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EX-32 - EXHIBIT 32.1 - SBT Bancorp, Inc.ex32-1.htm

 

 

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 June 30, 2014

or

[   ]

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

 

For the transition period from _______ to __________

 

Commission File Number: 000-51832

 

SBT Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

         Connecticut                                                      

 

                   20-4346972                

 

(State or Other Jurisdiction of

 

(I.R.S. Employer

 

Incorporation or Organization)

 

Identification No.)

 
 

 

 

 

 
 

86 Hopmeadow Street, P.O. Box 248, Simsbury, CT

 

06070

 
 

(Address of Principal Executive Offices)

 

    (Zip Code)

 

  

(860) 408-5493

(Registrant's Telephone Number, Including Area Code)

 

Not Applicable

(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 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 [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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]     No [ ]

 

 
-1-

 

  

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 [   ]

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]

 

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

 

As of July 31, 2014, the registrant had 900,750 shares of its Common Stock, no par value per share, outstanding.

 

 
-2-

 

   

TABLE OF CONTENTS

 

SBT Bancorp, Inc. and Subsidiary

 

 

  Page No.
     
 

PART I - FINANCIAL INFORMATION

 
     
Item 1.

Financial Statements

 
     
  Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013

4

     
  Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)

5

     
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)

6

     
  Condensed Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2014 and 2013 (unaudited)

7

     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)

8

     
 

Notes to Condensed Consolidated Financial Statements – (unaudited)

9 - 24

     
Item 2.

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

25 - 33

     
Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

     
Item 4.

Controls and Procedures

33

     
 

PART II - OTHER INFORMATION

  
     
Item 1.

Legal Proceedings

34

     
Item 1A.

Risk Factors

34

     
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

     
Item 3.

Defaults Upon Senior Securities

34

     
Item 4.

Mine Safety Disclosures

34

     
Item 5.

Other Information

34

     
Item 6.

Exhibits

34-35

     

SIGNATURES

36

     

EXHIBIT INDEX

37

 

 
-3-

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for share amounts)

 

 

 

6/30/14

   

12/31/13

 
   

(Unaudited)

         
ASSETS                

Cash and due from banks

  $ 10,387     $ 13,355  
Interest-bearing deposits with the Federal Reserve Bank and Federal Home Loan Bank     12,014       24,165  

Money market mutual funds

    378       346  

Federal funds sold

    27       724  
Cash and cash equivalents     22,806       38,590  
                 

Investments in available-for-sale securities (at fair value)

    84,428       87,449  

Federal Home Loan Bank stock, at cost

    1,820       2,196  

Loans held-for-sale

    10,657       2,861  
                 

Loans

    270,947       279,667  
Less allowance for loan losses     2,737       2,792  
Loans, net     268,210       276,875  
                 

Premises and equipment, net

    1,540       1,618  

Accrued interest receivable

    1,051       1,074  

Other real estate owned

    695       -  

Bank owned life insurance

    7,076       6,729  

Other assets

    4,365       4,456  
Total assets   $ 402,648     $ 421,848  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Deposits:

               
Demand deposits   $ 111,944     $ 116,015  
Savings and NOW deposits     168,063       173,500  
Time deposits     65,429       68,989  
Total deposits     345,436       358,504  

Securities sold under agreements to repurchase

    2,877       4,390  

Federal Home Loan Bank advances

    24,000       30,000  

Other liabilities

    1,538       1,558  
Total liabilities     373,851       394,452  
                 

Stockholders' equity:

               
Preferred stock, senior non-cumulative perpetual, Series C, no par; 9,000 shares issued and outstanding at June 30, 2014 and December 31, 2013; liquidation value of $1,000 per share     8,982       8,976  
Common stock, no par value; authorized 2,000,000 shares; issued and outstanding 901,164 shares and 900,750 shares, respectively, as of June 30, 2014 and 900,264 shares and 899,850 shares as of December 31, 2013     10,155       10,136  
Retained earnings     10,237       10,347  
Treasury stock, 414 shares     (7 )     (7 )
Unearned compensation-restricted stock awards     (321 )     (401 )
Accumulated other comprehensive loss     (249 )     (1,655 )
Total stockholders' equity     28,797       27,396  
Total liabilities and stockholders' equity   $ 402,648     $ 421,848  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 
-4-

