UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _____________
Commission file number:0-54447
NAUGATUCK VALLEY FINANCIAL CORPORATION |
(Exact name of registrant as specified in its charter) |
MARYLAND | 01-0969655 | |
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
organization) | ||
333 CHURCH STREET, NAUGATUCK, CONNECTICUT | 06770 | |
(Address of principal executive offices) | (Zip Code) |
(203) 720-5000 |
(Registrant’s telephone number, including area code) |
N/A |
(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 Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such 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 ¨
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). Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer ¨ | Accelerated Filer ¨ |
Non-accelerated Filer ¨ | Smaller Reporting Company x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of November 6, 2015, there were 7,002,208 shares of the registrant’s common stock outstanding.
NAUGATUCK VALLEY FINANCIAL CORPORATION
Table of Contents
2
Part I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(unaudited)
(In thousands) | September 30, 2015 | December 31, 2014 | ||||||
ASSETS | ||||||||
Cash and due from depository institutions | $ | 17,910 | $ | 10,940 | ||||
Federal funds sold | 276 | - | ||||||
Cash and cash equivalents | 18,186 | 10,940 | ||||||
Investment securities available-for-sale, at fair value | 53,783 | 77,538 | ||||||
Investment securities held-to-maturity, at amortized cost | 10,490 | 13,441 | ||||||
Loans held for sale | 1,878 | 1,062 | ||||||
Loans receivable, net | 381,008 | 363,259 | ||||||
Accrued income receivable | 1,509 | 1,599 | ||||||
Foreclosed real estate | 423 | 335 | ||||||
Premises and equipment, net | 8,919 | 9,125 | ||||||
Bank owned life insurance | 10,590 | 10,393 | ||||||
Federal Home Loan Bank ("FHLB") of Boston stock, at cost | 4,548 | 4,548 | ||||||
Other assets | 2,377 | 2,850 | ||||||
Total assets | $ | 493,711 | $ | 495,090 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities | ||||||||
Deposits | $ | 369,804 | $ | 373,459 | ||||
FHLB advances | 57,731 | 53,762 | ||||||
Mortgagors' escrow accounts | 2,141 | 4,341 | ||||||
Deferred tax liabilities | 111 | 651 | ||||||
Other liabilities | 2,163 | 2,006 | ||||||
Total liabilities | 431,950 | 434,219 | ||||||
Stockholders' equity | ||||||||
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued or outstanding | - | - | ||||||
Common stock, $.01 par value; 25,000,000 shares authorized; 7,002,366 shares issued; 7,002,208 shares outstanding at September 30, 2015 and December 31, 2014, respectively | 70 | 70 | ||||||
Paid-in capital | 58,797 | 58,698 | ||||||
Retained earnings | 5,202 | 3,323 | ||||||
Unearned employee stock ownership plan ("ESOP") shares (294,387 shares at September 30, 2015 and December 31, 2014) | (2,480 | ) | (2,480 | ) | ||||
Treasury Stock, at cost (158 shares at September 30, 2015 and December 31, 2014) | (1 | ) | (1 | ) | ||||
Accumulated other comprehensive income, net of tax | 173 | 1,261 | ||||||
Total stockholders' equity | 61,761 | 60,871 | ||||||
Total liabilities and stockholders' equity | $ | 493,711 | $ | 495,090 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands, except share data) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans | $ | 4,365 | $ | 4,261 | $ | 12,652 | $ | 12,743 | ||||||||
Interest and dividends on investments and deposits | 464 | 758 | 1,676 | 2,276 | ||||||||||||
Total interest income | 4,829 | 5,019 | 14,328 | 15,019 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 539 | 597 | 1,703 | 1,799 | ||||||||||||
Interest on borrowed funds | 221 | 188 | 639 | 530 | ||||||||||||
Total interest expense | 760 | 785 | 2,342 | 2,329 | ||||||||||||
Net interest income | 4,069 | 4,234 | 11,986 | 12,690 | ||||||||||||
Provision (credit) for loan losses | - | (50 | ) | (1,420 | ) | (789 | ) | |||||||||
Net interest income after provision/credit for loan losses | 4,069 | 4,284 | 13,406 | 13,479 | ||||||||||||
Noninterest income | ||||||||||||||||
Service charge income | 186 | 186 | 512 | 535 | ||||||||||||
Fees for other services | 68 | 75 | 198 | 232 | ||||||||||||
Mortgage banking income | 215 | 506 | 664 | 831 | ||||||||||||
Income from bank owned life insurance | 65 | 66 | 197 | 195 | ||||||||||||
Net gain on sale of investments | 545 | 1,034 | 1,373 | 1,227 | ||||||||||||
Income from investment advisory services, net | 49 | 79 | 206 | 246 | ||||||||||||
Other income | 30 | 33 | 93 | 97 | ||||||||||||
Total noninterest income | 1,158 | 1,979 | 3,243 | 3,363 | ||||||||||||
Noninterest expense | ||||||||||||||||
Compensation, taxes and benefits | 2,510 | 2,879 | 7,574 | 8,868 | ||||||||||||
Occupancy | 522 | 568 | 1,624 | 1,692 | ||||||||||||
Computer processing | 381 | 343 | 1,066 | 1,039 | ||||||||||||
Professional fees | 314 | 421 | 1,116 | 1,263 | ||||||||||||
FDIC insurance premiums | 102 | 88 | 389 | 619 | ||||||||||||
Insurance | 85 | 175 | 403 | 437 | ||||||||||||
Advertising | 92 | 101 | 313 | 314 | ||||||||||||
Expenses (recoveries) on foreclosed real estate, net | (57 | ) | 63 | 40 | 441 | |||||||||||
Writedowns on foreclosed real estate | - | - | - | 38 | ||||||||||||
Directors' compensation | 51 | 54 | 224 | 226 | ||||||||||||
Supplies | 33 | 68 | 146 | 197 | ||||||||||||
Merger related expenses | 335 | - | 947 | - | ||||||||||||
Expenses related to sale of loans | - | 51 | - | 247 | ||||||||||||
Other expenses | 341 | 396 | 928 | 1,120 | ||||||||||||
Total noninterest expense | 4,709 | 5,207 | 14,770 | 16,501 | ||||||||||||
Income before provision for income taxes | 518 | 1,056 | 1,879 | 341 | ||||||||||||
Provision for income taxes | - | - | - | - | ||||||||||||
Net income | $ | 518 | $ | 1,056 | $ | 1,879 | $ | 341 | ||||||||
Earnings per common share - basic and diluted | $ | 0.08 | $ | 0.16 | $ | 0.28 | $ | 0.05 |
See accompanying notes to unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income | $ | 518 | $ | 1,056 | $ | 1,879 | $ | 341 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Increase (decrease) in unrealized gain on available-for-sale investment securities | 588 | 593 | (254 | ) | 2,453 | |||||||||||
Reclassification adjustment for net gains recognized in net income (1) | (545 | ) | (1,034 | ) | (1,373 | ) | (1,227 | ) | ||||||||
Other comprehensive income (loss) before tax effect | 43 | (441 | ) | (1,627 | ) | 1,226 | ||||||||||
Income tax benefit (expense) related to items in other comprehensive income (loss) | (18 | ) | 151 | 539 | (387 | ) | ||||||||||
Reclassification adjustment net of tax amount | 25 | (290 | ) | (1,088 | ) | 839 | ||||||||||
Total comprehensive income (loss) | $ | 543 | $ | 766 | $ | 791 | $ | 1,180 |
(1) Net gain on sale of investments is the affected line item in the Consolidated Statements of Operations.
See accompanying notes to unaudited consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2015 and 2014 (unaudited)
Common | Paid-in | Retained | Unearned ESOP | Treasury | Accumulated Other Comprehensive | |||||||||||||||||||||||
(In thousands) | Stock | Capital | Earnings | Shares | Stock | Income (Loss) | Total | |||||||||||||||||||||
Balance at December 31, 2014 | $ | 70 | $ | 58,698 | $ | 3,323 | $ | (2,480 | ) | $ | (1 | ) | $ | 1,261 | $ | 60,871 | ||||||||||||
Net income | - | - | 1,879 | - | - | - | 1,879 | |||||||||||||||||||||
Stock based compensation - options | - | 99 | - | - | - | - | 99 | |||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | (1,088 | ) | (1,088 | ) | |||||||||||||||||||
Balance at September 30, 2015 | $ | 70 | $ | 58,797 | $ | 5,202 | $ | (2,480 | ) | $ | (1 | ) | $ | 173 | $ | 61,761 |
Common | Paid-in | Retained | Unearned ESOP | Treasury | Accumulated Other Comprehensive | |||||||||||||||||||||||
(In thousands) | Stock | Capital | Earnings | Shares | Stock | Income (Loss) | Total | |||||||||||||||||||||
Balance at December 31, 2013 | $ | 70 | $ | 58,757 | $ | 2,322 | $ | (2,824 | ) | $ | (1 | ) | $ | (90 | ) | $ | 58,234 | |||||||||||
Net income | - | - | 341 | - | - | - | 341 | |||||||||||||||||||||
Stock based compensation - options | - | 19 | - | - | - | - | 19 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | 839 | 839 | |||||||||||||||||||||
Balance at September 30, 2014 | $ | 70 | $ | 58,776 | $ | 2,663 | $ | (2,824 | ) | $ | (1 | ) | $ | 749 | $ | 59,433 |
See accompanying notes to unaudited consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
(In thousands) | 2015 | 2014 | ||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | 1,879 | $ | 341 | ||||
Adjustments to reconcile net loss to cash provided by operating activities: | ||||||||
(Credit) Provision for loan losses | (1,420 | ) | (789 | ) | ||||
Depreciation and amortization expense | 605 | 566 | ||||||
Net (gain) loss on sales of foreclosed assets | (95 | ) | 60 | |||||
Writedowns on foreclosed real estate | - | 38 | ||||||
Gain on sale of mortgage servicing rights | - | (281 | ) | |||||
Mortgage banking activity: | ||||||||
Gain on sales of mortgage loans | (663 | ) | (484 | ) | ||||
Mortgage loans originated for sale | (24,259 | ) | (25,359 | ) | ||||
Proceeds from sale of mortgage loans | 24,106 | 26,087 | ||||||
Net amortization of investment premiums and discounts | 335 | 4 | ||||||
Net gain on sale of investments | (1,373 | ) | (1,227 | ) | ||||
Stock-based compensation | 99 | 19 | ||||||
Cash surrender value of bank owned life insurance | (197 | ) | (195 | ) | ||||
Net change in: | ||||||||
Accrued income receivable | 90 | (104 | ) | |||||
Deferred loan fees | 16 | (21 | ) | |||||
Other assets | 473 | (628 | ) | |||||
Other liabilities | 158 | (356 | ) | |||||
Net cash (used in)/provided by operating activities | (246 | ) | (2,329 | ) | ||||
Cash flows from investing activities | ||||||||
Proceeds from maturities, calls and repayments of available-for-sale securities | 14,512 | 27,403 | ||||||
Proceeds from sale of available-for-sale securities | 25,600 | 18,124 | ||||||
Proceeds from principal repayments and maturities of held-to-maturity securities | 2,791 | 3,643 | ||||||
Redemption of Federal Home Loan Bank stock | - | 896 | ||||||
Purchase of available-for-sale securities | (16,787 | ) | (72,129 | ) | ||||
Loan originations net of principal payments | (16,768 | ) | (842 | ) | ||||
Purchase of premises and equipment | (399 | ) | (472 | ) | ||||
Proceeds from the sale of mortgage servicing rights | - | 1,217 | ||||||
Proceeds from the sale of commercial loans | - | 4,580 | ||||||
Proceeds from the sale of foreclosed assets | 430 | 1,681 | ||||||
Net cash (used in)/provided by investing activities | 9,379 | (15,899 | ) | |||||
Cash flows from financing activities | ||||||||
Net change in time deposits | (7,408 | ) | (8,041 | ) | ||||
Net change in other deposit accounts | 3,752 | (5,895 | ) | |||||
Proceeds from FHLB advances | 21,597 | 47,500 | ||||||
Repayment of FHLB advances | (17,628 | ) | (26,237 | ) | ||||
Net change in mortgagors' escrow accounts | (2,200 | ) | (2,013 | ) | ||||
Change in other borrowings | - | (4,173 | ) | |||||
Net cash provided by/(used in) financing activities | (1,887 | ) | 1,141 | |||||
Net change in cash and cash equivalents | 7,246 | (17,087 | ) | |||||
Cash and cash equivalents at beginning of period | 10,940 | 26,374 | ||||||
Cash and cash equivalents at end of period | $ | 18,186 | $ | 9,287 | ||||
Supplementary disclosures of cash flow information: | ||||||||
Non-cash investing activities: | ||||||||
Transfer of loans to foreclosed assets | $ | 423 | $ | 391 | ||||
Transfer of commercial loans to loans held for sale | $ | - | $ | 3,957 | ||||
Cash paid during the period for: | ||||||||
Interest paid | $ | 2,332 | $ | 2,313 | ||||
Increase (decrease) in unrealized gains on available for sale securities arising during the period | $ | (1,627 | ) | $ | 1,226 |
See accompanying notes to unaudited consolidated financial statements.
7
Notes to Unaudited Consolidated Financial Statements
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Nature of Operations
Naugatuck Valley Financial Corporation (“Naugatuck Valley Financial” or the “Company”) is a stock savings and loan holding company incorporated in the State of Maryland. The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary bank, Naugatuck Valley Savings and Loan (“Naugatuck Valley Savings” or the “Bank”). The Company became the holding company for the Bank effective June 29, 2011.
Naugatuck Valley Savings is a federally chartered stock savings association and has served its customers in Connecticut since 1922. The Bank operates as a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses with a variety of deposit and lending products from its full service banking offices in the Greater Naugatuck Valley region of southwestern Connecticut. The Bank attracts deposits from the general public and uses those funds to originate one-to-four family, multi-family and commercial real estate, construction, commercial real estate, construction, commercial business and consumer loans.
At September 30, 2015, Naugatuck Valley Savings had one wholly-owned subsidiary, Church Street OREO One, LLC. Church Street OREO One, LLC was established in February 2013 to hold properties acquired through foreclosure as well as from non-judicial proceedings.
Proposed Merger
On June 3, 2015, the Company and Liberty Bank, a Connecticut-chartered mutual savings bank (“Liberty”), entered into an Agreement and Plan of Merger (“the Merger Agreement”) under which Liberty will acquire the Company and the Bank. Consummation of the transaction remains subject to customary closing conditions, including receipt of requisite shareholder approval and all required regulatory approvals. Subsequent to September 30, 2015, this pending merger transaction received all required regulatory approvals and shareholder approval and is expected to occur in the first quarter of 2016. Under the terms of the Merger Agreement, Liberty will acquire all of the Company’s outstanding common stock at a price of $11.00 per share in Cash. If the Merger Agreement is terminated under certain circumstances, the Company will be required to pay Liberty a termination fee of $3.1 million.
In connection with the proposed merger, the Company has incurred merger related expenses of $335,000 and $947,000, principally legal fees, professional services, and software conversion fees for the three months and nine months ended September 30, 2015.
Basis of Presentation
The accompanying consolidated interim financial statements are unaudited and include the accounts of the Company, the Bank, and the Bank’swholly owned subsidiaries, Naugatuck Valley Mortgage Servicing Corporation (through December 31, 2014) and Church Street OREO One, LLC. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the December 31, 2014 audited Consolidated Financial Statements and the accompanying Notes included in our Annual Report on Form 10-K. All significant intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and the results of its operations and its cash flows at the dates and for the periods presented.
In preparing the consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition, and the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, deferred income taxes and the valuation of and the evaluation for other than temporary impairment (“OTTI”) on investment securities. While management uses available information to recognize losses and properly value these assets, future adjustments may be necessary based on changes in economic conditions both in Connecticut and nationally.
8
The Company’s only business segment is Community Banking. This segment represented all the revenues, income and assets of the consolidated Company and therefore, is the only reported segment as defined by FASB ASC 820, Segment Reporting.
Management has evaluated subsequent events for potential recognition or disclosure in the consolidated financial statements as of the date of this filing. No subsequent events were identified that would have required a change to the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
Certain reclassifications have been made to the prior period amounts to conform with the September 30, 2015 consolidated financial statement presentation. These reclassifications only changed the reporting categories and did not affect the Company’s results of operations or financial position.
Summary of Significant Accounting Policies
The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2014 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies compared with those contained in our Form 10-K disclosure for the year ended December 31, 2014.
Recently Adopted Accounting Guidance
Income Taxes — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists: (a consensus of the FASB Emerging Issues Task Force). In July 2013, the FASB issued ASU 2013-11. Per this ASU, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU became effective during the three months ended June 30, 2014. The adoption of this guidance has not had a material impact on the Company’s consolidated financial statements.
Receivables – Troubled Debt Restructurings by Creditors: In January 2014, the FASB issued ASU 2014-04. This update clarifies that when an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan, upon either: (i) the creditor obtaining legal title to the property upon completion of the foreclosure; or (ii) the borrower conveying all interest in the property to the creditor to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. The ASU became effective in January 2014 and its adoption has not had a material impact on the Company’s consolidated financial statements.
Transfer and Servicing (Topic 860) — Repurchase to Maturity Transactions, Repurchase Refinancings and Disclosures: In June 2014, the FASB issued ASU 2014-11. The standard introduces two new disclosure requirements. The first requires an entity to disclose information about certain transactions that are economically similar to a repurchase agreement. The second disclosure increases the transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. This standard became effective in December 2014 and its adoption has not had a material impact on the Company’s consolidated financial statements.
