, 2015. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the FHLB and other wholesale market sources.

 

Our primary investing activities are the origination and purchase of loans and the purchase of securities. During the nine months ended September 30, 2014, we originated $55.0 million in loans and purchased $2.6 million in securities.

 

Financing activities consist primarily of activity in deposit accounts, FHLB advances and the sale of residential mortgages. We experienced a net increase in total deposits of $7.2 million for the nine months ended September 30, 2014. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. FHLB advances reflected a net decrease of $2.1 million during the nine months ended September 30, 2014. FHLB advances have primarily been used to fund loan demand and deposit outflows. We sold $15.5 million in conforming residential mortgage loans for the nine months ended September 30, 2014.

 

Capital Management. The Bank is subject to various regulatory capital requirements including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2014, the Bank exceeded all of its regulatory capital requirements and is considered “well capitalized” under regulatory guidelines.

 

In July 2013, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

 

The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also

 

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implements consolidated capital requirements for savings and loan holding companies, such as the Company, effective January 1, 2015. Management is evaluating what impact, if any, these new rules will have on the operation of the Bank and/or the Company.

 

Off-Balance Sheet Arrangements.   For the nine months ended September 30, 2014, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4.   Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure (i) that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (ii)  that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

Neither the Company nor the Bank is engaged in pending legal proceedings material to the Company’s consolidated financial condition or results of operations.

 

Item 1A. Risk Factors

 

Other than as set forth in prior filings with the Securities and Exchange Commission or this Quarterly Report on Form 10-Q, there have been no material changes to the Risk Factors set forth in the Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission on March 28, 2014.

 

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

 

a) Not applicable

 

b) Not applicable

 

c) The following table presents a summary of the Company’s share repurchases during the quarter ended September 30, 2014.

 

 

 

 

 

 

 

Total Number of Shares

 

Maximum Number of

 

 

 

 

 

 

 

Purchased as Part of

 

Shares That May Yet be

 

 

 

Total Number of

 

Average Price Paid

 

Publicly Announced

 

Purchased Under the

 

Period

 

Shares Purchased

 

Per Share

 

Program (1)

 

Program (1)

 

July 1 through July 31, 2014

 

0

 

$

0.00

 

0

 

32,973

 

August 1 through August 31, 2014

 

0

 

$

0.00

 

0

 

32,973

 

September 1 through September 30, 2014

 

0

 

$

0.00

 

0

 

32,973

 

 


(1) On July 23, 2013 the Company announced that its Board of Directors had authorized a second stock repurchase program pursuant to which the Company intends to purchase up to approximately 5.0% of its then issued and outstanding shares, or up to 93,765 shares. The repurchase program has no expiration date.

 

Item 3.   Defaults Upon Senior Securities

 

None

 

Item 4.   Mine Safety Disclosures

 

Not applicable

 

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Item 5.   Other Information

 

a)  Not applicable

 

b) There were no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors during the period covered by this Form 10-Q.

 

Item 6.   Exhibits

 

31.1  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32     Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

101   The following financial statements from Georgetown Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 12, 2014, formatted in XBRL: (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

 

101.INS

Interactive datafile

XBRL Instance Document

101.SCH

Interactive datafile

XBRL Taxonomy Extension Schema Document

101.CAL

Interactive datafile

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Interactive datafile

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Interactive datafile

XBRL Taxonomy Extension Label Linkbase

101.PRE

Interactive datafile

XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

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

 

 

 

 

GEORGETOWN BANCORP, INC.

 

 

(Registrant)

 

 

 

 

 

 

Date: November 12, 2014

 

/s/ Robert E. Balletto

 

 

Robert E. Balletto

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

Date: November 12, 2014

 

/s/ Joseph W. Kennedy

 

 

Joseph W. Kennedy

 

 

Senior Vice President, Chief Financial Officer and Treasurer

 

 

(Principal Accounting and Financial Officer)

 

40