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except for per share amounts)

  

   

For the three months ended

   

For the six months ended

 
   

6/30/2014

   

6/30/2013

   

6/30/2014

   

6/30/2013

 
Interest and dividend income:                                

Interest and fees on loans

  $ 2,543     $ 2,320     $ 5,154     $ 4,655  

Investment securities

    440       556       920       1,090  

Federal funds sold and overnight deposits

    21       9       32       20  
Total interest and dividend income     3,004       2,885       6,106       5,765  
Interest expense:                                

Deposits

    222       216       434       436  

Federal Home Loan Bank advances

    5       1       7       1  

Repurchase agreements

    1       2       2       3  
Total interest expense     228       219       443       440  
                                 
Net interest and dividend income     2,776       2,666       5,663       5,325  
                                 
Provision for loan losses     -       80       30       110  
                                 
Net interest and dividend income after provision for loan losses     2,776       2,586       5,633       5,215  
Noninterest income:                                

Service charges on deposit accounts

    116       122       234       250  

Gain on sales and writedowns of available-for-sale securities, net

    103       27       103       104  

Other service charges and fees

    141       204       383       363  

Increase in cash surrender value of life insurance policies

    48       52       97       108  

Gain on loans sold and commission fee income

    82       521       121       1,092  

Investment services fees and commissions

    68       36       129       85  

Other income

    47       2       50       (1 )
Total noninterest income     605       964       1,117       2,001  
Noninterest expense:                                

Salaries and employee benefits

    1,603       1,714       3,576       3,457  

Occupancy expense

    320       283       667       560  

Equipment expense

    127       58       228       118  

Advertising and promotions

    181       192       284       358  

Forms and supplies

    59       37       94       67  

Professional fees

    133       123       210       252  

Directors’ fees

    64       74       131       125  

Correspondent charges

    51       89       131       165  

Postage

    9       21       31       43  

FDIC assessment

    102       10       205       55  

Data processing

    175       147       320       278  

Other expenses

    492       302       799       562  
Total noninterest expense     3,316       3,050       6,676       6,040  
Income before income taxes     65       500       74       1,176  
Income tax (benefit) provision     (50 )     99       (119 )     258  
Net income   $ 115     $ 401     $ 193     $ 918  
Net income available to common stockholders   $ 89     $ 375     $ 142     $ 867  
Weighted average shares outstanding, basic     881,861       870,694       880,973       870,513  
Earnings per common share, basic   $ 0.10     $ 0.43     $ 0.16     $ 1.00  
Weighted average shares outstanding, assuming dilution     884,675       877,500       885,673       877,018  
Earnings per common share, assuming dilution   $ 0.10     $ 0.43     $ 0.16     $ 0.99  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 
-5-

 

 

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND SIX MONTHS ENDED JUNE 30, 2014 and 2013

 

(Unaudited)

(Dollars in thousands)

  

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2014

   

2013

   

2014

   

2013

 
   

(unaudited)

   

(unaudited)

 

Net income

  $ 115     $ 401     $ 193     $ 918  

Other comprehensive income (loss), net of tax:

                               

Change in fair value of securities available for sale

    1,080       (2,759 )     2,234       (3,235 )

Reclassification adjustment for net realized gains in net income

    (103 )     (27 )     (103 )     (104 )
Other comprehensive income (loss), before tax     977       (2,786 )     2,131       (3,339 )

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

    (332 )     948       (725 )     1,136  
Other comprehensive income (loss), net of tax     645       (1,838 )     1,406       (2,203 )
Comprehensive income (loss)   $ 760     $ (1,437 )   $ 1,599     $ (1,285 )

  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 
-6-

 

   

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

  

                   

Unearned

                   