Receivables – Troubled Debt Restructurings by Creditors (Topic 310-40) — Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure: In August 2014, the FASB issued ASU 2014-14. This guidance requires that, upon foreclosure, a government-guaranteed mortgage loan be transferred from loans to other receivables when all of the following conditions are met: (i) the loan has a government guarantee that is not separable from the loan before foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the real property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of real estate is fixed, which is an attribute specific to VA loans. The amount of the separate other receivable shall be measured based on the amount of the loan balance, including interest, expected to be recovered from the guarantor. The standard became effective in December 2014 and its adoption has not had a material impact on the Company’s consolidated financial statements.
9
Recently Issued Accounting Guidance
Presentation of Financial Statements – Going Concern (Subtopic 205-40)— Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern: In August 2014, the FASB issued ASU 2014-15 which defines management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures in the notes to the financial statements. This standard will be effective for the first annual reporting period beginning after December 15, 2016 and interim periods thereafter.
Interest - Imputation of Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs:In April 2015, the FASB issued ASU No. 2015-03.The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2015, and is to be applied retrospectively. Early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.
Revenue from Contracts with Customers (Topic 606). The FASB has issued Accounting Standards Update (ASU) No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company has not yet selected a transition method and is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements.
10
NOTE 2 – INVESTMENT SECURITIES
At September 30, 2015, the composition of the investment portfolio was:
Amortized | Gross Unrealized | �� | Fair | |||||||||||||
(In thousands) | Cost Basis | Gains | Losses | Value | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. Government agency mortgage-backed securities | $ | 23,738 | $ | 167 | $ | (149 | ) | $ | 23,756 | |||||||
U.S. Government agency collateralized mortgage obligations | 9,015 | 191 | - | 9,206 | ||||||||||||
Obligations of state and municipal subdivisions | 20,745 | 278 | (202 | ) | 20,821 | |||||||||||
Total available-for-sale securities | $ | 53,498 | $ | 636 | $ | (351 | ) | $ | 53,783 |
Amortized | Gross Unrealized | Fair | ||||||||||||||
(In thousands) | Cost Basis | Gains | Losses | Value | ||||||||||||
Held-to-maturity securities: | ||||||||||||||||
U.S. Government agency mortgage-backed securities | $ | 10,490 | $ | 169 | $ | (29 | ) | $ | 10,630 | |||||||
Total held-to-maturity securities | $ | 10,490 | $ | 169 | $ | (29 | ) | $ | 10,630 |
At December 31, 2014, the composition of the investment portfolio was:
Amortized | Gross Unrealized | Fair | ||||||||||||||
(In thousands) | Cost Basis | Gains | Losses | Value | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. Government and agency obligations | $ | 5,000 | $ | 42 | $ | - | $ | 5,042 | ||||||||
U.S. Government agency mortgage-backed securities | 51,904 | 1,332 | (149 | ) | 53,087 | |||||||||||
U.S. Government agency collateralized mortgage obligations | 12,802 | 378 | (1 | ) | 13,179 | |||||||||||
Obligations of state and municipal subdivisions | 5,920 | 310 | - | 6,230 | ||||||||||||
Total available-for-sale securities | $ | 75,626 | $ | 2,062 | $ | (150 | ) | $ | 77,538 |
Amortized | Gross Unrealized | Fair | ||||||||||||||
(In thousands) | Cost Basis | Gains | Losses | Value | ||||||||||||
Held-to-maturity securities: | ||||||||||||||||
U.S. Government agency mortgage-backed securities | $ | 13,441 | $ | 212 | $ | (20 | ) | $ | 13,633 | |||||||
Total held-to-maturity securities | $ | 13,441 | $ | 212 | $ | (20 | ) | $ | 13,633 |
For the three and nine months ended September 30, 2015 and September 30, 2014, the Company realized gross gains on sales of investment securities of $545,000, $1,034,000, $1,373,000, and $1,227,000 million, respectively.
11
The following is a summary of the fair values and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2015, and December 31, 2014:
At September 30, 2015 (In thousands) | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||
U.S. Government agency mortgage-backed securities | $ | 9,545 | $ | (114 | ) | $ | 2,801 | $ | (35 | ) | $ | 12,346 | $ | (149 | ) | |||||||||
Obligations of state and municipal subdivisions | 10,530 | (189 | ) | 1,722 | (13 | ) | 12,252 | (202 | ) | |||||||||||||||
Total securities in unrealized loss position | $ | 20,075 | $ | (303 | ) | $ | 4,523 | $ | (48 | ) | $ | 24,598 | $ | (351 | ) |
At December 31, 2014(In thousands) | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||
U.S. Government agency collateralized mortgage obligations | $ | 10,804 | $ | (55 | ) | $ | 6,300 | $ | (94 | ) | $ | 17,104 | $ | (149 | ) | |||||||||
U.S. Government agency mortgage-backed securities | 1,351 | (1 | ) | - | - | 1,351 | (1 | ) | ||||||||||||||||
Total securities in unrealized loss position | $ | 12,155 | $ | (56 | ) | $ | 6,300 | $ | (94 | ) | $ | 18,455 | $ | (150 | ) |
The amortized cost and fair value of securities at September 30, 2015 and December 31, 2014, by expected maturity, are set forth below. Actual maturities of mortgage-backed securities and collateralized mortgage obligations may differ from contractual maturities because the mortgages underlying the securities may be prepaid or called with or without call or prepayment penalties. Because these securities are not due at a single maturity date, the maturity information is not presented.
Available-for-Sale | Held-to-Maturity | |||||||||||||||
At September 30, 2015 | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
U.S. Government agency mortgage-backed securities | $ | 23,738 | $ | 23,756 | $ | 10,490 | $ | 10,630 | ||||||||
U.S. Government agency collateralized mortgage obligations | 9,015 | 9,206 | - | - | ||||||||||||
Subtotal | 32,753 | 32,962 | 10,490 | 10,630 | ||||||||||||
Securities with fixed maturities: | ||||||||||||||||
Due in one year or less | - | - | - | - | ||||||||||||
Due after one year through five years | - | - | - | - | ||||||||||||
Due after five years through ten years | 8,225 | 8,289 | - | - | ||||||||||||
Due after ten years | 12,520 | 12,532 | - | - | ||||||||||||
Subtotal | 20,745 | 20,821 | - | - | ||||||||||||
Total | $ | 53,498 | $ | 53,783 | $ | 10,490 | $ | 10,630 |
Available-for-Sale | Held-to-Maturity | |||||||||||||||
At December 31, 2014 | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
U.S. Government agency mortgage-backed securities | $ | 51,904 | $ | 53,087 | $ | 13,441 | $ | 13,633 | ||||||||
U.S. Government agency collateralized mortgage obligations | 12,802 | 13,179 | - | - | ||||||||||||
Subtotal | 64,706 | 66,266 | 13,441 | 13,633 | ||||||||||||
Securities with fixed maturities: | ||||||||||||||||
Due in one year or less | - | - | - | - | ||||||||||||
Due after one year through five years | - | - | - | - | ||||||||||||
Due after five years through ten years | 1,898 | 2,009 | - | - | ||||||||||||
Due after ten years | 9,022 | 9,263 | - | - | ||||||||||||
Subtotal | 10,920 | 11,272 | - | - | ||||||||||||
Total | $ | 75,626 | $ | 77,538 | $ | 13,441 | $ | 13,633 |
12
Pledged Securities
The following table summarizes the amortized cost and fair value of available for sale and held to maturity securities that are pledged as collateral for the following obligations:
September 30, 2015 | December 31, 2014 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
State of Connecticut to secure public deposits | $ | 4,638 | $ | 4,549 | $ | 18,446 | $ | 18,881 | ||||||||
Total | $ | 4,638 | $ | 4,549 | $ | 18,446 | $ | 18,881 |
Effective May 4, 2015 upon the termination of theBank’s Formal Agreement with the OCC, the collateral requirement for public deposits with the State of Connecticut was reduced from 110% to 10% of the uninsured balance of public deposits.
NOTE 3 – LOANS RECEIVABLE
A summary of loans receivable at September 30, 2015 and December 31, 2014 is as follows:
September 30, | December 31, | |||||||
(In thousands) | 2015 | 2014 | ||||||
Real estate loans: | ||||||||
One-to-four family | $ | 179,603 | $ | 180,739 | ||||
Multi-family and commercial real estate | 137,581 | 122,526 | ||||||
Construction and land development | 3,427 | 3,415 | ||||||
Total real estate loans | 320,611 | 306,680 | ||||||
Commercial business loans | 24,896 | 25,801 | ||||||
Consumer loans: | ||||||||
Home equity | 33,246 | 28,700 | ||||||
Other consumer | 6,942 | 8,144 | ||||||
Total consumer loans | 40,188 | 36,844 | ||||||
Total loans | 385,695 | 369,325 | ||||||
Less: | ||||||||
Allowance for loan losses | 4,615 | 6,023 | ||||||
Deferred loan origination fees, net | 72 | 43 | ||||||
Loans receivable, net | $ | 381,008 | $ | 363,259 |
The Bank’s lending activities are conducted principally in the Naugatuck Valley area of Connecticut. The Bank’s investment in loans includes both adjustable and fixed rate loans.
Credit quality of financing receivables
Management segregates the loan portfolio into portfolio segments which are defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
The Company’s loan portfolio is segregated as follows:
One-to-four Family Owner Occupied Loans. This portfolio segment consists of the origination of first mortgage loans secured by one-to-four family owner occupied residential properties and residential construction loans to individuals to finance the construction of residential dwellings for personal use located in our market area. The Company has experienced a significant decrease in foreclosures on its owner occupied loan portfolio over the past year. Foreclosures are at relatively low levels. Management believes this is due mainly to its conservative underwriting and lending strategies which do not allow for high risk loans such as “Option ARM,” “sub-prime” or “Alt-A” loans.
13
Multi-family and Commercial Real Estate Loans. As described above, this portfolio grouping has been further disaggregated into loans secured by:
· | Investor owned one-to-four family and multi-family properties; |
· | Industrial and warehouse properties; |
· | Office buildings; |
· | Retail properties; and |
· | Special use properties. |
Loans secured by these types of commercial real estate collateral generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.
Construction and Land Development Loans. This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater 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, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue with debt service which exposes the Company to greater risk of non-payment and loss. Additionally, economic factors such as the decline of property values may have an adverse affect on the ability of the borrower to sell the property.
Commercial Business Loans. This portfolio segment includes commercial business loans secured by real estate, assignments of corporate assets, and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.
Real Estate Secured Consumer Loans. This portfolio segment includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type are written at a maximum of 75% of the appraised value of the property and we require that we have no lower than a second lien position on the property. These loans are written at a higher interest rate and a shorter term than mortgage loans. The Company has experienced a low level of foreclosure in this type of loan during recent periods. These loans can be affected by economic conditions and the values of the underlying properties.
Other Consumer Loans. This portfolio segment includes loans secured by passbook or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan may entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly.
14
Credit Quality Indicators
The Company’s policies provide for the classification of loans into the following categories: pass (1 - 5); special mention (6); substandard-accruing (7); substandard-nonaccruing (8); doubtful (9); and loss (10). In June 2013, the Company added substandard-accruing as an additional risk grade to further delineate the Bank’s risk profile in the previous substandard category. Consistent with regulatory guidelines, loans that are considered to be of lesser quality are considered adversely classified as substandard, doubtful or loss. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans (or portions of loans) classified as loss are those considered uncollectible. The Company generally charges off loans or portions of loans as soon as they are considered to be uncollectible and of little value. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention. When loans are classified as special mention, substandard or doubtful, management focuses increased monitoring and attention on these loans in assessing the credit risk and specific allowance requirements for these loans.
The following tables are a summary of the loan portfolio credit quality indicators, by loan class, as of September 30, 2015 and December 31, 2014:
Credit Risk Profile by Internally Assigned Grade: | ||||||||||||||||||||||||
September 30, 2015 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Risk Rating: | ||||||||||||||||||||||||
Pass | $ | 176,383 | $ | 132,158 | $ | 2,063 | $ | 22,470 | $ | 39,665 | $ | 372,739 | ||||||||||||
Special Mention | 993 | 3,662 | 768 | 1,452 | 203 | 7,078 | ||||||||||||||||||
Substandard: | ||||||||||||||||||||||||
- Accruing | 122 | 1,023 | - | 260 | 72 | 1,477 | ||||||||||||||||||
- Nonaccruing | 2,105 | 738 | 596 | 714 | 248 | 4,401 | ||||||||||||||||||
Subtotal - substandard | 2,227 | 1,761 | 596 | 974 | 320 | 5,878 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 179,603 | $ | 137,581 | $ | 3,427 | $ | 24,896 | $ | 40,188 | $ | 385,695 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
Credit Risk Profile by Internally Assigned Grade: | ||||||||||||||||||||||||
September 30, 2015 | Investor Owned One-to-Four family and multi- family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi-Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Risk Rating: | ||||||||||||||||||||||||
Pass | $ | 30,856 | $ | 23,608 | $ | 27,989 | $ | 16,094 | $ | 33,611 | $ | 132,158 | ||||||||||||
Special Mention | 446 | 1,115 | 22 | 369 | 1,710 | 3,662 | ||||||||||||||||||
Substandard: | ||||||||||||||||||||||||
- Accruing | 241 | - | 95 | 144 | 543 | 1,023 | ||||||||||||||||||
- Nonaccruing | 389 | 17 | 326 | - | 6 | 738 | ||||||||||||||||||
Subtotal - substandard | 630 | 17 | 421 | 144 | 549 | 1,761 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 31,932 | $ | 24,740 | $ | 28,432 | $ | 16,607 | $ | 35,870 | $ | 137,581 |
15
Credit Risk Profile by Internally Assigned Grade: | ||||||||||||||||||||||||
December 31, 2014 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Risk Rating: | ||||||||||||||||||||||||
Pass | $ | 177,598 | $ | 116,020 | $ | 1,835 | $ | 23,535 | $ | 36,348 | $ | 355,336 | ||||||||||||
Special Mention | 731 | 4,040 | 853 | 707 | 207 | 6,538 | ||||||||||||||||||
Substandard: | ||||||||||||||||||||||||
- Accruing | 19 | 1,498 | - | 755 | 74 | 2,346 | ||||||||||||||||||
- Nonaccruing | 2,391 | 968 | 727 | 804 | 215 | 5,105 | ||||||||||||||||||
Subtotal - substandard | 2,410 | 2,466 | 727 | 1,559 | 289 | 7,451 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 180,739 | $ | 122,526 | $ | 3,415 | $ | 25,801 | $ | 36,844 | $ | 369,325 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
Credit Risk Profile by Internally Assigned Grade: | ||||||||||||||||||||||||
December 31, 2014 | Investor Owned One-to- Four family and multi- family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi- Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Risk Rating: | ||||||||||||||||||||||||
Pass | $ | 23,793 | $ | 23,707 | $ | 23,503 | $ | 17,092 | $ | 27,925 | $ | 116,020 | ||||||||||||
Special Mention | 1,027 | 1,145 | 319 | 104 | 1,445 | 4,040 | ||||||||||||||||||
Substandard: | ||||||||||||||||||||||||
- Accruing | 252 | - | 100 | 150 | 996 | 1,498 | ||||||||||||||||||
- Nonaccruing | 389 | 23 | 546 | - | 10 | 968 | ||||||||||||||||||
Subtotal - substandard | 641 | 23 | 646 | 150 | 1,006 | 2,466 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 25,461 | $ | 24,875 | $ | 24,468 | $ | 17,346 | $ | 30,376 | $ | 122,526 |
Delinquencies
When a loan is 15 days past due, the Company sends the borrower a late notice. The Company also contacts the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, the Company mails the borrower a letter reminding the borrower of the delinquency and attempts to contact the borrower personally to determine the reason for the delinquency in order to ensure that the borrower understands the terms of the loan and the importance of making payments on or before the due date. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, the Company will send the borrower a final demand for payment and may recommend foreclosure. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company each month.
Loans, including troubled debt restructurings (“TDRs”), are automatically placed on nonaccrual status when payment of principal or interest is more than 90 days delinquent. Loans may also be placed on nonaccrual status if collection of principal or interest in full, or in part, is in doubt or if the loan has been restructured. When loans are placed on nonaccrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan’s payment status is current for a reasonable period of time (usually six consecutive months) to establish a reliable assessment of collectability.
