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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

 

Commission File Number 000-51726

 

Magyar Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 20-4154978
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
   
400 Somerset Street, New Brunswick, New Jersey 08901    
(Address of Principal Executive Office) (Zip Code)

 

(732) 342-7600

(Issuer’s Telephone Number including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for 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 þ      No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ      No o

 

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

 

Large accelerated filer    o Accelerated filer      o
Non-accelerated filer      o Smaller reporting company þ
(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 o      No þ

 

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

   
Class Outstanding at August 1, 2014
Common Stock, $0.01 Par Value 5,815,444

 

 
 

 

MAGYAR BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

      Page Number
       
Item 1. Financial Statements   1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
Item 3. Quantitative and Qualitative Disclosures About Market Risk   36
Item 4. Controls and Procedures   37
       
PART II. OTHER INFORMATION
       
Item 1. Legal Proceedings   38
Item 1a. Risk Factors   38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   38
Item 3. Defaults Upon Senior Securities   38
Item 4. Mine Safety Disclosures   38
Item 5. Other Information   38
Item 6. Exhibits   38
       
Signature Pages   39

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

 

   June 30,   September 30, 
   2014   2013 
   (Unaudited) 
Assets          
Cash  $1,128   $1,129 
Interest earning deposits with banks   7,161    16,663 
Total cash and cash equivalents   8,289    17,792 
           
Investment securities - available for sale, at fair value   12,600    15,774 
Investment securities - held to maturity, at amortized cost (fair value of          
$48,141 and $51,802 at June 30, 2014 and September 30, 2013, respectively)   48,255    52,558 
Federal Home Loan Bank of New York stock, at cost   2,688    1,982 
Loans receivable, net of allowance for loan losses of $2,800 and $3,013          
at June 30, 2014 and September 30, 2013, respectively   410,560    396,800 
Bank owned life insurance   10,580    10,342 
Accrued interest receivable   1,677    1,752 
Premises and equipment, net   18,759    20,880 
Other real estate owned ("OREO")   14,580    14,756 
Other assets   5,053    5,092 
           
Total assets  $533,041   $537,728 
           
Liabilities and Stockholders' Equity          
Liabilities          
Deposits  $435,745   $453,328 
Escrowed funds   1,231    1,018 
Federal Home Loan Bank of New York advances   41,550    27,100 
Securities sold under agreements to repurchase   5,000    5,000 
Accrued interest payable   156    141 
Accounts payable and other liabilities   3,490    5,821 
           
Total liabilities   487,172    492,408 
           
Stockholders' equity          
Preferred stock: $.01 Par Value, 1,000,000 shares authorized; none issued        
Common stock: $.01 Par Value, 8,000,000 shares authorized;          
5,923,742 issued; 5,815,444 and 5,811,394 shares outstanding          
at June 30, 2014 and September 30, 2013, respectively   59    59 
Additional paid-in capital   26,296    26,322 
Treasury stock: 108,298 and 112,348 shares at June 30, 2014          
  and September 30, 2013, respectively, at cost   (1,211)   (1,256)
Unearned Employee Stock Ownership Plan shares   (908)   (1,002)
Retained earnings   22,190    21,835 
Accumulated other comprehensive loss   (557)   (638)
           
Total stockholders' equity   45,869    45,320 
           
Total liabilities and stockholders' equity  $533,041   $537,728 

 

The accompanying notes are an integral part of these statements.

1

 

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(In Thousands, Except Per Share Data)

 

   For the Three Months   For the Nine Months 
   Ended June 30,   Ended June 30, 
   2014   2013   2014   2013 
   (Unaudited) 
Interest and dividend income                    
Loans, including fees  $4,497   $4,540   $13,474   $13,560 
Investment securities                    
Taxable   341    393    1,097    1,153 
Tax-exempt               1 
Federal Home Loan Bank of New York stock   21    25    70    82 
                     
Total interest and dividend income   4,859    4,958    14,641    14,796 
                     
Interest expense                    
Deposits   598    754    1,857    2,346 
Borrowings   255    323    784    1,030 
                     
Total interest expense   853    1,077    2,641    3,376 
Net interest and dividend income   4,006    3,881    12,000    11,420 
                     
Provision for loan losses   342    254    1,082    1,695 
Net interest and dividend income after                    
provision for loan losses   3,664    3,627    10,918    9,725 
                     
Other income                    
Service charges   189    226    576    671 
Income on bank owned life insurance   73    83    238    249 
Other operating income   48    18    95    66 
Gains on sales of loans   25    9    127    355 
Gains on sales of investment securities       57    36    121 
                     