Accumulated

         
   

Preferred

           

Compensation-

                   

Other

         
   

Stock

   

Common

   

Restricted 

   

Treasury

   

Retained

   

Comprehensive

         
   

Series C

   

Stock

   

Stock Awards

   

Stock

   

Earnings

   

Income (Loss)

   

Total

 

Balance, December 31, 2012

  $ 8,964     $ 9,901     $ (368 )   $ (7 )   $ 9,819     $ 1,128     $ 29,437  

Net income

    -       -       -       -       918       -       918  

Other comprehensive loss, net of tax

    -       -       -       -       -       (2,203 )     (2,203 )

Preferred stock dividend-SBLF

    -       -       -       -       (45 )     -       (45 )

Preferred stock amortization (accretion)

    6       -       -       -       (6 )     -       -  

Stock based compensation

    -       -       78       -       -       -       78  

Dividends declared common stock

    -       -       -       -       (249 )     -       (249 )

Common stock issued

    -       19       -       -       -       -       19  

Balance, June 30, 2013

  $ 8,970     $ 9,920     $ (290 )   $ (7 )   $ 10,437     $ (1,075 )   $ 27,955  
                                                         

Balance, December 31, 2013

  $ 8,976     $ 10,136     $ (401 )   $ (7 )   $ 10,347     $ (1,655 )   $ 27,396  

Net income

    -       -       -       -       193       -       193  

Other comprehensive income, net of tax

    -       -       -       -       -       1,406       1,406  

Preferred stock dividend-SBLF

    -       -       -       -       (45 )     -       (45 )

Preferred stock amortization (accretion)

    6       -       -       -       (6 )     -       -  

Stock based compensation

    -       -       80       -       -       -       80  

Dividends declared common stock

    -       -       -       -       (252 )     -       (252 )

Common stock issued

    -       19       -       -       -       -       19  

Balance, June 30, 2014

  $ 8,982     $ 10,155     $ (321 )   $ (7 )   $ 10,237     $ (249 )   $ 28,797  

  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 
-7-

 

  

SBT BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

  

    For the six months ended  
   

6/30/2014

   

6/30/2013

 
Cash flows from operating activities:                
Net income   $ 193     $ 918  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:                

Interest capitalized on interest-bearing time deposits with other banks

    -       (67 )

Amortization of securities, net

    198       333  

Writedown of available-for-sale securities

    -       8  

Gain on sales of available-for-sale securities

    (103 )     (112 )

Change in deferred loan origination costs, net

    (18 )     (175 )

Provision for loan losses

    30       110  

Loans originated for sale

    (16,183 )     -  

Proceeds from sales of loans

    8,497       -  

Gains on sales of loans

    (110 )     -  

Writedown on other real estate owned

    49       -  

Depreciation and amortization

    201       101  

Accretion on impairment of operating lease

    (22 )     (22 )

Increase in other assets

    (442 )     (635 )

Decrease (increase) in interest receivable

    23       (52 )

(Increase) decrease in taxes receivable

    (120 )     188  

Increase in cash surrender value of bank owned life insurance

    (97 )     (108 )

Stock-based compensation

    80       78  

Decrease in other liabilities

    (33 )     (144 )

Increase in interest payable

    35       15  
Net cash (used in) provided by operating activities     (7,822 )     436  
                 
Cash flows from investing activities:                
Maturities and redemptions of interest-bearing time deposits with other banks     -       1,075  
Purchases of Federal Home Loan Bank stock     -       (1,057 )
Redemption of Federal Home Loan Bank stock     376       -  
Purchases of available-for-sale securities     -       (35,183 )
Proceeds from maturities of available-for-sale securities     3,918       18,043  
Proceeds from sales of available-for-sale securities     1,139       5,649  
Loan originations and principal collections, net     10,793       (15,319 )
Loans purchased     (2,897 )     (3,175 )
Recoveries of loans previously charged off     13       5  
Purchase of bank owned life insurance     (250 )     -  
Capital expenditures     (195 )     (44 )
Net cash provided by (used in) investing activities     12,897       (30,006 )
                 