16
The following tables set forth certain information with respect to our loan portfolio delinquencies, by loan class, as of September 30, 2015 and December 31, 2014:
Delinquencies | ||||||||||||||||||||||||||||
As of September 30, 2015 | 31-60 Days Past Due | 61-90 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Loans | Carrying Amount > 90 Days and Accruing | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Real estate loans | ||||||||||||||||||||||||||||
One-to-four family | $ | 927 | $ | 41 | $ | 1,566 | $ | 2,534 | $ | 177,069 | $ | 179,603 | $ | - | ||||||||||||||
Construction and land development | - | - | 596 | 596 | 2,831 | 3,427 | - | |||||||||||||||||||||
Multi-family and commercial real estate: | ||||||||||||||||||||||||||||
Investor owned one-to-four family and multi-family | 632 | - | 389 | 1,021 | 30,911 | 31,932 | - | |||||||||||||||||||||
Industrial and Warehouse | 389 | - | - | 389 | 24,351 | 24,740 | - | |||||||||||||||||||||
Office buildings | - | - | 326 | 326 | 28,106 | 28,432 | - | |||||||||||||||||||||
Retail properties | - | - | - | - | 16,607 | 16,607 | - | |||||||||||||||||||||
Special use properties | 223 | - | - | 223 | 35,647 | 35,870 | - | |||||||||||||||||||||
Subtotal Multi-family and commercial real estate | 1,244 | - | 715 | 1,959 | 135,622 | 137,581 | - | |||||||||||||||||||||
Commercial business loans | 294 | - | 665 | 959 | 23,937 | 24,896 | - | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Home equity loans | 228 | - | 164 | 392 | 32,854 | 33,246 | - | |||||||||||||||||||||
Other consumer loans | 1 | - | - | 1 | 6,941 | 6,942 | - | |||||||||||||||||||||
Subtotal Consumer | 229 | - | 164 | 393 | 39,795 | 40,188 | - | |||||||||||||||||||||
Total | $ | 2,694 | $ | 41 | $ | 3,706 | $ | 6,441 | $ | 379,254 | $ | 385,695 | $ | - |
Delinquencies | ||||||||||||||||||||||||||||
As of December 31, 2014 | 31-60 Days Past Due | 61-90 Days Past Due | Greater Than | Total Past Due | Current | Total Loans | Carrying Amount > 90 Days and Accruing | |||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Real estate loans | ||||||||||||||||||||||||||||
One-to-four family | $ | 349 | $ | 153 | $ | 1,594 | $ | 2,096 | $ | 178,643 | $ | 180,739 | $ | - | ||||||||||||||
Construction and land development | - | - | 726 | 726 | 2,689 | 3,415 | - | |||||||||||||||||||||
Multi-family and commercial real estate: | ||||||||||||||||||||||||||||
Investor owned one-to-four family and multi-family | - | - | 389 | 389 | 25,072 | 25,461 | - | |||||||||||||||||||||
Industrial and Warehouse | - | - | - | - | 24,875 | 24,875 | - | |||||||||||||||||||||
Office buildings | - | - | 206 | 206 | 24,262 | 24,468 | - | |||||||||||||||||||||
Retail properties | - | - | - | - | 17,346 | 17,346 | - | |||||||||||||||||||||
Special use properties | - | - | - | - | 30,376 | 30,376 | - | |||||||||||||||||||||
Subtotal Multi-family and commercial real estate | - | - | 595 | 595 | 121,931 | 122,526 | - | |||||||||||||||||||||
Commercial business loans | 972 | - | 703 | 1,675 | 24,126 | 25,801 | - | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Home equity loans | 222 | 97 | 28 | 347 | 28,353 | 28,700 | - | |||||||||||||||||||||
Other consumer loans | 6 | - | - | 6 | 8,138 | 8,144 | - | |||||||||||||||||||||
Subtotal Consumer | 228 | 97 | 28 | 353 | 36,491 | 36,844 | - | |||||||||||||||||||||
Total | $ | 1,549 | $ | 250 | $ | 3,646 | $ | 5,445 | $ | 363,880 | $ | 369,325 | $ | - |
17
Impaired loans and nonperforming assets
The following table sets forth certain information with respect to our nonperforming assets as of September 30, 2015 and December 31, 2014:
September 30, | December 31, | |||||||
2015 | 2014 | |||||||
Nonperforming Assets | (Dollars in thousands) | |||||||
Nonaccrual loans: | ||||||||
One-to-four family | $ | 1,094 | $ | 1,414 | ||||
Multi-family and commercial real estate | 350 | 375 | ||||||
Construction and land development | 596 | 726 | ||||||
Commercial business loans | 666 | 804 | ||||||
Consumer loans | 247 | 187 | ||||||
Total | 2,953 | 3,506 | ||||||
Troubled debt restructurings - non-accrual | 1,448 | 1,600 | ||||||
Subtotal nonperforming loans | 4,401 | 5,106 | ||||||
Foreclosed real estate | 423 | 335 | ||||||
Total nonperforming assets | $ | 4,824 | $ | 5,441 | ||||
Total nonperforming loans to total loans | 1.14 | % | 1.38 | % | ||||
Total nonperforming loans to total assets | 0.89 | % | 1.03 | % | ||||
Total nonperforming assets to total assets | 0.98 | % | 1.10 | % |
Nonperforming loans (defined as nonaccrual loans and nonperforming TDRs) totaled $4.4 million at September 30, 2015 compared to $5.1 million at December 31, 2014, a decrease of $705,000, or 12.9%. The amount of income that was contractually due but not recognized on nonperforming loans totaled $87,000 and $31,000 for the nine months ended September 30, 2015 and September 30, 2014, respectively.
At September 30, 2015, the Company had 28 loans on nonaccrual status of which nine were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.
At December 31, 2014, the Company had 34 loans on nonaccrual status of which 17 were less than 90 days past due; however, these loans were placed on nonaccrual status due to the uncertainty of their collectability.
The Company accounts for impaired loans in accordance with GAAP. An impaired loan generally is one for which it is probable, based on current information, that the Company will not collect all the amounts due under the contractual terms of the loan. All impaired loans are individually evaluated for impairment at least quarterly. As a result of this impairment evaluation, the Company provides a specific reserve for, or charges off, that portion of the asset that is deemed uncollectible.
18
The following tables summarize impaired loans by portfolio segment as of September 30, 2015 and December 31, 2014:
As of September 30, 2015 | Recorded Investment with No Specific Valuation Allowance | Recorded Investment with Specific Valuation Allowance | Total Recorded Investment | Unpaid Contractual Principal Balance | Related Specific Valuation | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Real estate loans | ||||||||||||||||||||
One-to-four family | $ | 2,923 | $ | 1,006 | $ | 3,929 | $ | 4,319 | $ | 26 | ||||||||||
Construction and land development | 596 | - | 596 | 887 | - | |||||||||||||||
Multi-family and commercial real estate: | ||||||||||||||||||||
Investor owned one-to-four family and multi-family properties | 389 | - | 389 | 395 | - | |||||||||||||||
Industrial and warehouse properties | 18 | - | 18 | 23 | - | |||||||||||||||
Office buildings | 326 | - | 326 | 346 | - | |||||||||||||||
Retail properties | - | - | - | - | - | |||||||||||||||
Special use properties | 7 | - | 7 | 21 | - | |||||||||||||||
Subtotal | 740 | - | 740 | 785 | - | |||||||||||||||
Commercial business loans | 783 | 77 | 860 | 923 | - | |||||||||||||||
Consumer loans | 318 | 100 | 418 | 448 | 4 | |||||||||||||||
Total impaired loans | $ | 5,360 | $ | 1,183 | $ | 6,543 | $ | 7,362 | $ | 30 |
As of December 31, 2014 | Recorded Investment with No Specific Valuation Allowance | Recorded Investment with Specific Valuation Allowance | Total Recorded Investment | Unpaid Contractual Principal Balance | Related Specific Valuation Allowance | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Real estate loans | ||||||||||||||||||||
One-to-four family | $ | 2,793 | $ | 1,536 | $ | 4,329 | $ | 4,555 | $ | 59 | ||||||||||
Construction and land development | 685 | - | 685 | 1,022 | - | |||||||||||||||
Multi-family and commercial real estate: | ||||||||||||||||||||
Investor owned one-to-four family and multi-family properties | 389 | - | 389 | 395 | - | |||||||||||||||
Industrial and warehouse properties | 22 | - | 22 | 28 | - | |||||||||||||||
Office buildings | 546 | - | 546 | 750 | - | |||||||||||||||
Retail properties | - | - | - | - | - | |||||||||||||||
Special use properties | 10 | - | 10 | 24 | - | |||||||||||||||
Subtotal | 967 | - | 967 | 1,197 | - | |||||||||||||||
Commercial business loans | 759 | 192 | 951 | 1,042 | 4 | |||||||||||||||
Consumer loans | 385 | 133 | 518 | 521 | 9 | |||||||||||||||
Total impaired loans | $ | 5,589 | $ | 1,861 | $ | 7,450 | $ | 8,337 | $ | 72 |
In the above table, the unpaid contractual principal balance represents the aggregate amounts legally owed to the Bank under the terms of the borrowers’ loan agreements. The recorded investment amounts shown above represent the unpaid contractual principal balance owed to the Bank less any amounts paid by borrowers on nonaccrual loans which were recognized as principal curtailments. On those nonaccrual loans accounted for under the cost recovery method, the Bank applies any borrower payments first against the principal balance of the loan and once the entire principal balance has been recovered, any subsequent payments are recognized as interest income.
19
The following table relates to interest income recognized by segment of impaired loans for the nine months ended September 30, 2015 and 2014:
Nine Months Ended September 30, | ||||||||||||||||
2015 | 2014 | |||||||||||||||
Average Recorded Investments | Interest Income Recognized | Average Recorded Investments | Interest Income Recognized | |||||||||||||
(In thousands) | ||||||||||||||||
Real estate loans | ||||||||||||||||
One-to four-family | $ | 4,180 | $ | 127 | $ | 5,567 | $ | 237 | ||||||||
Construction | 641 | 1 | 1,400 | 9 | ||||||||||||
Multi-family and commercial real estate | 880 | - | 2,109 | 111 | ||||||||||||
Commercial business loans | 908 | 10 | 1,554 | 85 | ||||||||||||
Consumer loans | 511 | 17 | 498 | 17 | ||||||||||||
Total | $ | 7,120 | $ | 155 | $ | 11,128 | $ | 459 |
Interest payments received on nonaccrual loans are accounted for on the cash-basis method or the cost recovery method until qualifying for return to accrual status. Under the cost recovery method, the interest payment is applied to the principal balance of the loan. The table above shows the interest income recognized on nonaccrual loans and on performing TDR loans using the cash-basis method. For the nine month periods ended September 30, 2015 and 2014, the amount of interest payments applied to principal under the cost recovery method was $23,000 and $37,000, respectively.
Troubled Debt Restructured Loans
A TDR is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment, whether on accrual or nonaccrual status.
Loan modifications are generally granted at the request of the individual borrower and may include concessions such as reduction in interest rates, changes in payments, maturity date extensions, or debt forgiveness/forbearance. TDRs are loans for which the original contractual terms of the loans have been modified and both of the following conditions exist: (i) the restructuring constitutes a concession (including reduction of interest rates or extension of maturity dates); and (ii) the borrower is either experiencing financial difficulties or absent such concessions, it is probable the borrower would experience financial difficulty complying with the original terms of the loan. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. The Company’s loan modifications are determined on a case-by-case basis in connection with ongoing loan collection processes.
The recorded investment balance of performing and nonperforming TDRs as of September 30, 2015 and December 31, 2014 are as follows:
(In thousands) | As of September 30, 2015 | As of December 31, 2014 | ||||||
Aggregate recorded investment of impaired loans performing under terms modified through a troubled debt restructuring: | ||||||||
Performing (1) | $ | 2,480 | $ | 2,549 | ||||
Nonperforming (2) | 1,102 | 1,256 | ||||||
Total | $ | 3,582 | $ | 3,805 |
(1) | Of the $2,480,000 in TDRs which were performing under the modified terms of their agreements at September 30, 2015, there were $385,000 in TDRs that remain on nonaccrual status because these TDRs have not yet demonstrated the requisite period of sustained performance. The combination of the $385,000 performing TDRs and the $1,063,000 nonperforming TDRs on nonaccrual status at September 30, 2015 equal the $1,448,000 in TDRs that were on nonaccrual status at September 30, 2015. |
Of the $2,549,000 in TDRs which were performing under the modified terms of their agreements at December 31, 2014, there were $2,164,000 in TDRs that remain on nonaccrual status because these TDRs have not yet demonstrated the requisite period of sustained performance. The combination of the $385,000 performing TDRs and the $1,215,000 nonperforming TDRs on nonaccrual status at December 31, 2014 equal the $1,600,000 in TDRs that were on nonaccrual status at December 31, 2014.
20
(2) | All of the $1,102,000 in TDRs that were not performing under the modified terms of their agreements at September 30, 2015, except for one loan in the amount of $39,000, were on nonaccrual status. |
All of the $1,256,000 in TDRs which were not performing under the modified terms of their agreements at December 31, 2014, except for one loan in the amount of $40,000, were on nonaccrual status.
As illustrated in the table below, during the nine months ended September 30, 2015, the following concessions were made on two loans totaling $331,000 (measured as a percentage of loan balances on TDRs):
· | Extension of payment terms for 16.0% (one loan for $53,000); |
· | Deferral of principal payments for 84.0% (one loan for $278,000). |
The following tables present a breakdown of the type of concessions made by loan class during the nine months ended September 30, 2015 and September 30, 2014:
For the Nine Months Ended September 30, 2015 | ||||||||||||||||
(Dollars in thousands) | Number of Loans | Pre- Modification Recorded Investment | Post- Modification Recorded Investment | % | ||||||||||||
Extended payment terms: | ||||||||||||||||
Commercial business loans | 1 | $ | 53 | $ | 53 | 16.0 | % | |||||||||
Principal payments deferred: | ||||||||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | 1 | 278 | 278 | 84.0 | % | |||||||||||
Grand Totals | 2 | $ | 331 | $ | 331 | 100.0 | % |
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As illustrated in the table below, during the nine months ended September 30, 2014, the following concessions were made on nine loans totaling $602,000 (measured as a percentage of loan balances on TDRs):
· | Deferral of principal payments for 72.9% (four loans for $439,000); |
· | Reduced interst rate for 10.8% (four loans for $65,000); and |
· | Extension of payment terms for 16.03% (one loan for $98,000). |
For the Nine Months Ended September 30, 2014 | ||||||||||||||||
(Dollars in thousands) | Number of Loans | Pre- Modification Recorded Investment | Post- Modification Recorded Investment | % | ||||||||||||
Below market interest rate: | ||||||||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | 1 | $ | 35 | $ | 35 | 5.8 | % | |||||||||
Commercial business loans | 3 | 30 | 30 | 5.0 | % | |||||||||||
Subtotal | 4 | 65 | 65 | 10.8 | % | |||||||||||
Extended payment terms: | ||||||||||||||||
Commercial business loans | 1 | 98 | 98 | 16.3 | % | |||||||||||
Subtotal | 1 | 98 | 98 | 16.3 | % | |||||||||||
Principal payments deferred: | ||||||||||||||||
Consumer loans - home equity | 1 | 28 | 28 | 4.7 | % | |||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | 3 | 411 | 411 | 68.2 | % | |||||||||||
Subtotal | 4 | 439 | 439 | 72.9 | % | |||||||||||
Grand Totals | 9 | $ | 602 | $ | 602 | 100.0 | % |
In cases where there was more than one concession granted, the modification was classified by the more dominant concession.
The majority of the Bank’s TDRs are a result of principal payment deferrals to troubled credits which have already been adversely classified. The Bank grants such consessions to reassess the borrower’s financial status and to develop a plan for repayment. These modifications did not have a material effect on the Company or the Bank.
The financial effects of each modification will vary based on the specific restructure. For some of the Bank’s TDRs, the loans were interest-only with a balloon payment at maturity. If the interest rate is not adjusted and the terms are consistent with the market, the Bank might not experience any loss associated with the restructure. If, however, the restructure involves forbearance agreements or interest rate modifications, the Bank might not collect all the principal and interest based on the original contractual terms. The Bank applies its procedures for placing TDRs on accrual or nonaccrual status using the same general guidance as for loans. The Bank estimates the necessary allowance for loan losses on TDRs using the same guidance as for other impaired loans.
There were no TDRs that had been modified during the previous twelve months ended September 30, 2015 that subsequently defaulted or were charged off during the nine months ended September 30, 2015.
Allowance for Loan Losses
The allowance for loan losses (“ALLL”) is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio.
The allowance for loan losses is established through a provision for loan losses charged to operations. Management periodically reviews the allowance for loan losses in order to identify those known and inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process begins with an individual evaluation of loans that are considered impaired. For these loans, an allowance is established based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or for loans that are considered collateral dependent, the fair value of the collateral.
22
All other loans are segregated into segments based on similar risk factors. Each of these groups is then evaluated based on several factors to estimate credit losses. Management will determine for each category of loans with similar risk characteristics the historical loss rate. Historical loss rates provide a reasonable starting point for the Bank’s analysis; however, this analysis and loss trends do not form a sufficient basis, by themselves, to determine the appropriate level of the loan loss allowance. Management also considers qualitative and environmental factors for each loan segment that are likely to impact, directly or indirectly, the inherent loss exposure of the loan portfolio. These factors include but are not limited to: changes in the amount and severity of delinquencies, non-accrual and adversely classified loans; changes in local, regional, and national economic conditions that will affect the collectability of the portfolio; changes in the nature and volume of loans in the portfolio; changes in concentrations of credit, lending area, industry concentrations, or types of borrowers; changes in lending policies, procedures, competition, management, portfolio mix, competition, pricing, loan to value trends, extension and modification requests; and loan quality trends. As of June 30, 2013, management added factors to more granularly assess loan quality trends, specifically, the changes and the trend in charge-offs and recoveries, changes in volume of Watch and Special Mention loans and the changes in the quality of the Bank’s loan review system. This analysis establishes factors that are applied to each of the segregated groups of loans to determine an appropriate level of loan loss allowance.
The determination of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is likelihood that different amounts would be reported under different conditions or assumptions. The OCC, as an integral part of its examination process, periodically reviews the allowance for loan losses and may require the Company to make additional provisions for estimated loan losses based upon judgments different from those of management.
The allowance generally consists of specific (or allocated) and general components. The specific component relates to loans that are recognized as impaired. For such impaired loans, an allowance is established when the discounted cash flows (or observable market price or collateral value, if the loan is collateral dependent) 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.