Total other income   335    393    1,072    1,462 
                     
Other expenses                    
Compensation and employee benefits   1,911    1,900    5,785    5,540 
Occupancy expenses   712    708    2,163    2,128 
Professional fees   221    218    721    717 
Data processing expenses   141    144    428    438 
OREO expenses   77    155    437    475 
FDIC deposit insurance premiums   181    173    543    521 
Loan servicing expenses   140    96    393    211 
Insurance expense   58    59    172    174 
Other expenses   293    296    860    917 
Total other expenses   3,734    3,749    11,502    11,121 
Income before income tax expense   265    271    488    66 
Income tax expense (benefit)   77    78    106    (67)
Net income  $188   $193   $382   $133 
                     
Net income per share-basic and diluted  $0.03   $0.03   $0.07   $0.02 

 

The accompanying notes are an integral part of these statements.

2

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(In Thousands)

 

   For the Three Months   For the Nine Months 
   Ended June 30,   Ended June 30, 
   2014   2013   2014   2013 
   (Unaudited) 
                 
Net income  $188   $193   $382   $133 
                     
Other comprehensive income (loss)                    
Net unrealized gain (loss) on                    
securities available for sale   108    (352)   166    (523)
Realized gains on sales of securities                    
 available for sale       (57)   (36)   (121)
Unrealized loss on derivatives       (17)       (54)
Other comprehensive income (loss), before tax   108    (426)   130    (698)
                     
Deferred income tax effect   (41)   159    (49)   259 
Total other comprehensive income (loss)   67    (267)   81    (439)
                     
Total comprehensive income (loss)  $255   $(74)  $463   $(306)

 

The accompanying notes are an integral part of these statements.

 

3

 MAGYAR BANCORP, INC. AND SUBSIDIARY

 Consolidated Statement of Changes in Stockholders' Equity

 For the Nine Months Ended June 30, 2014 and 2013

 (In Thousands, Except for Share Amounts) 

 

                           Accumulated     
   Common Stock   Additional       Unearned       Other     
   Shares   Par   Paid-In   Treasury   ESOP   Retained   Comprehensive     
   Outstanding   Value   Capital   Stock   Shares   Earnings   Loss   Total 
   (Unaudited) 
                                 
Balance, September 30, 2013   5,811,394   $59   $26,322   $(1,256)  $(1,002)  $21,835   $(638)  $45,320 
Net income                       382        382 
Other comprehensive income                           81    81 
Treasury stock used for restricted stock plan   4,050        (18)   45        (27)        
ESOP shares allocated           (21)       94            73 
Stock-based compensation expense           13                    13 
                                         
Balance, June 30, 2014   5,815,444   $59   $26,296   $(1,211)  $(908)  $22,190   $(557)  $45,869 

 

 

                           Accumulated     
   Common Stock   Additional       Unearned       Other     
   Shares   Par   Paid-In   Treasury   ESOP   Retained   Comprehensive     
   Outstanding   Value   Capital   Stock   Shares   Earnings   Loss   Total 
   (Unaudited) 
Balance, September 30, 2012   5,807,344   $59   $26,367   $(1,301)  $(1,116)  $21,600   $(604)  $45,005 
                                         
Net income                       133        133 
Other comprehensive loss                           (439)   (439)
Treasury stock used for restricted stock plan   4,050        (18)   45        (27)        
ESOP shares allocated           (38)       86            48 
Stock-based compensation expense           13                    13 
                                         
Balance, June 30, 2013   5,811,394   $59   $26,324   $(1,256)  $(1,030)  $21,706   $(1,043)  $44,760 

 

The accompanying notes are an integral part of these statements.

4

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In Thousands)

 

   For the Nine Months Ended 
   June 30, 
   2014   2013 
   (Unaudited) 
Operating activities          
Net income  $382   $133 
Adjustment to reconcile net income to net cash provided          
by operating activities          
Depreciation expense   697    693 
Premium amortization on investment securities, net   226    163 
Provision for loan losses   1,082    1,695 
Provision for loss on other real estate owned   167     
Proceeds from the sales of loans   2,890    4,226 
Gains on sale of loans   (127)   (355)
Gains on sales of investment securities   (36)   (121)
Losses on the sales of other real estate owned   11    64 
ESOP compensation expense   73    48 
Stock-based compensation expense   13    13 
Deferred income tax expense   40     
Decrease (increase) in accrued interest receivable   75    (17)
Increase in surrender value bank owned life insurance   (238)   (249)
Decrease (increase) in other assets   (50)   827 
Increase in accrued interest payable   15    1 
(Decrease) increase in accounts payable and other liabilities   (2,331)   185 
Net cash provided by operating activities   2,889    7,306 
           