Cash flows from financing activities:                
Net decrease in demand deposits, NOW and savings accounts     (9,508 )     (16,141 )
(Decrease) increase in time deposits     (3,560 )     320  
Net decrease in securities sold under agreements to repurchase     (1,513 )     (1,147 )
(Paydown of) proceeds from Federal Home Loan Bank advances     (6,000 )     26,000  
Proceeds from issuance of common stock     19       19  
Dividends paid - preferred stock     (45 )     (45 )
Dividends paid - common stock     (252 )     (249 )
Net cash (used in) provided by financing activities     (20,859 )     8,757  
                 
Net decrease in cash and cash equivalents     (15,784 )     (20,813 )
Cash and cash equivalents at beginning of period     38,590       34,100  
Cash and cash equivalents at end of period   $ 22,806     $ 13,287  
                 
Supplemental disclosures:                
Interest paid   $ 408     $ 425  
Income taxes paid     1       258  
Loan transferred to (from) other real estate owned     744       (35 )

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 
-8-

 

  

SBT BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

(Dollars in thousands)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all necessary adjustments, consisting of only normal recurring accruals, to present fairly the financial position, results of operations, cash flows and changes in stockholders’ equity of SBT Bancorp, Inc. (the “Company”) for the periods presented. The Company’s only business is its investment in The Simsbury Bank and Trust Company, Inc. (the “Bank”), which is a community-oriented financial institution providing a variety of banking and investment services. In preparing the interim financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. The interim results of operations are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.

 

While management believes that the disclosures presented are adequate so as to not make the information misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes included in the Company’s Form 10-K for the year ended December 31, 2013.

 

NOTE 2 – STOCK-BASED COMPENSATION

 

At June 30, 2014, the Company maintained a stock-based employee compensation plan. The Company recognizes the cost resulting from all share-based payment transactions in the consolidated financial statements and establishes fair value as the measurement objective in accounting for share-based payment arrangements. During the six months ended June 30, 2014, the Company recognized $80 thousand in stock-based employee compensation expense. During the six months ended June 30, 2013, the Company recognized $78 thousand in stock-based employee compensation expense.

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

1.

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

 

2. 

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

 

The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

 

 
-9-

 

 

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

 

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

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The objective of this ASU was to clarify principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

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

 

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718):  Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.” The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. ASU 2014-12 may be adopted either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements, and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. The Company is currently reviewing this ASU to determine if it will have an impact on its consolidated financial statements.

 

 
-10-

 

 

NOTE 4 – FAIR VALUE MEASUREMENT DISCLOSURES

 

In accordance with ASC 820, the Company groups its financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.

 

Level 2 Inputs – Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

Level 3 Inputs – Unobservable inputs for determining the fair value of the assets or liabilities that are based on the entity’s own assumption about the assumptions that market participants would use to price the assets or liabilities.

 

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value for June 30, 2014 and December 31, 2013. The Company did not have any significant transfers of assets or liabilities to and from Levels 1 and 2 of the fair value hierarchy during the six months ended June 30, 2014.

 

The Company’s cash instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

 

The Company’s investment in obligations of states and municipalities, mortgage-backed securities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, we obtain fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information, and the instrument’s terms and conditions.

 

The Company’s fair values of interest-bearing time deposits with other banks, loans and deposits, as reported in this footnote, are classified within level 3 of the fair value hierarchy. Fair values for these assets and liabilities are based on management estimates derived from revaluing these securities at prevailing current interest rates.

 

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. For Level 3 inputs, fair values are based on management estimates.

 

Other real estate owned values are estimated using Level 2 inputs based upon appraisals of similar properties obtained from a third party. For Level 3 inputs, fair values are based on management estimates.

 

 
-11-

 

 

The following summarizes assets measured at fair value at June 30, 2014 and December 31, 2013.