The ALLL balance decreased from $6.02 million at December 31, 2014 to $4.62 million at September 30, 2015, a decrease of $1.40 million or 23.4%. The decrease was the result of a credit provision of $1.42 million and net recoveries of $12,000 in the nine months ended September 30, 2015. The decrease in the ALLL was consistent with the lower historical loss experience, especially during the most recent four quarters, of the rolling eight quarter historical loss period, and the stability shown in the Bank’s asset quality trends during the nine month period ended September 30, 2015. For the most recent quarter and nine months ended September 30, 2015, the Company had net recoveries of $33,000 and $12,000, respectively. The Bank’s nonperforming loans decreased by $705,000, or 12.9%, for the nine months ended September 30, 2015. In addition, the Bank’s adversely classified loans decreased $1,574,000, or 21.1%, during the nine months ended September 30, 2015.
The Company continues to monitor and modify its allowance for loan losses as conditions dictate. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.
23
The following tables set forth the balance of and transactions in the allowance for loan losses at September 30, 2015, September 30, 2014, and December 31, 2014, by portfolio segment, disaggregated by impairment methodology, which is then further segregated by loans evaluated for impairment individually and collectively.
As of and for the Nine Months Ended September 30, 2015 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 1,633 | $ | 3,097 | $ | 414 | $ | 592 | $ | 287 | $ | 6,023 | ||||||||||||
Provision for loan losses | 398 | (1,221 | ) | (404 | ) | (456 | ) | 263 | (1,420 | ) | ||||||||||||||
Charge-offs | (104 | ) | (14 | ) | - | (24 | ) | (159 | ) | (301 | ) | |||||||||||||
Recoveries | 1 | 43 | 168 | 75 | 26 | 313 | ||||||||||||||||||
Balance at September 30, 2015 | $ | 1,928 | $ | 1,905 | $ | 178 | $ | 187 | $ | 417 | $ | 4,615 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 26 | $ | - | $ | - | $ | - | $ | 4 | $ | 30 | ||||||||||||
Collectively evaluated for impairment | 1,902 | 1,905 | 178 | 187 | 413 | 4,585 | ||||||||||||||||||
Total allowance | $ | 1,928 | $ | 1,905 | $ | 178 | $ | 187 | $ | 417 | $ | 4,615 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 3,929 | $ | 740 | $ | 596 | $ | 860 | $ | 418 | $ | 6,543 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 175,674 | 136,841 | 2,831 | 24,036 | 39,770 | 379,152 | ||||||||||||||||||
Total loans | $ | 179,603 | $ | 137,581 | $ | 3,427 | $ | 24,896 | $ | 40,188 | $ | 385,695 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, 2015 | Investor One- to-Four Family and Multi-Family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi- Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 509 | $ | 597 | $ | 352 | $ | 548 | $ | 1,091 | $ | 3,097 | ||||||||||||
Provision for loan losses | (126 | ) | (247 | ) | (103 | ) | (208 | ) | (537 | ) | (1,221 | ) | ||||||||||||
Charge-offs | - | - | (14 | ) | - | - | (14 | ) | ||||||||||||||||
Recoveries | - | - | 43 | - | - | 43 | ||||||||||||||||||
Balance at September 30, 2015 | $ | 383 | $ | 350 | $ | 278 | $ | 340 | $ | 554 | $ | 1,905 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | 383 | 350 | 278 | 340 | 554 | 1,905 | ||||||||||||||||||
Total allowance | $ | 383 | $ | 350 | $ | 278 | $ | 340 | $ | 554 | $ | 1,905 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 389 | $ | 18 | $ | 326 | $ | - | $ | 7 | $ | 740 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 31,543 | 24,722 | 28,106 | 16,607 | 35,863 | 136,841 | ||||||||||||||||||
Total loans | $ | 31,932 | $ | 24,740 | $ | 28,432 | $ | 16,607 | $ | 35,870 | $ | 137,581 |
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As of and for the Nine Months Ended September 30, 2014 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 1,849 | $ | 5,097 | $ | 1,118 | $ | 1,443 | $ | 384 | $ | 9,891 | ||||||||||||
Provision for loan losses | 326 | (205 | ) | (23 | ) | (757 | ) | (130 | ) | (789 | ) | |||||||||||||
Charge-offs | (541 | ) | (1,306 | ) | (442 | ) | (133 | ) | (13 | ) | (2,435 | ) | ||||||||||||
Recoveries | 10 | 25 | 44 | 139 | 86 | 304 | ||||||||||||||||||
Balance at September 30, 2014 | $ | 1,644 | $ | 3,611 | $ | 697 | $ | 692 | $ | 327 | $ | 6,971 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 26 | $ | - | $ | - | $ | 97 | $ | 8 | $ | 131 | ||||||||||||
Collectively evaluated for impairment | 1,618 | 3,611 | 697 | 595 | 319 | 6,840 | ||||||||||||||||||
Total allowance | $ | 1,644 | $ | 3,611 | $ | 697 | $ | 692 | $ | 327 | $ | 6,971 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 4,415 | $ | 657 | $ | 898 | $ | 1,233 | $ | 514 | $ | 7,717 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 174,662 | 117,778 | 4,144 | 23,592 | 36,362 | 356,538 | ||||||||||||||||||
Total loans | $ | 179,077 | $ | 118,435 | $ | 5,042 | $ | 24,825 | $ | 36,876 | $ | 364,255 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, 2014 | Investor One- to-Four Family and Multi-Family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi- Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 515 | $ | 1,034 | $ | 563 | $ | 856 | $ | 2,129 | $ | 5,097 | ||||||||||||
Provision for loan losses | 136 | (60 | ) | (187 | ) | 185 | (279 | ) | (205 | ) | ||||||||||||||
Charge-offs | (166 | ) | (234 | ) | - | (491 | ) | (415 | ) | (1,306 | ) | |||||||||||||
Recoveries | 1 | 5 | - | - | 19 | 25 | ||||||||||||||||||
Segment ending balance as of September 30, 2014 | $ | 486 | $ | 745 | $ | 376 | $ | 550 | $ | 1,454 | $ | 3,611 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | 486 | 745 | 376 | 550 | 1,454 | 3,611 | ||||||||||||||||||
Total allowance | $ | 486 | $ | 745 | $ | 376 | $ | 550 | $ | 1,454 | $ | 3,611 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 389 | $ | 25 | $ | 206 | $ | - | $ | 37 | $ | 657 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 21,499 | 27,695 | 22,408 | 17,527 | 28,649 | 117,778 | ||||||||||||||||||
Total loans | $ | 21,888 | $ | 27,720 | $ | 22,614 | $ | 17,527 | $ | 28,686 | $ | 118,435 |
25
As of December 31, 2014 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 59 | $ | - | $ | - | $ | 4 | $ | 9 | $ | 72 | ||||||||||||
Collectively evaluated for impairment | 1,574 | 3,097 | 414 | 588 | 278 | 5,951 | ||||||||||||||||||
Total allowance | $ | 1,633 | $ | 3,097 | $ | 414 | $ | 592 | $ | 287 | $ | 6,023 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 4,223 | $ | 969 | $ | 726 | $ | 978 | $ | 492 | $ | 7,388 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 176,516 | 121,557 | 2,689 | 24,823 | 36,352 | 361,937 | ||||||||||||||||||
Total loans | $ | 180,739 | $ | 122,526 | $ | 3,415 | $ | 25,801 | $ | 36,844 | $ | 369,325 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
As of December 31, 2014 | Investor One- to-Four Family and Multi-Family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi- Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | 509 | 597 | 352 | 548 | 1,091 | 3,097 | ||||||||||||||||||
Total allowance | $ | 509 | $ | 597 | $ | 352 | $ | 548 | $ | 1,091 | $ | 3,097 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 389 | $ | 23 | $ | 546 | $ | - | $ | 11 | $ | 969 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 25,072 | 24,852 | 23,922 | 17,346 | 30,365 | 121,557 | ||||||||||||||||||
Total loans | $ | 25,461 | $ | 24,875 | $ | 24,468 | $ | 17,346 | $ | 30,376 | $ | 122,526 |
The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.
Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examination may require us to make additional provisions for loan losses based on judgments different from ours. The Company also periodically engages an independent consultant to review our credit risk grading process and the risk grades on selected portfolio segments as well as the methodology, analysis and adequacy of the allowance for loan and lease losses.
Although we believe that we use the best information available to determine the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
NOTE 4 - MORTGAGE BANKING ACTIVITY
Mortgage banking includes three components: (1) the origination of residential mortgage loans for sale in the secondary market, (2) the servicing of mortgage loans sold to investors, and (3) the sale of mortgage servicing rights.
26
The following represents the Company’s noninterest income derived from these activities:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Gain on sales of mortgage loans | $ | 214 | $ | 188 | $ | 663 | $ | 484 | ||||||||
Mortgage servicing income | 1 | 63 | 1 | 66 | ||||||||||||
Gain on sale of mortgage servicing rights | - | 255 | - | 281 | ||||||||||||
Total | $ | 215 | $ | 506 | $ | 664 | $ | 831 |
The Bank originates government sponsored residential mortgage loans which are sold servicing released. The Bank also originates conventional residential mortgage loans for its portfolio and for sale, both on a servicing rights retained and released basis. The decrease in the Bank’s mortgage servicing income for the nine month period ended September 30, 2015 compared to the same period in 2014 is due to the sale of mortgage servicing rights detailed below and was the result of the Bank selling most of their loans on the secondary market on a servicing released basis.
As of August 29, 2014, the Company sold its mortgage servicing rights with a book value of approximately $948,000 relating to loans previously sold to and serviced for Federal Home Loan Mortgage Company (“Freddie Mac”) of approximately $134.8 million to another financial institution. This transaction closed on September 18, 2014 with a servicing transfer date of October 16, 2014 and satisfied all of the criteria to be accounted for as a sale of financial assets. The Company may have potential repurchase exposure on these underlying mortgage loans based on investor demands related to facts and circumstances which may have pre-dated this transaction. The investor has not exercised any repurchase obligations from the sale date through September 30, 2015.
NOTE 5 – FORECLOSED REAL ESTATE
Changes in foreclosed real estate during the three and nine months ended September 30, 2015 and September 30, 2014 are as follows:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Beginning balance | $ | 39 | $ | 536 | $ | 335 | $ | 1,846 | ||||||||
Additions | 423 | - | 423 | 391 | ||||||||||||
Proceeds from dispositions | (142 | ) | (77 | ) | (430 | ) | (1,681 | ) | ||||||||
Gain (loss) on sales | 103 | (1 | ) | 95 | (60 | ) | ||||||||||
Writedowns | - | - | - | (38 | ) | |||||||||||
Balance at end of period | $ | 423 | $ | 458 | $ | 423 | $ | 458 |
At September 30, 2015, the Bank held three properties consisting of single family residences. At September 30, 2015 and at December 31, 2014, the Bank had $3.4 million and $3.2 million in loans in process of foreclosure, respectively.
The Company records the gain (loss) on sale of foreclosed real estate in the expenses on foreclosed properties, net category along with expenses for acquiring and maintaining foreclosed real estate properties.
NOTE 6 – DEPOSITS
A summary of deposits at September 30, 2015 and December 31, 2014 consisted of the following:
September 30, 2015 | December 31, 2014 | |||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | ||||||||||||
Noninterest bearing demand deposits | $ | 76,618 | 20.7 | % | $ | 68,957 | 18.5 | % | ||||||||
Interest bearing deposits | ||||||||||||||||
Now accounts and money market accounts | 48,798 | 13.2 | % | 50,738 | 13.6 | % | ||||||||||
Savings accounts | 106,520 | 28.8 | % | 108,488 | 29.0 | % | ||||||||||
Certificates of deposit | 137,868 | 37.3 | % | 145,276 | 38.9 | % | ||||||||||
Total interest bearing deposits | 293,186 | 79.3 | % | 304,502 | 81.5 | % | ||||||||||
Total deposits | $ | 369,804 | 100.0 | % | $ | 373,459 | 100.0 | % |
27
Scheduled maturities of certificates of deposit are as follows:
(In thousands) | At September 30, 2015 | At December 31, 2014 | ||||||
Through twelve months | $ | 55,946 | $ | 56,895 | ||||
Twelve months through three years | 55,697 | 55,962 | ||||||
Over three years | 26,225 | 32,419 | ||||||
$ | 137,868 | $ | 145,276 |
The aggregate amount of individual certificate of deposit accounts of $100,000 or more at September 30, 2015 and December 31, 2014 was $58.3 million and $60.7 million, respectively. Deposits up to $250,000 are federally insured through the Federal Deposit Insurance Corporation (“FDIC”). The aggregate amount of individual certificate of deposit accounts of $250,000 or more at September 30, 2015 and December 31, 2014 was $15.0 million and $13.2 million, respectively.
NOTE 7 – FHLB ADVANCES
The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). At September 30, 2015, the Bank had the ability to borrow up to $81.8 million from the FHLB. This borrowing capacity is based on a certain percentage of the value of the Bank’s qualified collateral, as defined in the FHLB Statement of Products Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.
The following table presents certain information regarding our FHLB advances during the periods or at the dates indicated.
At September 30, 2015 | At December 31, 2014 | |||||||||||||||
(Dollars in thousands) | Amount Due | Weighted Average Cost | Amount Due | Weighted Average Cost | ||||||||||||
Year of maturity: (1) | ||||||||||||||||
2015 | $ | 3,365 | 0.78 | % | $ | 6,792 | 0.73 | % | ||||||||
2016 | 16,150 | 0.85 | % | 16,068 | 0.85 | % | ||||||||||
2017 | 22,402 | 1.57 | % | 21,021 | 1.59 | % | ||||||||||
2018 | 7,748 | 2.53 | % | 5,743 | 2.90 | % | ||||||||||
2019 | 5,703 | 2.09 | % | 3,420 | 2.59 | % | ||||||||||
2020 - 2024 | 2,028 | 1.33 | % | 383 | 0.18 | % | ||||||||||
2025 - 2028 | 335 | - | 335 | - | ||||||||||||
Total FHLB advances | $ | 57,731 | 1.48 | % | $ | 53,762 | 1.43 | % |
(1) Amount due includes scheduled principal payments on amortizing advances.
The Bank is required to maintain an investment in capital stock of the FHLB in an amount that is based on a percentage of its outstanding residential first mortgage loans. The stock is bought from and sold to the Federal Home Loan Bank based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation persists; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to its operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.
NOTE 8 – OTHER BORROWED FUNDS
The Bank utilized securities sold under agreements to repurchase to accommodate its customers’ needs to invest funds short term and as a source of borrowings. During 2014, the Bank changed product types in order to make it more advantageous for these customers to be in a deposit product. At December 31, 2014, there were no customers utilizing securities sold under agreement to repurchase as an investment.
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The Bank maintains a credit facility with the Federal Reserve Bank of Boston for which certain assets are pledged to secure such borrowings. As of September 30, 2015 and December 31, 2014, there were no borrowings outstanding under this facility. In addition, the Federal Reserve Bank of Boston, as one of the Bank’s correspondent banks, requires the Bank to pledge at least $1 million in loans and/or investment securities for potential daylight overdraft exposure. At September 30, 2015 and December 31, 2014, the Bank had $6.8 million and $7.4 million, respectively, in commercial real estate loans pledged with the Federal Reserve Bank of Boston.
At September 30, 2015, the Bank had reserve requirements with the Federal Reserve Bank of Boston amounting to $1.8 million. The Bank’s balances in cash on hand and on deposit with the Federal Reserve Bank of Boston were sufficient to meet these reserve requirements.
NOTE 9 – STOCK BASED COMPENSATION
Both stock options and restricted stock awards vest at 20% per year beginning on the first anniversary of the date of grant. The Company records stock-based compensation expense related to outstanding stock options and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. Stock options expire ten years after the date of the grant.
(a) | Stock Option Awards |
Stock option awards have been granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock options and restricted stock awards are considered common stock equivalents for the purpose of computing earnings per share on a diluted basis.
A summary of the status of outstanding stock options at September 30, 2015 and changes therein was as follows:
2015 | ||||||||
Number of Shares | Weighted Average Exercise Price | |||||||
Options outstanding at the beginning of year | 209,808 | $ | 9.36 | |||||
Granted | 162,566 | 8.60 | ||||||
Forfeited | (2,947 | ) | 9.41 | |||||
Exercised | - | - | ||||||
Expired | (95,469 | ) | 11.12 | |||||
Options outstanding at September 30, 2015 | 273,958 | $ | 8.30 | |||||
Options exercisable at September 30, 2015 | 25,392 | $ | 8.38 | |||||
Weighted-average fair value of options granted during the year | $ | 2.61 |
The exercise price and weighted average remaining contractual life in years for all options outstanding at September 30, 2015 are detailed below.
Outstanding as of September 30, 2015 | Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||
3,392 | $ | 12.51 | 1.5 | |||||||
110,000 | $ | 7.74 | 8.7 | |||||||
160,566 | $ | 8.60 | 9.3 | |||||||
273,958 |
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award.
29
In determining the expected volatility of the options, the Company utilized the historical volatility of other similar companies during a period of time equal to the expected life of the options because the Company’s common shares have been publicly traded for a period less than the expected life of the options.
The Company assumed no dividend payments would be made during the expected contractual term of the option period.
The Company determined the expected contractual term of the options to be 6.5 years using the simplified method under SEC’s Staff Accounting Bulletin No. 110 due to the Company not having sufficient historical data to provide a reasonable basis for estimation.
The risk-free rate utilized for this calculation was based upon the U.S. Treasury yield curve in effect at the date of the options grant.