Investing activities          
Net increase in loans receivable   (13,426)   (15,328)
Purchases of loans receivable   (5,514)    
Purchases of investment securities held to maturity   (4,419)   (23,777)
Purchases of investment securities available for sale   (2,053)   (7,075)
Sales of investment securities held to maturity   3,036     
Sales of investment securities available for sale       4,307 
Principal repayments on investment securities held to maturity   5,572    10,254 
Principal repayments on investment securities available for sale   5,281    2,665 
Purchases of premises and equipment   (95)   (246)
Proceeds from the sale of premises and equipment   1,519     
Investment in other real estate owned   (4)   (264)
Proceeds from the sale of other real estate owned   1,337    2,038 
(Purchase) redemption of Federal Home Loan Bank stock   (706)   168 
Net cash used by investing activities   (9,472)   (27,258)
           
Financing activities          
Net (decrease) increase in deposits   (17,583)   27,508 
Net increase in escrowed funds   213    336 
Proceeds from long-term advances   7,100    4,692 
Repayments of long-term advances   (5,200)   (7,462)
Net change in short-term advances   12,550    (1,400)
Net cash (used) provided by financing activities   (2,920)   23,674 
Net (decrease) increase in cash and cash equivalents   (9,503)   3,722 
           
Cash and cash equivalents, beginning of period   17,792    10,044 
           
Cash and cash equivalents, end of period  $8,289   $13,766 
           
Supplemental disclosures of cash flow information          
Cash paid for          
Interest  $2,626   $3,375 
Income taxes  $9   $54 
Non-cash investing activities          
Real estate acquired in full satisfaction of loans in foreclosure  $1,335   $3,116 

 

The accompanying notes are an integral part of these statements.

 

5

 

 MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

 

 

NOTE A – BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of Magyar Bancorp, Inc. (the “Company”), its wholly owned subsidiary, Magyar Bank (the “Bank”), and the Bank’s wholly owned subsidiaries Magyar Service Corporation, Hungaria Urban Renewal, LLC, and MagBank Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

 

Operating results for the three and nine months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending September 30, 2014. The September 30, 2013 information has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during 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 other real estate owned, and the assessment of realizability of deferred income tax assets.

 

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2014 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through the date these financial statements were issued.

 

 

NOTE B- RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update (ASU 2014-04) related to; Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.  The update applies to all creditors who obtain physical possession of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.  The amendments in this update clarify when an in-substance repossession or foreclosure occurs and requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014.  Early adoption is permitted.  The Company is currently analyzing the impact of the updated guidance on its financial statements.

In May 2014, FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606). ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

6

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

For a public business entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently analyzing the impact of the guidance on its financial statements.

An entity should apply the amendments in this ASU using one of the following two methods:

Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:

·For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
·For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
·For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:

·The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.
·An explanation of the reasons for significant changes.

 

 

NOTE C - CONTINGENCIES

 

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

 

NOTE D - EARNINGS PER SHARE

 

Basic and diluted earnings per share for the three and nine months ended June 30, 2014 and 2013 were calculated by dividing net income by the weighted-average number of shares outstanding for the period.

 

   For the Three Months   For the Nine Months 
   Ended June 30,   Ended June 30, 
   2014   2013   2014   2013 
   (In thousands except for per share data) 
                 
Income applicable to common shares  $188   $193   $382   $133 
Weighted average number of common shares                    
outstanding - basic   5,815    5,811    5,814    5,810 
Stock options and restricted stock   1    1    1    1 
Weighted average number of common shares                    
and common share equivalents - diluted   5,816    5,812    5,815    5,811 
                     
Basic earnings per share  $0.03   $0.03   $0.07   $0.02 
                     
Diluted earnings per share  $0.03   $0.03   $0.07   $0.02 

7

Options to purchase 188,276 shares of common stock at a weighted average price of $14.61 were outstanding and not included in the computation of diluted earnings per share for the three and nine months ended June 30, 2014 because the grant (or option strike) price was greater than the average market price of the common shares during the period and are thus anti-dilutive. Options to purchase 188,276 shares of common stock at a weighted average price of $14.61 were outstanding and not included in the computation of diluted earnings per share for the three and nine months ended June 30, 2013 because the grant (or option strike) price was greater than the average market price of the common shares during the periods and are thus anti-dilutive.

 

 

NOTE E – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM

 

The Company follows FASB Accounting Standards Codification (“ASC”) Section 718, Compensation-Stock Compensation, which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

 

ASC 718 also requires the Company to realize as a financing cash flow rather than an operating cash flow, as previously required, the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, the Company classified share-based compensation for employees and outside directors within “compensation and employee benefits” in the consolidated statement of operations to correspond with the same line item as the cash compensation paid.

 

Stock options generally vest over a five-year service period and expire ten years from issuance. Management recognizes compensation expense for all option grants over the awards’ respective requisite service periods. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Since there was limited historical information on the volatility of the Company’s stock, management also considered the average volatilities of similar entities for an appropriate period in determining the assumed volatility rate used in the estimation of fair value. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The 7-year Treasury yield in effect at the time of the grant provided the risk-free rate for periods within the contractual life of the option. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Once vested, these awards are irrevocable. Shares will be obtained from either the open market or treasury stock upon share option exercise.

 

Restricted shares generally vest over a five-year service period on the anniversary of the grant date. Once vested, these awards are irrevocable. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted shares under the Company’s restricted stock plans. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.

 

The following is a summary of the status of the Company’s stock option activity and related information for its option plan for the nine months ended June 30, 2014:

 

           Weighted    
       Weighted   Average  Aggregate 
   Number of   Average   Remaining  Intrinsic 
   Stock Options   Exercise Price   Contractual Life  Value 
                
Balance at September 30, 2013   188,276   $14.61         
Granted                
Exercised                
Forfeited                
Balance at June 30, 2014   188,276   $14.61    2.7 years  $ 
                   
Exercisable at June 30, 2014   188,276   $14.61    2.7 years  $ 

 

The following is a summary of the Company’s non-vested stock awards as of June 30, 2014 and changes during the nine months ended June 30, 2014:

8

       Weighted 
       Average 
   Number of   Grant Date 
   Stock Awards   Fair Value 
Balance at September 30, 2013   9,352   $4.42 
Granted        
Vested   (4,050)   4.44 
Forfeited        
Balance at June 30, 2014   5,302   $4.41 

 

Stock option and stock award expenses included with compensation expense were $0 and $13,000, respectively, for the nine months ended June 30, 2014 and June 30, 2013.

 

The Company announced in November 2007 its second stock repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares. Through June 30, 2014, the Company had repurchased a total of 81,000 shares of its common stock at an average cost of $8.33 per share under this program. No shares were repurchased during the nine months ended June 30, 2014. Under the stock repurchase program, 48,924 shares of the 129,924 shares authorized remained available for repurchase as of June 30, 2014. The Company’s intended use of the repurchased shares is for general corporate purposes, including the funding of awards granted under the 2006 Equity Incentive Plan.

 

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees of the Company and the Bank who meets the eligibility requirements as defined in the plan. The ESOP trust purchased 217,863 shares of common stock in the open market using proceeds of a loan from the Company. The total cost of shares purchased by the ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The Bank will make cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears a variable interest rate that adjusts annually every January 1st to the then published Prime Rate (3.25% at January 1, 2014) with principal and interest payable annually in equal installments over thirty years. The loan is secured by shares of the Company’s stock.

 

As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheet. As shares are released from collateral, the Company reports compensation expense equal to the then current market price of the shares, and the shares become outstanding for earnings per share computations.

 

At June 30, 2014, shares allocated to participants totaled 115,990. Unallocated ESOP shares held in suspense totaled 101,873 at June 30, 2014 and had a fair market value of $818,040. The Company's contribution expense for the ESOP was $73,000 and $48,000 for the nine months ended June 30, 2014 and 2013, respectively.

 

 

NOTE F – OTHER COMPREHENSIVE INCOME (LOSS)

 

The components of other comprehensive income (loss) and the related income tax effects are as follows:

 

   Three Months Ended June 30, 
   2014   2013 
       Tax   Net of       Tax   Net of 
   Before Tax   Benefit   Tax   Before Tax   Benefit   Tax 
   Amount   (Expense)   Amount   Amount   (Expense)   Amount 
   (Dollars in thousands) 
Unrealized holding gain (loss)                              
arising during period on:                              
                               
Available-for-sale investments  $108   $(41)  $67   $(352)  $129   $(223)
Less reclassification adjustment for net                              
realized gains on available-for-sale investments (a) (b)               (57)   23    (34)
Interest rate derivatives               (17)   7    (10)
                               
Other comprehensive income (loss), net  $108   $(41)  $67   $(426)  $159   $(267)