Assumptions used to determine the weighted average fair value of the stock options granted were as follows:
Grant Date | ||||||||
May 27, 2014 | January 31, 2015 | |||||||
Dividend yield | 0.00 | % | 0.00 | % | ||||
Expected volatility | 28.42 | % | 26.76 | % | ||||
Risk-free rate | 1.95 | % | 1.49 | % | ||||
Expected life in years | 6.5 | 6.5 | ||||||
Weighted-average fair value of options at grant date | $ | 2.55 | $ | 2.61 |
Restricted Stock Awards
The following table summarizes the restricted stock awards outstanding for the year ended December 31, 2014 and the nine months ended September 30, 2015:
Number of Shares | Weighted Average Fair Value on Grant Date | |||||||
Nonvested at January 1, 2014 | - | $ | - | |||||
Granted | 4,114 | 8.01 | ||||||
Vested | - | - | ||||||
Forefeited | - | - | ||||||
Nonvested at December 31, 2014 | 4,114 | 8.01 | ||||||
Granted | - | - | ||||||
Vested | - | - | ||||||
Forefeited | - | - | ||||||
Nonvested at September 30, 2015 | 4,114 | $ | 8.01 | |||||
Weighted average remaining contractual life in years | 4.1 |
The fair value of restricted stock awards is measured based on the number of shares granted and the closing market price of the Company’s common stock on the date of grant. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is zero based on historical data and other factors.
The Company recorded stock-based compensation expense of $36,000 and $99,000 for the three and nine months ended September 30, 2015, respectively, in connection with the stock options and restricted stock awards. At September 30, 2015 the Company has unrecognized option expense of $552,674 to be recognized over the remaining vesting period of the options. The Company has unrecognized compensation expense related to non-vested restricted stock awards of $27,109 to be recognized over the remaining vesting period of the restricted stock awards.
30
NOTE 10 – STOCKHOLDERS’ EQUITY
Income Per Share
Basic net income per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed in a manner similar to basic net income per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Company’s common stock equivalents relate solely to stock option and restricted stock awards. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. For the nine months ended September 30, 2015, anti-dilutive options excluded from the calculations totaled 3,392 options (with an exercise price of $12.51 per share). For the nine months ended September 30, 2014, anti-dilutive options excluded from the calculations totaled 97,163 options (with an exercise price of $11.12 per share) and 3,392 options (with an exercise price of $12.51 per share), respectively. Unreleased common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating either basic or diluted net income per common share.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
(in thousands except for per share data) | ||||||||||||||||
Net income | $ | 518 | $ | 1,056 | $ | 1,879 | $ | 341 | ||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 6,707,821 | 6,675,457 | 6,707,821 | 6,675,457 | ||||||||||||
Diluted | 6,775,090 | 6,680,475 | 6,753,459 | 6,677,441 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.08 | $ | 0.16 | $ | 0.28 | $ | 0.05 | ||||||||
Diluted | $ | 0.08 | $ | 0.16 | $ | 0.28 | $ | 0.05 |
Dividends
The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company.
NOTE 11 – REGULATORY CAPITAL REQUIREMENTS
On May 4, 2015, the Office of the Comptroller of the Currency (“OCC”) notified the Bank that the Formal Agreement between the Bank and the OCC dated January 17, 2012 was terminated. In addition to the termination of the Formal Agreement, the OCC notified the Bank that it no longer requires the Bank to maintain the individual minimum capital requirements imposed on June 4, 2013. On June 11, 2015, the Federal Reserve Bank of Boston notified the Company that the Memorandum of Understanding between the Company and the Federal Reserve Bank of Boston dated May 21, 2013 was terminated.
As a savings and loan holding company with consolidated assets of less than $1.0 billion, the Company is not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. There is a five- year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements apply to savings and loan holding companies.
As a source of strength to its subsidiary bank, the Company had liquid assets of approximately $3.1 million at September 30, 2015, which the Company could contribute to the Bank if needed, to enhance the Bank’s capital levels. If the Company had contributed those assets to the Bank as of September 30, 2015, the Bank would have had a Tier 1 leverage ratio of approximately 12.05%.
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Effective January 1, 2015, Basel III implementation date for community banks, the applicable capital regulations have been revised to:
· | Establish a new common equity Tier 1 minimum capital requirement (at 4.5% of risk-weighted assets); |
· | Increase the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets); |
· | Change what constitutes regulatory capital including the phasing out of certain components over a transition period; |
· | Amends the risk-weights of certain assets to better reflect credit risk and other risk exposures; and |
· | Phase in a “capital conservation buffer” requirement beginning January 1, 2016 at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019. If a depository institution does not maintain the applicable “capital conservation buffer” in addition to its minimum risk-based capital requirements, the Basel III capital regulation may limit capital distributions and certain discretionary bonus payments. |
For the Bank, the new common equity Tier 1 capital ratio is the same as its Tier 1 risk-based capital ratio because the Bank’s Tier 1 capital consists only of common equity. Furthermore, as of March 31, 2015, the Bank elected to exclude its accumulated other comprehensive income (which, for the Bank, primarily consists of unrealized gains and losses on available for sale investment securities) from its Tier 1 capital. This is consistent with its previous treatment of this item.
The following tables are summaries of the Company’s consolidated capital amounts and ratios and the Bank’s actual capital amounts and ratios as computed under the standards established by the Federal Deposit Insurance Act at September 30, 2015 and December 31, 2014.
At September 30, 2015 | Well Capitalized Requirements | Minimum Requirements (3) | Actual | |||||||||||||||||||||
(Dollars in thousands) | $ | % | $ | % | $ | % | ||||||||||||||||||
The Company Consolidated | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | N/A | N/A | N/A | N/A | $ | 61,587 | 12.29 | % | ||||||||||||||||
Tier 1 Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 61,587 | 17.95 | % | |||||||||||||||||
Total Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 65,271 | 19.20 | % | |||||||||||||||||
The Bank | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | $ | 25,047 | 5.00 | % | $ | 22,542 | 4.50 | % | $ | 57,297 | 11.44 | % | ||||||||||||
Common Equity Tier 1 (CET1) (2) (4) | 22,298 | 6.50 | % | 15,437 | 4.50 | % | 27,297 | 16.70 | % | |||||||||||||||
Tier 1 Risk-Based Capital (2) | 27,443 | 8.00 | % | 20,582 | 6.00 | % | 27,297 | 16.70 | % | |||||||||||||||
Total Risk-Based Capital (2) | 34,304 | 10.00 | % | 27,443 | 8.00 | % | 61,589 | 17.95 | % |
(1) Tier 1 capital to total average assets.
(2) Tier 1 or total risk-based capital to risk-weighted assets.
(3) Formal Agreement and related ICMRs terminated on May 4, 2015.
(4) New capital requirement under Basel III effective January 1, 2015.
32
At December 31, 2014 | Adequately Capitalized Requirements | Individual Minimum Capital Requirements (3) | Actual | |||||||||||||||||||||
(Dollars in thousands) | $ | % | $ | % | $ | % | ||||||||||||||||||
The Company Consolidated | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | N/A | N/A | N/A | N/A | $ | 59,611 | 12.09 | % | ||||||||||||||||
Tier 1 Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 59,611 | 18.94 | % | |||||||||||||||||
Total Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 63,571 | 20.20 | % | |||||||||||||||||
The Bank | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | $ | 19,796 | 4.00 | % | $ | 44,541 | 9.00 | % | $ | 55,090 | 11.13 | % | ||||||||||||
Tier 1 Risk-Based Capital (2) | 12,658 | 4.00 | % | N/A | N/A | 55,090 | 17.41 | % | ||||||||||||||||
Total Risk-Based Capital (2) | 25,317 | 8.00 | % | 41,139 | 13.00 | % | 59,071 | 18.67 | % |
(1) Tier 1 capital to total assets.
(2) Tier 1 or total risk-based capital to risk-weighted assets.
(3) Imposed on June 4, 2013 and teminated on May 4, 2015.
As of September 30, 2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.
NOTE 12 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit represents the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults, and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis.
The Company controls the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral that it deems necessary.
Financial instruments whose contractual amounts represent credit risk at September 30, 2015 and December 31, 2014 were as follows:
September 30, | December 31, | |||||||
(In thousands) | 2015 | 2014 | ||||||
Commitments to extend credit: | ||||||||
Commercial real estate loan committments | $ | 12,573 | $ | 30,254 | ||||
Unused home equity lines of credit | 21,081 | 19,084 | ||||||
Commercial and industrial loan commitments | 12,080 | 12,587 | ||||||
Amounts due on other commitments | 9,805 | 7,257 | ||||||
Commercial letters of credit | 523 | 588 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral held varies, but may include residential and commercial property, deposits and securities.
33
NOTE 13 – FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below:
Cash and cash equivalents—The carrying amounts for cash and due from banks and federal funds sold approximate fair value because of the short maturities of those investments. The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 1 within the fair value hierarchy.
Available for sale and held to maturity securities—Where quoted prices are available in an active market, the securities are classified within Level 1 of the valuation hierarchy. Examples of such instruments include mutual funds. If quoted prices are not available, then fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of securities with similar characteristics and the securities are classified within Level 2 of the valuation hierarchy. Examples of such instruments include U.S. government agency bonds, U.S. government agency mortgage-backed securities and private label collateralized mortgage obligations. Available for sale securities are recorded at fair value on a recurring basis and held to maturity securities are only disclosed at fair value.
Loans held for sale—The carrying amounts of these assets approximate fair value because these loans, are generally sold through forward sales (either already contracted or soon to be executed at the recording date). The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 2 within the fair value hierarchy.
Loans receivable—For variable rate loans that reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the loan portfolio. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated period end market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the loan portfolio. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments are based on unobservable inputs, the resulting fair value measurement is categorized as a Level 3 measurement.
Accrued interest receivable—The carrying amount approximates fair value. The Company does not record these assets at fair value on a recurring basis. These assets are classified as Level 1 within the fair value hierarchy.
Federal Home Loan Bank stock—The Bank is a member of the FHLB and is required to maintain an investment in capital stock of the FHLB. The carrying amount is a reasonable estimate of fair value. The Company does not record this asset at fair value on a recurring basis. Based on redemption provisions, the stock of the FHLB has no quoted market value and is carried at cost. FHLB stock is classified as Level 3 within the fair value hierarchy.
Foreclosed real estate— Foreclosed real estate represents real estate acquired through or in lieu of foreclosure and which are recorded at fair value on a nonrecurring basis. Fair value is based upon appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company classifies the fair value measurement as Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company classifies the fair value measurement as Level 3. The Company classified these assets as Level 3 within the fair value hierarchy.
Deposit liabilities—The fair value of demand deposits, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered by market participants for deposits of similar remaining maturities, estimated using local market data, to a schedule of aggregated expected maturities of such deposits. The Company does not record deposits at fair value on a recurring basis. Demand deposits, savings and money market deposits are classified as Level 1 within the fair value hierarchy. Certificates of deposit are classified as Level 2 within the fair value hierarchy.
Borrowed funds—The fair value of FHLB advances and other borrowed funds (repurchase agreements) are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The Company does not record this liability at fair value on a recurring basis. FHLB advances and other borrowings are classified as Level 2 within the fair value hierarchy.
34
Accrued interest payable—The carrying amounts approximates fair value. The Company does not record the liability at fair value on a recurring basis. This liability is classified as Level 1 within the fair value hierarchy.
Mortgagors’ escrow accounts—The carrying amount approximates fair value. The Company does not record this liability at fair value on a recurring basis. This liability is classified as Level 2 within the fair value hierarchy.
The following is a summary of the carrying values and estimated fair values of the Company’s significant financial instruments as of September 30, 2015 and December 31, 2014:
September 30, 2015 | December 31, 2014 | |||||||||||||||||
Fair Value | Carrying | Fair | Carrying | Fair | ||||||||||||||
(In thousands) | Hierarchy Level | Value | Value | Value | Value | |||||||||||||
Financial Assets | ||||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 18,186 | $ | 18,186 | $ | 10,940 | $ | 10,940 | |||||||||
Investment securities, available-for-sale | Level 2 | 53,783 | 53,783 | 77,538 | 77,538 | |||||||||||||
Investment securities, held-to-maturity | Level 2 | 10,490 | 10,630 | 13,441 | 13,633 | |||||||||||||
Loans held for sale | Level 2 | 1,878 | 1,878 | 1,062 | 1,062 | |||||||||||||
Loans receivable, net: | ||||||||||||||||||
Performing | Level 2 | 374,495 | 379,568 | 355,943 | 359,687 | |||||||||||||
Impaired | Level 3 | 6,513 | 6,513 | 7,316 | 7,316 | |||||||||||||
Accrued interest receivable | Level 1 | 1,509 | 1,509 | 1,599 | 1,599 | |||||||||||||
FHLB Stock | Level 3 | 4,548 | 4,548 | 4,548 | 4,548 | |||||||||||||
Financial Liabilities | ||||||||||||||||||
Demand deposits, savings, Now and money market deposits | Level 1 | 231,936 | 231,936 | 228,183 | 228,183 | |||||||||||||
Time deposits | Level 2 | 137,868 | 139,708 | 145,276 | 147,385 | |||||||||||||
FHLB advances | Level 2 | 57,731 | 58,306 | 53,762 | 54,148 | |||||||||||||
Mortgagors' escrow accounts | Level 2 | 2,141 | 2,141 | 4,341 | 4,341 | |||||||||||||
Accrued interest payable | Level 1 | 77 | 77 | 67 | 67 |
The Company discloses fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The estimated fair value amounts as of September 30, 2015 and December 31, 2014 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at such dates.
The information presented should not be interpreted as an estimate of the fair value of the Company as a whole since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
The Company uses fair value measurements to record available-for sale investment securities and residential loans held for sale at fair value on a recurring basis. Additionally, the Company uses fair value measurements to measure the reported amounts of impaired loans, foreclosed real estate and mortgage-servicing rights at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or market value accounting or write-downs of individual assets.
Unrecognized financial instruments—Loan commitments on which the committed interest rate is less than the current market rate were insignificant at September 30, 2015 and December 31, 2014.
35
The following table represents a further breakdown of investment securities and other financial instruments measured at fair value on a recurring basis:
Fair Value At September 30, 2015 | ||||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets measured at fair value on a recurring basis: | ||||||||||||||||
Available-for-sale investment securities: | ||||||||||||||||
U.S. Government agency mortgage-backed obligations | $ | - | $ | 23,756 | $ | - | $ | 23,756 | ||||||||
U.S. Government agency collateralized mortgage obligations | - | 9,206 | - | 9,206 | ||||||||||||
Obligations of state and municipal subdivisions | - | 20,821 | - | 20,821 |
Fair Value At December 31, 2014 | ||||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets measured at fair value on a recurring basis: | ||||||||||||||||
Available-for-sale investment securities: | ||||||||||||||||
U.S. Government and agency obligations | $ | - | $ | 5,042 | $ | - | $ | 5,042 | ||||||||
U.S. Government agency mortgage-backed obligations | - | 53,087 | - | 53,087 | ||||||||||||
U.S. Government agency collateralized mortgage obligations | - | 13,179 | - | 13,179 | ||||||||||||
Obligations of state and municipal subdivisions | - | 6,230 | - | 6,230 |
The following table represents assets measured at fair value on a non-recurring basis:
Fair Value At September 30, 2015 | ||||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets measured at fair value on a non-recurring basis: | ||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 6,513 | $ | 6,513 | ||||||||
Foreclosed real estate | - | - | 423 | 423 |
Fair Value At December 31, 2014 | ||||||||||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets measured at fair value on a non-recurring basis: | ||||||||||||||||
Impaired loans | $ | - | $ | - | $ | 7,316 | $ | 7,316 | ||||||||
Foreclosed real estate | - | - | 335 | 335 |
During the nine months ended September 30, 2015, the following fair values of those reflected in the above table were remeasured:
· | $3.4 million in collateral dependent impaired loans; and |
· | $423,000 in foreclosed real estate. |
Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent management believes necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment.
Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
36
NOTE 14 – SUBSEQUENT EVENT
In October 2015, the Board of Directors of the Bank voted to terminate the Naugatuck Valley Savings and Loan KSOP Plan (“the Plan”) effective December 2015, due to the impending merger with Liberty Bank. Such termination will require the Bank to contribute to the Plan an amount equal to the unearned employee stock ownership plan shares based on the fair value of the shares as of September 30, 2015. The financial impact of this plan termination amounts to approximately $2.95 million in additional compensation expense to be recognized in the fourth quarter of 2015.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended to assist you in understanding the financial condition and results of operationsof the Company. This discussion should be read in conjunction with the accompanying unaudited financial statements as of and for the three and nine months ended September 30, 2015 and 2014 together with the audited financial statementsas of and for the year ended December 31, 2014, included in the Company’s Form 10-K initially filed with the Securities and Exchange Commission on March 19, 2015.
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the size, quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, changes in relevant accounting principles and guidelines and the receipt of requisite shareholder or regulatory approval of the proposed merger with Liberty may not be received or other conditions to the completion of the merger might not be satisfied or waived. In addition, operations will continue to be impacted until the merger transaction is either consummated or terminated. Additional factors are discussed under “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Overview: As of September 30, 2015, the Company had $493.7 million of total assets, $385.7 million of gross loans receivable, and $369.8 million of total deposits. Total stockholders’ equity at September 30, 2015 was $61.8 million. The Company had net income for the quarter ended September 30, 2015 of $518,000 (or basic and diluted income per share of $0.08 as compared to net income of $1.1 million (or basic and diluted income per share of $0.16) for the third quarter of 2014. The decline in the Company’s operating results was largely attributable to the gain on the sales of investments of $545,000 for the three months ended September 30, 2015 compared to $1.0 million for the same period in 2014. In addition, there were $335,000 in merger related expenses incurred during the 2015 quarter.