9

   Nine Months Ended June 30, 
   2014   2013 
       Tax   Net of       Tax   Net of 
   Before Tax   Benefit   Tax   Before Tax   Benefit   Tax 
   Amount   (Expense)   Amount   Amount   (Expense)   Amount 
   (Dollars in thousands) 
Unrealized holding gain (loss)                              
arising during period on:                              
                               
Available-for-sale investments  $166   $(63)  $103   $(523)  $189   $(334)
Less reclassification adjustment for net                              
realized gains on available-for-sale investments (a) (b)   (36)   14    (22)   (121)   48    (73)
Interest rate derivatives               (54)   22    (32)
                               
Other comprehensive income (loss), net  $130   $(49)  $81   $(698)  $259   $(439)

 

(a) Realized gains on securities transactions included in gains on sales of investment securities in the accompanying Consolidated Statements of Operations

(b) Tax effect included in income tax expense in the accompanying Consolidated Statements of Operations

 

 

NOTE G – FAIR VALUE DISCLOSURES

 

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

In accordance with ASC 820, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
     
  Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
     
  Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

 

We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

 

Securities available-for-sale

Our available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. Our securities available-for-sale portfolio consists of U.S government and government-sponsored enterprise obligations, municipal bonds, and mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. Our independent pricing service provides us with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in our portfolio. Various modeling techniques are used to determine pricing for our mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

10

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a recurring basis.

 

   Fair Value at June 30, 2014 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands)  
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,391   $   $1,391   $ 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   10,786        10,786     
Private label mortgage-backed securities-residential   423        423     
            Total securities available for sale  $12,600   $   $12,600   $ 

 

  

   Fair Value at September 30, 2013 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands)  
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,556   $   $1,556   $ 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   9,401        9,401     
Mortgage-backed securities-commercial   4,002        4,002     
Private label mortgage-backed securities-residential   815        815     
            Total securities available for sale  $15,774   $   $15,774   $ 

 

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

 

Mortgage Servicing Rights, net

Mortgage Servicing Rights (MSRs) are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3.

 

Impaired Loans

Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral, less anticipated selling and disposition costs, if the asset is collateral dependent. The regulatory agencies require the lost method for loans from which repayment is expected to be provided solely by the underlying collateral. Our impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3.

 

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Bank’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.

11

Other Real Estate Owned

The fair value of other real estate owned is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3.

 

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at June 30, 2014 and September 30, 2013

 

   Fair Value at June 30, 2014 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
                 
Impaired loans  $4,204   $   $   $4,204 
Other real estate owned   1,736            1,736 
   $5,940   $   $   $5,940 

 

   Fair Value at September 30, 2013 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
                 
Impaired loans  $8,534   $   $   $8,534 
Other real estate owned   230            230 
   $8,764   $   $   $8,764 

  

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value:

 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
   Fair Value   Valuation      
June 30, 2014  Estimate   Techniques  Unobservable Input  Range (Weighted Average)
              
Impaired loans  $4,204   Appraisal of collateral (1)  Liquidation expenses (2)  0% to -15.6% (-6.4%)
Other real estate owned  $1,736   Appraisal of collateral (1), (3)  Appraisal adjustments (2)  -8.0% to -30.0% (-11.4%)

 

(1)  Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)  Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments not already disclosed above for which it is practicable to estimate fair value:

12

Cash and interest earning deposits with banks: The carrying amounts are a reasonable estimate of fair value.

 

Held to maturity securities: The fair values of our held to maturity securities are obtained from an independent nationally recognized pricing service. Our independent pricing service provides us with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in our portfolio.

 

Loans: Fair value for the loan portfolio, excluding impaired loans with specific loss allowances, is estimated based on discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

 

Federal Home Loan Bank of New York (“FHLB”) stock: The carrying amount of FHLB stock approximates fair value and considers the limited marketability of the investment.

 

Bank-owned life insurance: The carrying amounts are based on the cash surrender values of the individual policies, which is a reasonable estimate of fair value.

 

Deposits: The fair value of deposits with no stated maturity, such as money market deposit accounts, interest-bearing checking accounts and savings accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is equivalent to current market rates for deposits of similar size, type and maturity.

 

Accrued interest receivable and payable: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Federal Home Loan Bank of New York advances and securities sold under reverse repurchase agreements: The fair value of borrowings is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the Federal Home Loan Bank of New York for borrowings of similar maturity and terms.

 

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of June 30, 2014 and September 30, 2013.  This table excludes financial instruments for which the carrying amount approximates level 1 fair value.  For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products being payable on demand and having no stated maturity.