The Company had net income for the nine months ended September 30, 2015 of $1.9 million (or basic and diluted income per share of $0.28) as compared to net income of $341,000 (or basic and diluted loss per share of $0.05) for the nine months ended September 30, 2014. The improvement in the Company’s earnings was largely attributable to a credit provision for loan losses of $1.4 million for the nine months ended September 30, 2015 compared to the credit provision for loan losses of $789,000 for the same period in 2014 for a net change of $631,000 and a $1.7 million decrease in noninterest expenses net of $947,000 in merger related incurred expenses during the 2015 period.
Critical Accounting Policies.We consider accounting policies involving significant judgment and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be critical accounting policies: allowance for loan losses, other than temporary impairments in the market value of investments, deferred income taxes and fair value of financial instruments.
37
Allowance for Loan Losses.Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, at a minimum, and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectability of the loan portfolio.
Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. We engage an independent firm to review our commercial loan portfolio at least quarterly and adjust our loan ratings based in part upon this review. In addition, our banking regulator, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination.
Other-Than-Temporary Impairments in the Market Value of Investments. Investment securities are reviewed at each reporting period for other-than-temporary impairment. For debt securities, an unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis. The credit loss component of an other than temporary impairment write-down is recorded in earnings, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided the Company does not intend to sell the underlying debt security and it is more likely than not that the Company will not be required to sell the debt security prior to recovery. In determining whether a credit loss exists and the period over which the fair value of the debt security is expected to recover, management considers the following factors: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, any external credit ratings, the level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities, the level of credit enhancement provided by the structure and the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. If an equity security is deemed other-than-temporarily impaired, the full impairment is considered credit related and a charge to earnings is recorded.
Deferred Income Taxes.We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed periodically as regulatory and business factors change.
Fair Value of Financial Instruments.We use fair value measurements to record certain assets at fair value on a recurring basis, primarily related to the carrying amounts for available-for-sale investment securities. Additionally, we may be required to record other assets, such as foreclosed real estate, at fair value, on a nonrecurring basis. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or market value accounting or write-down of individual assets. Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time, they are susceptible to material near-term changes. The fair values disclosed do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect the possible tax ramifications or estimated transaction costs.
This discussion should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K.
Results of Operations for the Three and Nine months Ended September 30, 2015 and 2014
Earnings Summary. For the three months ended September 30, 2015, the Company recorded net income of $518,000 compared to net income of $1.1 million for the same period in 2014. This $538,000 decline in the Company’s operating results was primarily attributable to a $821,000 decrease in noninterest income, a $498,000 decrease in noninterest expense, a $165,000 decrease in net interest income, and a decline in the 2014 credit provision for loan losses of $50,000 for the three months ended September 30, 2015 compared to the same period in 2014.
38
For the nine months ended September 30, 2015, the Company earned net income of $1.9 million compared to net income of $341,000 in the same period in 2014. This $1.5 million improvement in the Company’s operating results was due to a $631,000 increase in credit provision for loan losses and a $1.7 million decrease in noninterest expense which were partially offset by a $704,000 decrease in net interest income and a $120,000 decrease in noninterest income for the nine months ended September 30, 2015 compared to the same period in 2014.
Average Balance and Yields.The following table summarizes average balances and average yields and costs for the three months ended September 30, 2015 and 2014. For the purpose of this table, average balances have been calculated using the average daily balances and nonaccrual loans are included in average balances.
For the Quarter Ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Interest | Annualized | Interest | Annualized | |||||||||||||||||||||
Average | Earned/ | Average | Average | Earned/ | Average | |||||||||||||||||||
Balance | Paid | Yield/Rate | Balance | Paid | Yield/Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans | $ | 385,609 | $ | 4,365 | 4.49 | % | $ | 369,058 | $ | 4,261 | 4.58 | % | ||||||||||||
Investment securities and Fed Funds sold | 73,861 | 421 | 2.26 | 95,234 | 734 | 3.06 | ||||||||||||||||||
Overnight Funds | 10,829 | 6 | 0.22 | 9,075 | 5 | 0.22 | ||||||||||||||||||
Federal Home Loan Bank stock | 4,548 | 37 | 3.23 | 4,764 | 19 | 1.58 | ||||||||||||||||||
Total interest-earning assets | 474,847 | 4,829 | 4.03 | % | 478,131 | 5,019 | 4.16 | % | ||||||||||||||||
Non interest-earning assets | 24,745 | 24,581 | -0.329 | % | ||||||||||||||||||||
Total Assets | $ | 499,592 | $ | 502,712 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Certificate accounts | $ | 137,548 | 450 | 1.30 | % | $ | 149,343 | $ | 506 | 1.34 | % | |||||||||||||
Regular savings accounts and escrow | 109,679 | 45 | 0.16 | 114,506 | 48 | 0.17 | ||||||||||||||||||
Checking and NOW accounts | 104,825 | 35 | 0.13 | 96,438 | 33 | 0.14 | ||||||||||||||||||
Money market accounts | 23,324 | 9 | 0.15 | 24,429 | 10 | 0.16 | ||||||||||||||||||
Total interest-bearing deposits | 375,376 | 539 | 0.57 | 384,716 | 597 | 0.62 | ||||||||||||||||||
FHLB advances | 59,714 | 221 | 1.47 | 52,260 | 188 | 1.43 | ||||||||||||||||||
Other borrowings | - | - | - | 1,557 | - | 0.00 | ||||||||||||||||||
Total interest-bearing liabilities | 435,090 | 760 | 0.69 | % | 438,533 | 785 | 0.71 | % | ||||||||||||||||
Non interest-bearing liabilities | 2,605 | 4,588 | ||||||||||||||||||||||
Total Liabilities | 437,695 | 443,121 | ||||||||||||||||||||||
Total Stockholders' Equity | 61,897 | 59,591 | ||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 499,592 | $ | 502,712 | ||||||||||||||||||||
Net interest income | $ | 4,069 | $ | 4,234 | ||||||||||||||||||||
Net interest spread | 3.34 | % | 3.45 | % | ||||||||||||||||||||
Net interest margin | 3.40 | % | 3.51 | % | ||||||||||||||||||||
Average interest earning assets to average interest bearing liabilities | 109.14 | % | 109.03 | % |
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The following table summarizes average balances and average yields and costs for the nine months ended September 30, 2015 and 2014. For the purpose of this table, average balances have been calculated using average daily balances and nonaccrual loans are included in average balances.
For the Nine Months Ended September 30, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Interest | Annualized | Interest | Annualized | |||||||||||||||||||||
Average | Earned/ | Average | Average | Earned/ | Average | |||||||||||||||||||
Balance | Paid | Yield/Rate | Balance | Paid | Yield/Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||
Loans | $ | 378,123 | $ | 12,652 | 4.47 | % | 372,213 | $ | 12,743 | 4.58 | % | |||||||||||||
Investment securities and Fed Funds sold | 85,180 | 1,579 | 2.48 | 95,007 | 2,203 | 3.10 | ||||||||||||||||||
Overnight Funds | 10,604 | 20 | 0.25 | 7,173 | 14 | 0.26 | ||||||||||||||||||
Federal Home Loan Bank stock | 4,549 | 77 | 2.26 | 5,163 | 60 | 1.55 | ||||||||||||||||||
Total interest-earning assets | 478,456 | 14,328 | 4.00 | % | 479,556 | 15,020 | 4.19 | % | ||||||||||||||||
Non interest-earning assets | 23,794 | 22,841 | ||||||||||||||||||||||
Total Assets | $ | 502,250 | 502,397 | |||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Certificate accounts | $ | 143,368 | 1,441 | 1.34 | % | 151,902 | $ | 1,520 | 1.34 | % | ||||||||||||||
Regular savings accounts & escrow | 111,091 | 136 | 0.16 | 116,896 | 146 | 0.17 | ||||||||||||||||||
Checking and NOW acounts | 100,345 | 97 | 0.13 | 94,007 | 101 | 0.14 | ||||||||||||||||||
Money Market accounts | 23,980 | 29 | 0.16 | 24,948 | 32 | 0.17 | ||||||||||||||||||
Total interest-bearing deposits | 378,784 | 1,703 | 0.60 | 387,753 | 1,799 | 0.62 | ||||||||||||||||||
FHLB advances | 58,921 | 639 | 1.45 | 47,394 | 531 | 1.50 | ||||||||||||||||||
Other borrowings | - | - | - | 4,523 | - | - | ||||||||||||||||||
Total interest-bearing liabilities | 437,705 | 2,342 | 0.72 | % | 439,670 | 2,330 | 0.71 | % | ||||||||||||||||
Non interest-bearing liabilities | 2,733 | 4,123 | ||||||||||||||||||||||
Total Liabilities | 440,438 | 443,793 | ||||||||||||||||||||||
Total Stockholders' Equity | 61,812 | 58,604 | ||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 502,250 | 502,397 | |||||||||||||||||||||
Net interest income | $ | 11,986 | $ | 12,690 | ||||||||||||||||||||
Net interest spread | 3.28 | % | 3.48 | % | ||||||||||||||||||||
Net interest margin | 3.35 | % | 3.54 | % | ||||||||||||||||||||
Average interest earning assets to average interest bearing liabilities | 109.31 | % | 109.07 | % |
40
Rate / Volume Analysis.The following table summarizes the changes in the components of net interest income attributable to both rate and volume for the three and nine months ended September 30, 2015 and 2014:
For the Quarter Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2015 compared to | September 30, 2015 compared to | |||||||||||||||||||||||
September 30, 2014 | September 30, 2014 | |||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
(In thousands) | Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans | $ | 191 | $ | (87 | ) | $ | 104 | $ | 207 | $ | (298 | ) | $ | (91 | ) | |||||||||
Investment securities / Federal funds Sold | (145 | ) | (168 | ) | (313 | ) | (213 | ) | (411 | ) | (624 | ) | ||||||||||||
Overnight funds | 1 | - | 1 | 7 | (1 | ) | 6 | |||||||||||||||||
Federal Home Loan Bank stock | (1 | ) | 19 | 18 | (8 | ) | 25 | 17 | ||||||||||||||||
Total interest income | 46 | (236 | ) | (190 | ) | (7 | ) | (685 | ) | (692 | ) | |||||||||||||
Interest expense: | ||||||||||||||||||||||||
Certificate accounts | (40 | ) | (16 | ) | (56 | ) | (79 | ) | - | (79 | ) | |||||||||||||
Regular savings accounts | (3 | ) | - | (3 | ) | (4 | ) | (6 | ) | (10 | ) | |||||||||||||
Checking and NOW accounts | 2 | - | 2 | 5 | (9 | ) | (4 | ) | ||||||||||||||||
Money market accounts | - | (1 | ) | (1 | ) | (1 | ) | (2 | ) | (3 | ) | |||||||||||||
Total deposit expense | (41 | ) | (17 | ) | (58 | ) | (79 | ) | (17 | ) | (96 | ) | ||||||||||||
FHLBB advances | 26 | 7 | 33 | 132 | (24 | ) | 108 | |||||||||||||||||
Other borrowings | - | - | - | - | - | - | ||||||||||||||||||
Total interest expense | (15 | ) | (10 | ) | (25 | ) | 53 | (41 | ) | 12 | ||||||||||||||
Increase (decrease) in net interest income | $ | 61 | $ | (226 | ) | $ | (165 | ) | $ | (60 | ) | $ | (644 | ) | $ | (704 | ) |
Net Interest Income.Net interest income for the quarter ended September 30, 2015 was $4.07 million, a decrease of $165,000, or 3.9%, compared to $4.2 million for the quarter ended September 30, 2014. Interest income on earning assets for the quarter ended September 30, 2015 decreased by $190,000, or 3.8%, compared to the comparable prior year period. This decrease in interest income was primarily the result of a $313,000, or 42.6%, decrease in interest income on investment securities partially offset by an increase of $104,000, or 2.4%, in interest income on loans. These decreases were principally due to a 13 basis point decline in the weighted average yield for interest earning assets to 4.03% for the 2015 quarter compared to 4.16% for the 2014 quarter. The nine basis point decrease in average loan yields in the 2015 quarter compared to the 2014 quarter was generally due to a decrease in market interest rates and the impact of increased lending competition on loan pricing. The 80 basis point decrease in average quarterly investment yields year-over-year resulted from the sale and reinvestment into securities and overnight funds at lower yields due to a decline in market interest rates over these periods. The average balance of investment securities for the 2015 quarter decreased $21.4 million and the average balance of overnight funds increased $1.8 million compared to the 2014 quarter. Management took advantage of market opportunities and sold approximately $11.6 million of higher yielding, longer duration investment securities during the 2015 quarter.
Interest expense for the quarter ended September 30, 2015 decreased by $25,000, or 3.2%, compared to the same period in 2014. This variance was principally attributable to a funding mix shift from deposits to FHLB borrowings whose cost impact from the increased average cost of FHLB borrowings (of four basis points) was offset by a decrease in the average balance of deposits. Quarter over quarter, the $9.3 decrease in the average balance of deposits resulted from a $11.8 million decrease in time deposits and a $4.8 million decrease in savings accounts partially offset by a $7.3 million increase in transaction accounts as depositors sought either alternative higher yielding investments and/or more liquid deposit accounts during this persistent low rate environment. The cost impact of these changes allowed the Bank to lower its average cost of deposits to 0.57% for the 2015 quarter from 0.62% for the 2014 quarter.
Net interest income for the 2015 quarter was $165,000 lower than the 2014 quarter, resulting in a decrease of the Company’s net interest spread and net interest margin by 11 basis points (from 3.51% to 3.40%) and by 11 basis points (from 3.45% to 3.34%), respectively.
41
Interest income for the nine months ended September 30, 2015 decreased $692,000, or 4.6% due primarily to a decrease in rate. This decrease in interest income was primarily the result of a $624,000, or 28.3%, decrease in interest income on investment securities and a $91,000, or 0.71%, decrease in interest income on loans. These decreases were principally due to a 19 basis point decline in the weighted average yield for interest earning assets to 4.00% for the 2015 period compared to 4.19% for the 2014 period. The 11 basis point decrease in average loan yields in the 2015 period compared to the 2014 period was generally due to a decrease in market interest rates and the impact of increased lending competition on loan pricing. The 62 basis point decrease in average investment yields year-over-year resulted from the sale and reinvestment into securities and overnight funds at lower yields due to a decline in market interest rates over these periods. The average balance of investment securities for the 2015 period decreased $9.8 million and the average balance of overnight funds increased $3.4 million compared to the 2014 period. In addition to its loan growth, the Company purchased $16.8 million in investment securities in the first nine months of 2015 to grow its interest income and to partially reinvest the $42.9 million in cash flows from sales, paydowns, and calls of investment securities during 2015. Management took advantage of market opportunities to sell some higher yielding, longer duration investment securities during the first nine months of 2015.
Interest expense for the nine months ended September 30, 2015 increased $12,000, or 0.51%, compared to the 2014 comparable period. The factors influencing this category year-over-year in terms of rate/volume variances for the three month periods discussed above had a similar impact for the nine month period comparisons; however, the magnitude of impact of these factors was due to their relative timing. During the nine months ended September 30, 2015, average interest bearing liabilities decreased $1.97 million, or 0.45%, compared to the same period in 2014, reflecting customer movement out of time deposits and into low costing transaction accounts and other market alternatives during this period of declining market interest rates. Management took advantage of this rate scenario to increase the Bank’s FHLB advances through a mix of intermediate term borrowings at long run favorable pricing. These changes in FHLB advances (along with the impact of maturing FHLB advances at higher rates) caused the weighted cost of FHLB advances to decrease by 5 basis points to 1.45% for the nine months ended September 30, 2015 as compared to 1.50% for the same period in 2014. With the two basis point reduction in the average cost of interest-bearing deposits year-over-year, the cost impact of these funding changes only increased the Company’s cost of funds by one basis point (from 0.71% for the 2014 nine month period to 0.72% for the 2015 comparable period).
Net interest income for the for the first nine months of 2015 was $704,000 lower than the 2014 comparable period, resulting in a decrease of the Company’s net interest spread and net interest margin by 20 basis points (from 3.48% to 3.28%) and by 19 basis points (from 3.54% to 3.35%), respectively.
Provision for Loan Losses.For the three months ended September 30, 2015, the Company recorded no provision for loan losses compared to a credit provision for loan losses of $50,000 for the same period in 2014. Net recoveries were $33,000 and $12,000, respectively, during the three and nine month periods ended September 30, 2015. For the nine months ended September 30, 2015, the Company recorded a $1.4 million credit provision for loan losses compared to a $789,000 credit provision for the same period in 2014. There was no provision for loan losses during the 2015 quarter because there were no developments within the loan portfolio and its asset quality risk profile which, when aggregated, required a change in the allowance for loan losses. The credit provision for the 2015 period was attributable to (i) management’s judgment that the inherent credit risk exposure in the loan portfolio had been significantly reduced and the significant improvement in the Company’s asset quality metrics due to increased loan workout efforts and prior period sales of adversely classified assets; and (ii) a $2.1 million decrease in net charge-offs in the nine month period ended September 30, 2015, compared to the same period in 2014. The allowance for loan losses as a percentage of total loans decreased to 1.20% at September 30, 2015 from 1.63% at December 31, 2014 as the Company’s rolling two year historical loss experience utilized in the periodic measurement of the ALLL continued to decrease with the stability of improved asset quality.