13

   Carrying   Fair   Fair Value Measurement Placement 
   Value   Value   (Level 1)   (Level 2)   (Level 3) 
   (Dollars in thousands) 
June 30, 2014                         
Financial instruments - assets                         
Investment securities held-to-maturity  $48,255   $48,141   $   $48,141   $ 
Loans   410,560    413,801            413,801 
                          
Financial instruments - liabilities                         
Certificates of deposit   153,634    155,408        155,408     
Borrowings   46,550    47,408        47,408     
                          
September 30, 2013                         
Financial instruments - assets                         
Investment securities held-to-maturity  $52,558   $51,802       $51,802   $ 
Loans   396,800    401,064            401,064 
                          
Financial instruments - liabilities                         
Certificates of deposit   153,841    155,306        155,306     
Borrowings   32,100    33,430        33,430     

 

 

There were no transfers between fair value measurement placements for the three and nine months ended June 30, 2014.

 

 

NOTE H - INVESTMENT SECURITIES

 

The following tables summarize the amortized cost and fair values of securities available for sale at June 30, 2014 and September 30, 2013:

 

   June 30, 2014 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,385   $6   $   $1,391 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   10,846    55    (115)   10,786 
Private label mortgage-backed securities-residential   420    3        423 
            Total securities available for sale   12,651    64    (115)   12,600 

14

   September 30, 2013 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,551   $5   $   $1,556 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   9,633    9    (241)   9,401 
Mortgage backed-securities-commercial   3,963    39        4,002 
Private label mortgage-backed securities-residential   808    9    (2)   815 
            Total securities available for sale  $15,955   $62   $(243)  $15,774 

 

The maturities of the debt securities and mortgage-backed securities available for sale at June 30, 2014 are summarized in the following table:

 

   June 30, 2014 
   Amortized   Fair 
   Cost   Value 
   (Dollars in thousands) 
Due within 1 year  $   $ 
Due after 1 but within 5 years        
Due after 5 but within 10 years        
Due after 10 years        
        Total debt securities        
           
Mortgage-backed securities:          
Residential   12,651    12,600 
Commercial        
        Total  $12,651   $12,600 

 

The following tables summarize the amortized cost and fair values of securities held to maturity at June 30, 2014 and September 30, 2013:

 

   June 30, 2014 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $7,755   $236   $(105)  $7,886 
Mortgage-backed securities - commercial   1,185            1,185 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed-securities - residential   35,706    447    (557)   35,596 
Debt securities   3,000        (162)   2,838 
Private label mortgage-backed securities - residential   609    31    (4)   636 
            Total securities held to maturity  $48,255   $714   $(828)  $48,141 

15

   September 30, 2013 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $9,455   $231   $(121)  $9,565 
Mortgage-backed securities - commercial   1,433        (3)   1,430 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities - residential   33,758    363    (975)   33,146 
Debt securities   4,000        (267)   3,733 
Private label mortgage-backed securities - residential   901    27    (11)   917 
Obligations of state and political subdivisions   11            11 
Corporate securities   3,000            3,000 
            Total securities held to maturity  $52,558   $621   $(1,377)  $51,802 

 

The maturities of the debt securities and the mortgage backed securities held to maturity at June 30, 2014 are summarized in the following table:

 

   June 30, 2014 
   Amortized   Fair 
   Cost   Value 
   (Dollars in  thousands) 
Due within 1 year  $   $ 
Due after 1 but within 5 years        
Due after 5 but within 10 years   1,000    951 
Due after 10 years   2,000    1,887 
        Total debt securities   3,000    2,838 
           
Mortgage-backed securities:          
Residential   44,070    44,118 
Commercial   1,185    1,185 
        Total  $48,255   $48,141 

  

 

NOTE I – IMPAIRMENT OF INVESTMENT SECURITIES

 

The Company recognizes credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold are recognized in other comprehensive income (“OCI”).

 

We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. We evaluate our intent and ability to hold debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.

 

Investment securities with fair values less than their amortized cost contain unrealized losses. The following tables present the gross unrealized losses and fair value at June 30, 2014 and September 30, 2013 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:

16

 

       June 30, 2014 
       Less Than 12 Months   12 Months Or Greater   Total 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Securities   Value   Losses   Value   Losses   Value   Losses 
       (Dollars in thousands) 
Obligations of U.S. government agencies:                                   
Mortgage-backed securities - residential   3   $788   $(14)  $2,460   $(91)  $3,248   $(105)
Mortgage-backed securities - commercial   1            1,185        1,185     
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   17    2,995    (32)   21,355    (640)   24,350    (672)
Debt securities   3            2,838    (162)   2,838    (162)
Private label mortgage-backed securities residential   1            291    (4)   291    (4)
        Total   25   $3,783   $(46)  $28,129   $(897)  $31,912   $(943)