Noninterest Income.The following table summarizes the components of noninterest income for the three and nine months ended September 30, 2015 and 2014:
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Service charge income | $ | 186 | $ | 186 | $ | 512 | $ | 535 | ||||||||
Fees for other services | 68 | 75 | 198 | 232 | ||||||||||||
Mortgage banking income | 215 | 506 | 664 | 831 | ||||||||||||
Income from bank owned life insurance | 65 | 66 | 197 | 195 | ||||||||||||
Net gain on sale of investments | 545 | 1,034 | 1,373 | 1,227 | ||||||||||||
Income from investment advisory services, net | 49 | 79 | 206 | 246 | ||||||||||||
Other income | 30 | 33 | 93 | 97 | ||||||||||||
Total noninterest income | $ | 1,158 | $ | 1,979 | $ | 3,243 | $ | 3,363 |
42
Noninterest income decreased $821,000, or 41.5%, for the quarter ended September 30, 2015 compared to the same period in 2014. The largest quarter-over-quarter changes were in gains on sale of investments which decreased by $489,000, or 47.3%, and in mortgage banking income which decreased by $291,000, or 57.5%.
Noninterest income was $3.2 million for the nine months ended September 30, 2015 and $3.4 million for the same period in 2014, a decrease of $120,000, or 3.6%. As stated above, management took advantage of market opportunities to sell some higher yielding, longer duration investment securities during the nine months in 2015 which resulted in the Company recognizing an aggregate of $1.4 million in year-to-date 2015 gains on sales of investment securities. The increased volume of investment sales activity during 2015 compared with the activity during the 2014 period resulted in the $146,000 year-over-year increase in gains on sales of investment securities. The timing of these market opportunities during these periods influenced the quarterly changes in this category.
Mortgage banking income decreased $291,000, or 57.5%, and $167,000, or 20.1%, for the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014, primarily due to a decrease in the gain on sales of mortgage loans based on a lower volumes of origination and sales of residential mortgage loans during the 2015 periods.
During 2015, service charge income was affected by a lower volume of overdraft transactions and an increase in service charges on checking accounts compared with the 2014 periods. The lower overdraft volume was attributable to the Bank more aggressively monitoring and controlling such activity. Service charges on checking accounts rebounded in the second and third quarters of 2015 from their decrease in the first quarter of 2015 based on a transition in the product offerings during the first quarter of 2015.
The decrease in investment advisory services of $30,000 for the three months ended September 30, 2015 compared to the same quarter in 2014 was primarily related to decreased transaction volume. For the nine months ended September 30, 2015, this category decreased $40,000, or 16.3%, compared to the same period in 2014 based on lower transaction volume and a transaction mix with lower than average commissions.
Noninterest Expense. The following table summarizes the components of noninterest expense for the three and nine months ended September 30, 2015 and 2014:
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(In thousands) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Compensation, taxes and benefits | $ | 2,510 | $ | 2,879 | $ | 7,574 | $ | 8,868 | ||||||||
Occupancy | 522 | 568 | 1,624 | 1,692 | ||||||||||||
Computer processing | 381 | 343 | 1,066 | 1,039 | ||||||||||||
Professional fees | 314 | 421 | 1,116 | 1,263 | ||||||||||||
FDIC insurance premiums | 102 | 88 | 389 | 619 | ||||||||||||
Insurance | 85 | 175 | 403 | 437 | ||||||||||||
Advertising | 92 | 101 | 313 | 314 | ||||||||||||
Expenses (recoveries) on foreclosed real estate, net | (57 | ) | 63 | 40 | 441 | |||||||||||
Writedowns on foreclosed real estate | - | - | - | 38 | ||||||||||||
Directors' compensation | 51 | 54 | 224 | 226 | ||||||||||||
Supplies | 33 | 68 | 146 | 197 | ||||||||||||
Merger related expenses | 335 | - | 947 | - | ||||||||||||
Expenses related to sale of loans | - | 51 | - | 247 | ||||||||||||
Other expenses | 341 | 396 | 928 | 1,120 | ||||||||||||
Total | $ | 4,709 | $ | 5,207 | $ | 14,770 | $ | 16,501 |
Noninterest expense decreased $498,000, or 9.6%, for the three months ended September 30, 2015 compared to the same period in 2014. Merger related expenses incurred in the third quarter of 2015 of $335,000 relate to the proposed merger with Liberty Bank and consist of legal and investment banking services. Excluding these merger related expenses, the year-over-year quarterly variance of $833,000, or 16.0%, was primarily due to decreases in: compensation, taxes and benefits of $369,000, or 12.8%, professional fees of $107,000, or 25.4%, and expenses on foreclosed real estate of $120,000, or 190.5%, insurance of $90,000, or 51.4%, and expenses related to the 2014 third quarter sale of loans amounting to $51,000 over the same period in 2014. These decreases were partially offset by increases in: FDIC Insurance expense of $14,000, or 15.9%, and computer processing expenses of 38,000, or 11.1%. The decrease in compensation, taxes and benefits was primarily due to the impact of 17 fewer full-time equivalent personnel in the third quarter of 2015 compared to the third quarter of 2014 level, most of which was the result of the 2014 mid-year reduction in workforce in the residential lending and mortgage servicing areas. Furthermore, there were also decreases in benefit expenses from the impact of retirement plan consolidation into the KSOP in the fourth quarter of 2014 and a net decrease in other benefit expenses including group insurance. The decrease in professional fees was attributable to less legal fees associated with the reduced volume of loan workouts, lower external audit fees and less costly outsourced loan reviews based on fewer adversely classified loans. This decrease was partially offset by the use of consultants to temporarily staff a crucial compliance function prior to the pending merger as a result of the attrition of key personnel. The $120,000 decrease in expenses on foreclosed real estate was primarily attributable to $103,000 in gains on sales of foreclosed properties and fewer foreclosed properties in the 2015 quarter with less attendant costs of maintaining and selling foreclosed properties during 2015. The decrease in insurance expense for the September 2015 quarter was attributable to the decreased premium for the 2015 renewal of the Company’s directors’ and officers’ liability insurance.
43
For the nine months ended September 30, 2015, noninterest expenses decreased $1.7 million, or 10.5%, compared to the same period in 2014. Excluding the $947,000 in merger related expenses mentioned above, the year-over-year variance of $2.68 million, or 16.2%, was primarily due to decreases in: compensation, taxes and benefits of $1.3 million, or 14.6%, expenses on foreclosed real estate of $401,000, or 90.9%, FDIC insurance premiums of $230,000, or 37.2%, expenses related to 2014 sales of loans amounting to $247,000, professional fees of $147,000, or 11.6%, and other expenses of $192,000, or 17.1%, over the same period in 2014. These decreases were partially offset by an increase in computer processing expenses of $27,000 or 2.6%, over the same period in 2014. The reasons for the decreases in the compensation expenses, professional fees and expenses on foreclosed real estate for the nine month period were analogous to that explained above for the three month periods. The decrease in FDIC premiums was attributable to a lower FDIC assessment rate in 2015 resulting from the improvement in the Bank’s supervisory ratings based on its improved risk profile. The decrease in other expenses was attributable to an increased focus on expense control from mid-2014 through the third quarter of 2015.
Income Tax Expense (Benefit).The Company reported no tax provision for its pre-tax operating income for the three and nine months ended September 30, 2015 and September 30, 2014. At September 30, 2015 and at September 30, 2014, there was a 100% valuation allowance on the deferred tax asset. The Company records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more-likely-than not that some or all of the deferred tax assets will not be realized.
Management has concluded that it was more likely-than-not that the Company would not be able to realize its deferred tax assets and accordingly has established a 100% valuation allowance equal to the net deferred tax asset balance at September 30, 2015. If, in the future, the Company generates taxable income on a sustained basis sufficient to support the deferred tax assets, management’s conclusion regarding the need for a deferred tax valuation allowance could change, resulting in the reversal of all or a portion of the deferred tax asset valuation at that time.
Management regularly analyzes the Company’s tax positions and at September 30, 2015, does not believe that the Company has taken any tax positions where future deductibility is not certain. As of September 30, 2015, the Company is subject to unexpired statutes of limitation for examination of its tax returns for U.S. federal income taxes for 2013 and 2014 and Connecticut income taxes for the years 2012-2014.
Comparison of Financial Condition at September 30, 2015 and December 31, 2014
Overview
Total assets were $493.7 million as of September 30, 2015, a decrease of $1.4 million or 0.3%, from $495.1 million as of December 31, 2014. Loans receivable, gross of $385.7 million increased by $16.4 million, or 4.4%, and cash and cash equivalents increased by $7.2 million, or 66.2%, partially offset by a decrease in investment securities of $26.7 million, or 29.4%. The loan portfolio increased during the period by type as follows: real estate loans increased by $14.2 million, or 4.6%; and consumer loans increased by $3.3 million, or 9.1%. These increases were offset by a decrease in commercial business loans of $905,000, or 3.5%. Of the increases in real estate loans, multifamily and commercial real estate loans increased $15.1 million, or 12.3%, while one-to-four family residential mortgage loans decreased $1.1 million, or 0.6%.
Total liabilities were $432.0 million at September 30, 2015 compared to $434.2 million at December 31, 2014. Deposits decreased $3.7 million, or 1.0%, to $373.2 million at September 30, 2015 from $373.5 million at December 31, 2014. Between December 31, 2014 and September 30, 2015, core deposits (defined as all deposits other than certificates of deposit) of $231.9 million increased $3.8 million, while certificates of deposit decreased $7.4 million. Advances from the FHLB increased by $4.0 million, from $53.8 million at December 31, 2014 to $57.7 million at September 30, 2015, primarily due to fund loan growth.
44
Total stockholders’ equity was $61.8 million at September 30, 2015 compared to $60.9 million at December 31, 2014. The increase in stockholders’ equity was due to net income of $1.9 million for the nine month period ended September 30, 2015 and a decrease in unrealized gain on available for sale investment securities of $1.1 million.
Lending Activities
As indicated in the table below, total gross loans receivable increased $16.4 million, or 4.4%, to $385.7 million at September 30, 2015 from $369.3 million at December 31, 2014.
September 30, | December 31, | |||||||
(In thousands) | 2015 | 2014 | ||||||
Real estate loans: | ||||||||
One-to-four family | $ | 179,603 | $ | 180,739 | ||||
Multi-family and commercial real estate | 137,581 | 122,526 | ||||||
Construction and land development | 3,427 | 3,415 | ||||||
Total real estate loans | 320,611 | 306,680 | ||||||
Commercial business loans | 24,896 | 25,801 | ||||||
Consumer loans: | ||||||||
Home equity | 33,246 | 28,700 | ||||||
Other consumer | 6,942 | 8,144 | ||||||
Total consumer loans | 40,188 | 36,844 | ||||||
Total loans | 385,695 | 369,325 | ||||||
Less: | ||||||||
Allowance for loan losses | 4,615 | 6,023 | ||||||
Deferred loan origination fees, net | 72 | 43 | ||||||
Loans receivable, net | $ | 381,008 | $ | 363,259 |
Nonperforming Assets
The following table provides information with respect to the Company’s nonperforming assets at the dates indicated:
September 30, | December 31, | |||||||
2015 | 2014 | |||||||
Nonperforming Assets | (Dollars in thousands) | |||||||
Nonaccrual loans: | ||||||||
One-to-four family | $ | 1,094 | $ | 1,414 | ||||
Multi-family and commercial real estate | 350 | 375 | ||||||
Construction and land development | 596 | 726 | ||||||
Commercial business loans | 666 | 804 | ||||||
Consumer loans | 247 | 187 | ||||||
Total | 2,953 | 3,506 | ||||||
Troubled debt restructurings - non-accrual | 1,448 | 1,600 | ||||||
Subtotal nonperforming loans | 4,401 | 5,106 | ||||||
Foreclosed real estate | 423 | 335 | ||||||
Total nonperforming assets | $ | 4,824 | $ | 5,441 | ||||
Total nonperforming loans to total loans | 1.14 | % | 1.38 | % | ||||
Total nonperforming loans to total assets | 0.89 | % | 1.03 | % | ||||
Total nonperforming assets to total assets | 0.98 | % | 1.10 | % |
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The following table shows the aggregate amounts of the Company’s loans classified by credit risk ratings at the dates indicated:
September 30, 2015 | December 31, 2014 | |||||||
(In thousands) | ||||||||
Substandard accruing | $ | 1,477 | $ | 2,346 | ||||
Substandard nonaccruing | 4,401 | 5,105 | ||||||
Total substandard loans | 5,878 | 7,451 | ||||||
Doubtful | - | - | ||||||
Total adversely classified loans | 5,878 | 7,451 | ||||||
Special mention loans | 7,078 | 6,538 | ||||||
Total criticized loans | $ | 12,956 | $ | 13,989 |
Nonperforming loans decreasesd $705,000, or 12.9%, between December 31, 2014 and September 30, 2015. In addtion, while the Bank’s adversely classified loans decreased by $1.6 million, or 21.1%. The levels and trends of adversely classified loans, warrant and receive management oversight and focus in management’s estimates related to the allowance for loan losses. In certain cases, where appropriate, specific allowances have been established to account for the increased credit risk of these assets.
Allowance for Loan Losses and Asset Quality.The allowance for loan losses is a valuation allowance for the probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When an increase to the allowance is needed, a provision for loan losses is charged against earnings. The recommendations for increases or decreases to the allowance are presented by management to the board of directors on a quarterly basis.
On a quarterly basis, or more often if warranted, management analyzes the loan portfolio. For individually evaluated loans that are considered impaired, an allowance is established as required, based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or for loans that are considered collateral dependent, the fair value of the collateral. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due under the contractual term of the loan agreement. For a further discussion of management’s methodology for evaluating the adequacy of the ALLL to provide for known and inherent risks in the loan portfolio, see Note 3 in the financial statements.
Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examination may require us to make additional provisions for loan losses based on judgments different from ours. The Company also periodically engages an independent consultant to review our credit risk grading process and the risk grades on selected portfolio segments as well as the methodology, analysis and adequacy of the allowance for loan and lease losses.