 

  

       September 30, 2013 
       Less Than 12 Months   12 Months Or Greater   Total 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Securities   Value   Losses   Value   Losses   Value   Losses 
       (Dollars in thousands) 
Obligations of U.S. government agencies:                                   
Mortgage-backed securities - residential   3   $1,887   $(57)  $1,099   $(64)  $2,986   $(121)
Mortgage-backed securities - commercial   1    1,430    (3)           1,430    (3)
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   22    30,638    (1,202)   626    (14)   31,264    (1,216)
Debt securities   4    3,732    (267)           3,732    (267)
Private label mortgage-backed securities residential   2    396    (11)   21    (2)   417    (13)
Corporate securities   1    3,000                3,000     
        Total   33   $41,083   $(1,540)  $1,746   $(80)  $42,829   $(1,620)

 

The investment securities listed above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event. At June 30, 2014 and September 30, 2013, there were twenty five and thirty three, respectively, investment securities with unrealized losses.

 

The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of June 30, 2014 and September 30, 2013.

 

 

NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

 

Loans receivable, net were comprised of the following:

 

17

   June 30,   September 30, 
   2014   2013 
   (Dollars in thousands) 
         
One-to four-family residential  $161,301   $152,977 
Commercial real estate   170,809    163,368 
Construction   13,801    16,749 
Home equity lines of credit   19,605    20,349 
Commercial business   36,243    34,492 
Other   11,388    11,631 
Total loans receivable   413,147    399,566 
Net deferred loan costs   213    247 
Allowance for loan losses   (2,800)   (3,013)
Total loans receivable, net  $410,560   $396,800 

  

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens.  The commercial real estate loan segment is further disaggregated into three classes. Commercial real estate loans include loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied commercial properties.  The construction loan segment consists primarily of loans to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built.  Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan.  The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.

 

Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is greater than 90 days past due.  Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  

Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value.

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those for which a specific allowance was not necessary at the dates presented:

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           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
At June 30, 2014  Investment   Allowance   Investment   Investment   Balance 
   (Dollars in thousands) 
                     
One-to four-family residential  $148   $17   $13,645   $13,793   $14,468 
Commercial real estate           5,229    5,229    6,453 
Construction   442    332    2,129    2,571    3,808 
Home equity lines of credit           1,043    1,043    1,282 
Commercial business   10    11    332    342    1,133 
Total impaired loans  $600   $360   $22,378   $22,978   $27,144 

 

           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
At September 30, 2013  Investment   Allowance   Investment   Investment   Balance 
   (Dollars in thousands) 
                     
One-to four-family residential  $6,192   $513   $8,478   $14,670   $15,631 
Commercial real estate   421    7    5,599    6,020    7,179 
Construction   600    11    2,896    3,496    4,953 
Home equity lines of credit           1,027    1,027    1,268 
Commercial business   11    11    84    95    116 
Other                    
Total impaired loans  $7,224   $542   $18,084   $25,308   $29,147 

 

The following table presents the average recorded investment in impaired loans for the periods indicated. There was no interest income recognized on impaired loans during the periods presented.

 

   Three Months   Nine Months 
   Ended June 30, 2014   Ended June 30, 2014 
   (Dollars in thousands) 
         
One-to four-family residential  $13,585   $13,921 
Commercial real estate   5,271    5,415 
Construction   2,574    2,885 
Home equity lines of credit   1,144    1,085 
Commercial business   738    413 
Other        
Average investment in impaired loans  $23,310   $23,718 

 

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   Three Months   Nine Months 
   Ended June 30, 2013   Ended June 30, 2013 
   (Dollars in thousands) 
         
One-to four-family residential  $10,984   $9,709 
Commercial real estate   6,370    6,333 
Construction   4,164    4,489 
Home equity lines of credit   1,008    1,445 
Commercial business   799    773 
Other        
Average investment in impaired loans  $23,324   $22,750 

 

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse.  Confirmation of the appropriate risk grade is performed by an external Loan Review Company that semi-annually reviews and assesses loans within the portfolio.  Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis. 