Although we believe that we use the best information available to determine the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because further events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above and in Note 3 of the financial statements. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
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The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the nine months ended September 30, 2015 and 2014:
As of and for the Nine Months Ended September 30, 2015 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 1,633 | $ | 3,097 | $ | 414 | $ | 592 | $ | 287 | $ | 6,023 | ||||||||||||
Provision for loan losses | 398 | (1,221 | ) | (404 | ) | (456 | ) | 263 | (1,420 | ) | ||||||||||||||
Charge-offs | (104 | ) | (14 | ) | - | (24 | ) | (159 | ) | (301 | ) | |||||||||||||
Recoveries | 1 | 43 | 168 | 75 | 26 | 313 | ||||||||||||||||||
Balance at September 30, 2015 | $ | 1,928 | $ | 1,905 | $ | 178 | $ | 187 | $ | 417 | $ | 4,615 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 26 | $ | - | $ | - | $ | - | $ | 4 | $ | 30 | ||||||||||||
Collectively evaluated for impairment | 1,902 | 1,905 | 178 | 187 | 413 | 4,585 | ||||||||||||||||||
Total allowance | $ | 1,928 | $ | 1,905 | $ | 178 | $ | 187 | $ | 417 | $ | 4,615 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 3,929 | $ | 740 | $ | 596 | $ | 860 | $ | 418 | $ | 6,543 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 175,674 | 136,841 | 2,831 | 24,036 | 39,770 | 379,152 | ||||||||||||||||||
Total loans | $ | 179,603 | $ | 137,581 | $ | 3,427 | $ | 24,896 | $ | 40,188 | $ | 385,695 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, 2015 | Investor One- to-Four Family and Multi-Family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi- Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 509 | $ | 597 | $ | 352 | $ | 548 | $ | 1,091 | $ | 3,097 | ||||||||||||
Provision for loan losses | (126 | ) | (247 | ) | (103 | ) | (208 | ) | (537 | ) | (1,221 | ) | ||||||||||||
Charge-offs | - | - | (14 | ) | - | - | (14 | ) | ||||||||||||||||
Recoveries | - | - | 43 | - | - | 43 | ||||||||||||||||||
Balance at September 30, 2015 | $ | 383 | $ | 350 | $ | 278 | $ | 340 | $ | 554 | $ | 1,905 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | 383 | 350 | 278 | 340 | 554 | 1,905 | ||||||||||||||||||
Total allowance | $ | 383 | $ | 350 | $ | 278 | $ | 340 | $ | 554 | $ | 1,905 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 389 | $ | 18 | $ | 326 | $ | - | $ | 7 | $ | 740 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 31,543 | 24,722 | 28,106 | 16,607 | 35,863 | 136,841 | ||||||||||||||||||
Total loans | $ | 31,932 | $ | 24,740 | $ | 28,432 | $ | 16,607 | $ | 35,870 | $ | 137,581 |
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As of and for theNine Months Ended September30, 2014 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 1,849 | $ | 5,097 | $ | 1,118 | $ | 1,443 | $ | 384 | $ | 9,891 | ||||||||||||
Provision for loan losses | 326 | (205 | ) | (23 | ) | (757 | ) | (130 | ) | (789 | ) | |||||||||||||
Charge-offs | (541 | ) | (1,306 | ) | (442 | ) | (133 | ) | (13 | ) | (2,435 | ) | ||||||||||||
Recoveries | 10 | 25 | 44 | 139 | 86 | 304 | ||||||||||||||||||
Balance at September 30, 2014 | $ | 1,644 | $ | 3,611 | $ | 697 | $ | 692 | $ | 327 | $ | 6,971 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 26 | $ | - | $ | - | $ | 97 | $ | 8 | $ | 131 | ||||||||||||
Collectively evaluated for impairment | 1,618 | 3,611 | 697 | 595 | 319 | 6,840 | ||||||||||||||||||
Total allowance | $ | 1,644 | $ | 3,611 | $ | 697 | $ | 692 | $ | 327 | $ | 6,971 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 4,415 | $ | 657 | $ | 898 | $ | 1,233 | $ | 514 | $ | 7,717 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 174,662 | 117,778 | 4,144 | 23,592 | 36,362 | 356,538 | ||||||||||||||||||
Total loans | $ | 179,077 | $ | 118,435 | $ | 5,042 | $ | 24,825 | $ | 36,876 | $ | 364,255 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, 2014 | Investor One- to-Four Family and Multi-Family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi- Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 515 | $ | 1,034 | $ | 563 | $ | 856 | $ | 2,129 | $ | 5,097 | ||||||||||||
Provision for loan losses | 136 | (60 | ) | (187 | ) | 185 | (279 | ) | (205 | ) | ||||||||||||||
Charge-offs | (166 | ) | (234 | ) | - | (491 | ) | (415 | ) | (1,306 | ) | |||||||||||||
Recoveries | 1 | 5 | - | - | 19 | 25 | ||||||||||||||||||
Segment ending balance as of September 30, 2014 | $ | 486 | $ | 745 | $ | 376 | $ | 550 | $ | 1,454 | $ | 3,611 | ||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | 486 | 745 | 376 | 550 | 1,454 | 3,611 | ||||||||||||||||||
Total allowance | $ | 486 | $ | 745 | $ | 376 | $ | 550 | $ | 1,454 | $ | 3,611 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 389 | $ | 25 | $ | 206 | $ | - | $ | 37 | $ | 657 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 21,499 | 27,695 | 22,408 | 17,527 | 28,649 | 117,778 | ||||||||||||||||||
Total loans | $ | 21,888 | $ | 27,720 | $ | 22,614 | $ | 17,527 | $ | 28,686 | $ | 118,435 |
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As of December 31, 2014 | One-to-Four Family | Multi-Family and Commercial Real Estate | Construction and Land Development | Commercial Business Loans | Consumer Loans | Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 59 | $ | - | $ | - | $ | 4 | $ | 9 | $ | 72 | ||||||||||||
Collectively evaluated for impairment | 1,574 | 3,097 | 414 | 588 | 278 | 5,951 | ||||||||||||||||||
Total allowance | $ | 1,633 | $ | 3,097 | $ | 414 | $ | 592 | $ | 287 | $ | 6,023 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 4,223 | $ | 969 | $ | 726 | $ | 978 | $ | 492 | $ | 7,388 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 176,516 | 121,557 | 2,689 | 24,823 | 36,352 | 361,937 | ||||||||||||||||||
Total loans | $ | 180,739 | $ | 122,526 | $ | 3,415 | $ | 25,801 | $ | 36,844 | $ | 369,325 |
Multi-Family and Commercial Real Estate | ||||||||||||||||||||||||
As of December 31, 2014 | Investor One- to-Four Family and Multi-Family | Industrial and Warehouse Properties | Office Buildings | Retail Properties | Special Use Properties | Total Multi- Family and Commercial Real Estate | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance related to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | 509 | 597 | 352 | 548 | 1,091 | 3,097 | ||||||||||||||||||
Total allowance | $ | 509 | $ | 597 | $ | 352 | $ | 548 | $ | 1,091 | $ | 3,097 | ||||||||||||
Ending loan balance individually evaluated for impairment | $ | 389 | $ | 23 | $ | 546 | $ | - | $ | 11 | $ | 969 | ||||||||||||
Ending loan balance collectively evaluated for impairment | 25,072 | 24,852 | 23,922 | 17,346 | 30,365 | 121,557 | ||||||||||||||||||
Total loans | $ | 25,461 | $ | 24,875 | $ | 24,468 | $ | 17,346 | $ | 30,376 | $ | 122,526 |
Liquidity and Capital Resources
Liquidity is the ability to meet current and future short-term financial obligations. The Bank’s primary sources of funds consist of retail deposit inflows, loan repayments, maturities and sales of investment securities and advances from the Federal Home Loan Bank of Boston. The deposit base is comprised of certificate accounts, regular savings accounts, checking and NOW accounts, money market savings accounts and health savings accounts. The Bank borrows funds from the Federal Home Loan Bank of Boston during periods of low liquidity, to match fund increases in our loan portfolio and to decrease our exposure to changes in interest rates.
Each quarter the Bank projects liquidity availability and demands on this liquidity for the next ninety days and on a monthly basis for a rolling 12 month period. The Bank regularly adjusts its investments in liquid assets based upon its assessment of (1) expected loan demand, (2) expected retail deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in federal funds and short- and intermediate-term investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, retail deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Bank’s most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2015, cash and cash equivalents totaled $18.2 million, including federal funds sold of $276,000. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $53.8 million at September 30, 2015. At September 30, 2015, the Bank had the ability to borrow a total of $81.8 million from the FHLB based on the collateral pledged, of which $57.7 million in borrowings was outstanding. In addition, the Bank had the ability to borrow $1.8 million from the Federal Reserve Bank Discount Window which was not utilized at September 30, 2015.
49
Certificates of deposit due within one year of September 30, 2015 totaled $55.9 million, or 15.1% of total deposits. If these deposits do not remain with the Bank, the Bank will need to seek other sources of funds, including other certificates of deposit, FHLB advances or other borrowings, and its available lines of credit. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than are currently paid on these maturing certificates of deposit. Based on past experience, however, the Bank believes that a significant portion of our certificates of deposit will remain with us. The Bank has the ability to attract and retain deposits by adjusting the interest rates offered.
Historically, the Bank has remained highly liquid. The Bank is not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material decrease in liquidity. The Bank expects that all of our liquidity needs, including the contractual commitments stated above and increases in loan demand, can be met by our currently available liquid assets and cash flows. In the event loan demand was to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston or the Federal Reserve Bank Discount Window. The Bank expects that our currently available liquid assets and our ability to borrow from both the Federal Home Loan Bank of Boston and the Federal Reserve Bank would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Company’s primary source of income is dividends received from the Bank.
As a source of strength to its subsidiary bank, the Company has liquid assets which the Company could contribute to the Bank if needed to enhance the Bank’s capital levels. The Company’s liquid assets totaled approximately $3.1 million at September 30, 2015. If the Company had contributed those assets to the Bank as of September 30, 2015, the Bank would have had a Tier 1 leverage ratio of approximately 12.05%.
Effective January 1, 2015, Basel III implementation date for community banks, the applicable capital regulations have been revised to:
· | Establish a new common equity Tier 1 minimum capital requirement (at 4.5% of risk-weighted assets); |
· | Increase the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets); |
· | Change what constitutes regulatory capital including the phasing out of certain components over a transition period; |
· | Amends the risk-weights of certain assets to better reflect credit risk and other risk exposures; and |
· | Phase in a “capital conservation buffer” requirement beginning January 1, 2016 at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019. If a depository institution does not maintain the applicable “capital conservation buffer” in addition to its minimum risk-based capital requirements, the Basel III capital regulation may limit capital distributions and certain discretionary bonus payments. |
For the Bank, the new common equity Tier 1 capital ratio is the same as its Tier 1 risk-based capital ratio because the Bank’s Tier 1 capital consists only of common equity. Furthermore, as of March 31, 2015, the Bank elected to exclude its accumulated other comprehensive income (which, for the Bank, primarily consists of unrealized gains and losses on available for sale investment securities) from its Tier 1 capital. This is consistent with its previous treatment of this item.
50
The following tables are summaries of the Company’s consolidated capital amounts and ratios and the Bank’s actual capital amounts and ratios as computed under the standards established by the Federal Deposit Insurance Act at September 30, 2015 and December 31, 2014.
At September 30, 2015 | Well Capitalized Requirements | Minimum Requirements (3) | Actual | |||||||||||||||||||||
(Dollars in thousands) | $ | % | $ | % | $ | % | ||||||||||||||||||
The Company Consolidated | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | N/A | N/A | N/A | N/A | $ | 61,587 | 12.29 | % | ||||||||||||||||
Tier 1 Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 61,587 | 17.95 | % | |||||||||||||||||
Total Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 65,271 | 19.20 | % | |||||||||||||||||
The Bank | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | $ | 25,047 | 5.00 | % | $ | 22,542 | 4.50 | % | $ | 57,297 | 11.44 | % | ||||||||||||
Common Equity Tier 1 (CET1) (2) (4) | 22,298 | 6.50 | % | 15,437 | 4.50 | % | 27,297 | 16.70 | % | |||||||||||||||
Tier 1 Risk-Based Capital (2) | 27,443 | 8.00 | % | 20,582 | 6.00 | % | 27,297 | 16.70 | % | |||||||||||||||
Total Risk-Based Capital (2) | 34,304 | 10.00 | % | 27,443 | 8.00 | % | 61,589 | 17.95 | % |
(1) Tier 1 capital to total average assets.
(2) Tier 1 or total risk-based capital to risk-weighted assets.
(3) Formal Agreement and related ICMRs terminated on May 4, 2015.
(4) New capital requirement under Basel III effective January 1, 2015.
At December 31, 2014 | Adequately Capitalized Requirements | Individual Minimum Capital Requirements (3) | Actual | |||||||||||||||||||||
(Dollars in thousands) | $ | % | $ | % | $ | % | ||||||||||||||||||
The Company Consolidated | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | N/A | N/A | N/A | N/A | $ | 59,611 | 12.09 | % | ||||||||||||||||
Tier 1 Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 59,611 | 18.94 | % | |||||||||||||||||
Total Risk-Based Capital (2) | N/A | N/A | N/A | N/A | 63,571 | 20.20 | % | |||||||||||||||||
The Bank | ||||||||||||||||||||||||
Tier 1 Leverage Capital (1) | $ | 19,796 | 4.00 | % | $ | 44,541 | 9.00 | % | $ | 55,090 | 11.13 | % | ||||||||||||
Tier 1 Risk-Based Capital (2) | 12,658 | 4.00 | % | N/A | N/A | 55,090 | 17.41 | % | ||||||||||||||||
Total Risk-Based Capital (2) | 25,317 | 8.00 | % | 41,139 | 13.00 | % | 59,071 | 18.67 | % |
(1) Tier 1 capital to total assets.
(2) Tier 1 or total risk-based capital to risk-weighted assets.
(3) Imposed on June 4, 2013 and teminated on May 4, 2015.
As of September 30, 2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risks. Such transactions are used primarily to manage customers’ requests for funding, and take the form of loan commitments, unused lines of credit, amounts due on construction loans and on commercial loans, commercial letters of credit and commitments to sell loans.
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The following table summarizes the commitments and contingent liabilities as of the dates indicated:
September 30, | December 31, | |||||||
(In thousands) | 2015 | 2014 | ||||||
Commitments to extend credit: | ||||||||
Commercial real estate loan committments | $ | 12,573 | $ | 30,254 | ||||
Unused home equity lines of credit | 21,081 | 19,084 | ||||||
Commercial and industrial loan commitments | 12,080 | 12,587 | ||||||
Amounts due on other commitments | 9,805 | 7,257 | ||||||
Commercial letters of credit | 523 | 588 |
For the nine months ended September 30, 2015, the Company did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our results of operations are highly dependent upon our ability to manage interest rate risk. We consider interest rate risk to be a significant market risk that could have a material effect on our financial condition and results of operations. Interest rate risk is measured and assessed on a quarterly basis. In our opinion, there has not been a material change in our interest rate risk exposure since the information disclosed in our annual report on Form 10-K for the year ended December 31, 2014.
We do not maintain a trading account for any class of financial instrument nor do we engage in hedging activities or purchase high-risk derivative instruments. Moreover, we have no material foreign currency exchange rate risk or commodity price risk.
Item 4. Controls and Procedures.
(a) | Disclosure Controls and Procedures |
The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2015 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) | Changes in Internal Control Over Financial Reporting |
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13(a)-15(f) of the Act) that occurred during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Matters Related to the Liberty Merger
Four putative class action lawsuits have been filed in Maryland, Morris Goldstein v. Naugatuck Valley Financial Corporationet al., in the Circuit Court for Baltimore City, Case No. 24C15003203,Lenard Cohen v. Naugatuck Valley Financial Corporationet al., in the Circuit Court for Baltimore City, Case No. 24C15003391,Angelo J. Falco v. Naugatuck Valley Financial Corporationet al., in the Circuit Court for Baltimore City, Case No. 24C15003392, andDallas Faulkner v. Naugatuck Valley Financial Corporation et al., in the Circuit Court for Baltimore City, Case No. 24C15003602. The lawsuits name as defendants Naugatuck Valley, the members of our board of directors and Liberty. A demand for jury trial has been made in each case. The court has consolidated all four of these lawsuits into one case,In re: Naugatuck Valley Financial Corporation Shareholder Litigation, Case No. 24C15003203.
On August 28, 2015, the plaintiffs filed a consolidated class action complaint alleging a breach of fiduciary duty due to inadequate merger consideration, the process leading to the proposed transaction and potential conflicts of interest. The lawsuits also allege that Liberty aided and abetted the breach of fiduciary duty. The consolidated class action complaint also alleges that the Company’s directors breached their fiduciary duties by failing to disclose allegedly material information related to the proposed merger in the Schedule 14A Proxy Statement, filed with the U.S. Securities and Exchange Commission. The relief sought includes, among other things, class certification, an injunction against the merger until all alleged breaches have been cured, damages if the merger has been completed prior to the entry of final judgment, costs and attorney’s fees. The Company believes the factual allegations in the complaint are without merit and is defending vigorously against these allegations.
Naugatuck Valley Financial and Naugatuck Valley Savings are also subject to claims and litigation that arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing Naugatuck Valley Financial and Naugatuck Valley Savings in connection with such claims and litigation, it is the opinion of management that the disposition or ultimate determination of such claims and litigation will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Naugatuck Valley Financial.
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and under “Item 1A – Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K and Quartely Report on Form 10-Q are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The proposed merger with Liberty may not be completed or the Merger Agreement may be terminated in accordance with its terms, which could adversely affect our business and results of operation.
The Merger Agreement is subject to a number of conditions that must be fulfilled to complete the merger. Those conditions include, among others, the expiration of applicable waiting periods, accuracy of specified representations and warranties of each party, the performance in all material respects by each party of its obligations under the Merger Agreement, and the absence of any injunctions or other legal restraints. If these conditions are not fulfilled, then the merger may not be completed.
Furthermore, the Merger Agreement contains termination rights which may be exercised by the Company or Liberty in specific circumstances, such as the following: required regulatory approval has been denied by final, non-appealable action of a governmental entity; the parties are unable to complete the Merger by April 30, 2016; the other party has committed a breach of a representation, warranty or covenant which would prevent a closing condition from being satisfied and the breach is not or cannot be cured within 30 days; or the Company’s stockholders failed to approve the Merger. In addition, the Company may terminate the Merger Agreement to enter into an alternative business combination transaction pursuant to a “superior proposal”, as defined by the Merger Agreement. If the Merger Agreement is terminated under certain circumstances, the Company will be required to pay Liberty a termination fee of $3.1 million.
In connection with the proposed merger, we have incurred and will continue to incur expenses, which could prove to be significant. Our business and our operating and financial results may be materially adversely affected by the expenses incurred in connection with the proposed merger. A failed transaction may result in negative publicity and a negative impression of us in the investment community. There can be no assurance that our business, these relationships or our financial condition will not be negatively impacted, as compared to the condition prior to the announcement of the merger, if the merger is not consummated.
We will be subject to business uncertainties while the merger is pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on us and consequently on Liberty. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed and could cause customers and others that deal with us to seek to change existing business relationships with us. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, our business could be negatively impacted.
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Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds. |
(a) | Not applicable. |
(b) | Not applicable. |
(c) | The Company did not repurchase any shares of its common stock during the quarter ended September 30, 2015. |
Item 3. – Defaults Upon Senior Securities. Not applicable | |
Item 4. – Mine Safety Disclosures. Not applicable | |
Item 5. – Other Information. Not applicable | |
Item 6. – Exhibits. |
Exhibits –
2.1 | Agreement and Plan of Merger dated June 3, 2015 by and between Liberty Bank and Naugatuck Valley Financial Corporation (1) | |
3.1 | Articles of Incorporation of Naugatuck Valley Financial Corporation (2) | |
3.2 | Bylaws of Naugatuck Valley Financial Corporation, as amended (3) | |
3.3 | Amendment to Bylaws of Naugatuck Valley Financial Corporation (1) | |
4.1 | Specimen Stock Certificate of Naugatuck Valley Financial Corporation (4) | |
10.1 | Change in Control Agreement by and between Naugatuck Valley Savings and Loan and Mark C. Foley (1) | |
10.2 | Change in Control Agreement by and between Naugatuck Valley Savings and Loan and James Hastings (1) | |
10.3 | Employment Agreement by and between Naugatuck Valley Savings and Loan and William C. Calderara (1) | |
10.4 | Amendment to the Naugatuck Valley Financial Corporation and Naugatuck Valley Savings & Loan Deferred Compensation Plan for Directors (1) | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification | |
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31.2 | Rule 13a-14(a)/15d-14(a) Certification | |
32.0 | Section 1350 Certifications | |
101.0 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholder’s Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements. |
(1) Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on June 4, 2015.
(2) Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended, initially filed on June 11, 2010.
(3) Incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended, initially filed on June 11, 2010.
(4) Incorporated herein by reference to Exhibit 4.0 to the Company’s Registration Statement on Form S-1, as amended, initially filed on June 11, 2010.
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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.
Naugatuck Valley Financial Corporation | |
Date: November 6, 2015 | by: |
/s/William C. Calderara | |
William C. Calderara | |
President and Chief Executive Officer | |
(principal executive officer) | |
Date: November 6, 2015 | by: |
/s/James Hastings | |
James Hastings | |
Executive Vice President and Chief Financial Officer | |
(principal accounting and financial officer) |
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