 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system at the dates presented:

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
   (Dollars in  thousands) 
June 30, 2014                    
One-to four-family residential  $151,692   $889   $8,720   $   $161,301 
Commercial real estate   165,350    1,429    4,030        170,809 
Construction   6,457        7,344        13,801 
Home equity lines of credit   17,233        2,372        19,605 
Commercial business   35,653    279    48    263    36,243 
Other   11,388                11,388 
Total  $387,773   $2,597   $22,514   $263   $413,147 

20

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
   (Dollars in  thousands) 
September 30, 2013                         
One-to four-family residential  $141,881   $346   $10,750   $   $152,977 
Commercial real estate   156,511    1,128    5,729        163,368 
Construction   8,839        7,910        16,749 
Home equity lines of credit   17,988        2,361        20,349 
Commercial business   32,905    466    1,121        34,492 
Other   11,631                11,631 
Total  $369,755   $1,940   $27,871   $   $399,566 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at the dates presented:

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (Dollars in thousands) 
June 30, 2014                                   
One-to four-family residential  $153,490   $   $22   $7,789   $7,811   $7,789   $161,301 
Commercial real estate   167,097    849    798    2,065    3,712    2,065    170,809 
Construction   11,229            2,572    2,572    2,572    13,801 
Home equity lines of credit   18,695            910    910    910    19,605 
Commercial business   35,969            274    274    274    36,243 
Other   11,388                        11,388 
Total  $397,868   $849   $820   $13,610   $15,279   $13,610   $413,147 

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (Dollars in thousands) 
September 30, 2013                                   
One-to four-family residential  $144,084   $   $378   $8,515   $8,893   $8,515   $152,977 
Commercial real estate   160,624            2,744    2,744    2,744    163,368 
Construction   13,223            3,526    3,526    3,526    16,749 
Home equity lines of credit   19,253    250        846    1,096    846    20,349 
Commercial business   34,467            25    25    25    34,492 
Other   11,631                        11,631 
Total  $383,282   $250   $378   $15,656   $16,284   $15,656   $399,566 

  

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans (NPFs).

 

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  

21

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors.

 

The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over a defined number of consecutive historical years is used.

 

Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources include: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ALL for loans individually evaluated for impairment.

 

The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2014:

  

   One-to-Four-           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
                                 
Balance- September 30, 2013  $844   $852   $604   $125   $452   $9   $127   $3,013 
Charge-offs   (108)       (75)                   (183)
Recoveries   9                2            11 
Provision   254    (7)   29    12    72    (9)   8   $359 
Balance- December 31, 2013  $999   $845   $558   $137   $526   $   $135   $3,200 
Charge-offs   (83)       (93)   (5)               (181)
Recoveries           75                    75 
Provision   (347)   (53)   (38)   (34)   922    13    (82)  $381 
Balance- March 31, 2014  $569   $792   $502   $98   $1,448   $13   $53   $3,475 
Charge-offs   (186)           (70)   (804)           (1,060)
Recoveries   43                            43 
Provision   7    35    261    35    6    (4)   2    342 
Balance- June 30, 2014  $433   $827   $763   $63   $650   $9   $55   $2,800 

 

The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2013:

22

   One-to-Four-           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
                                 
Balance-September 30, 2012  $610   $1,929   $640   $232   $383   $23   $41   $3,858 
Charge-offs   (192)                   (13)       (205)
Recoveries                                
Provision   251    (85)   (169)   1    406    8    29    441 
Balance-December 31, 2012  $668   $1,844   $471   $233   $789   $18   $70   $4,094 
Charge-offs   (221)   (576)   (1,057)       (75)           (1,929)
Recoveries       20                        20 
Provision   95    (268)   1,197    (56)   80    (8)   (40)  $1,000 
Balance- March 31, 2013  $542   $1,020   $611   $177   $794   $10   $30   $3,184 
Charge-offs           (23)       (99)           (122)
Recoveries           284                    284 
Provision   226    (177)   (126)   15    272    (2)   46   $254 
Balance- June 30, 2013  $768   $843   $746   $192   $967   $8   $76   $2,600 

 

The following table summarizes the ALL by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2014 and September 30, 2013:  

 

   One-to-Four-           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
Allowance for Loan Losses:                                        
Balance - June 30, 2014  $433   $827   $763   $63   $650   $9   $55   $2,800 
Individually evaluated                                        
for impairment   17        332        11            360 
Collectively evaluated                                        
for impairment   416    827    431    63    639    9    55    2,440 
                                         
Loans receivable:                                        
Balance - June 30, 2014  $161,301   $170,809   $13,801   $19,605   $36,243   $11,388        $413,147 
Individually evaluated                                        
for impairment   13,793    5,229    2,571    1,043    342             22,978 
Collectively evaluated                                        
for impairment   147,508    165,580    11,230    18,562    35,901    11,388         390,169 

 

   One-to-Four-           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
Allowance for Loan Losses:                                        
Balance - September 30, 2013  $844   $852   $604