 

Assets Measured at Fair Value on a Recurring Basis

 

 

           

Fair Value Measurements at Reporting Date Using:

 
           

Quoted prices in

   

Significant Other

   

Significant

 
           

Active Markets for

   

 Observable

   

Unobservable

 
           

Identical Assets

   

Inputs

   

Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
    (Dollars In Thousands)  
June 30, 2014:                                
Debt securities issued by U.S. government corporations and agencies   $ 18,583     $ -     $ 18,583     $ -  

Obligations of states and municipalities

    12,972       -       12,972       -  

Mortgage-backed securities

    52,318       -       52,318       -  

SBA loan pools

    555       -       555       -  
    $ 84,428     $ -     $ 84,428     $ -  
                                 
December 31, 2013:                                
Debt securities issued by U.S. government corporations and agencies   $ 18,247     $ -     $ 18,247     $ -  

Obligations of states and municipalities

    13,973       -       13,973       -  

Mortgage-backed securities

    54,568       -       54,568       -  

SBA loan pools

    661       -       661       -  
    $ 87,449     $ -     $ 87,449     $ -  

 

Assets Measured at Fair Value on a Nonrecurring Basis

  

            Fair Value Measurements at Reporting Date Using:  
           

Quoted prices in

   

Significant

   

Significant

 
           

Active Markets for

   

Other Observable

   

Unobservable

 
           

Identical Assets

   

Inputs

   

Inputs

 
   

Total

   

Level 1

   

Level 2

   

Level 3

 
    (Dollars In Thousands)  

June 30, 2014

                               
                                 
Other real estate owned   $ 695     $ -     $ -     $ 695  
    $ 695     $ -     $ -     $ 695  

  

 
-12-

 

 

The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, were as follows as of June 30, 2014 and December 31, 2013:

  

   

June 30, 2014

 
   

Carrying

   

Fair Value

 
   

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in thousands)

 
Financial assets:                                        

Cash and cash equivalents

  $ 22,806     $ 22,806     $ -     $ -     $ 22,806  

Available-for-sale securities

    84,428       -       84,428       -       84,428  

Federal Home Loan Bank stock

    1,820       1,820       -       -       1,820  

Loans held-for-sale

    10,657       -       -       10,858       10,858  

Loans, net

    270,947       -       -       268,704       268,704  

Accrued interest receivable

    1,051       1,051       -       -       1,051  
                                         
Financial liabilities:                                        

Deposits

    345,436       -       -       345,797       345,797  

Securities sold under agreements to repurchase

    2,877       -       2,877       -       2,877  

Federal Home Loan Bank advances

    24,000       -       24,000       -       24,000  

 

 

   

December 31, 2013

 
   

Carrying

   

Fair Value

 
   

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(Dollars in thousands)

 
Financial assets:                                        

Cash and cash equivalents

  $ 38,590     $ 38,590     $ -     $ -     $ 38,590  

Available-for-sale securities

    87,449       -       87,449       -       87,449  

Federal Home Loan Bank stock

    2,196       2,196       -       -       2,196  

Loans held-for-sale

    2,861       -       -       2,909       2,909  

Loans, net

    276,875       -       -       277,539       277,539  

Accrued interest receivable

    1,074       1,074       -       -       1,074  
                                         
Financial liabilities:                                        

Deposits

    358,504       -       -       358,961       358,961  

Securities sold under agreements to repurchase

    4,390       -       4,390       -       4,390  

Federal Home Loan Bank advances

    30,000       -       30,000       -       30,000  

 

 

NOTE 5 – EARNINGS PER COMMON SHARE

 

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then share in the earnings of the entity.

 

 
-13-

 

 

The following information was used in the computation of EPS on both a basic and diluted basis for the three and six months ended June 30, 2014 and June 30, 2013:

  

    For the three months ended  
   

6/30/14

   

6/30/13

 
   

(In Thousands, Except Share and Per Share Data)

 
Basic earnings per share computation:                
Net income   $ 115     $ 401  

Preferred stock net accretion

    (3 )     (3 )

Cumulative preferred stock dividends

    (23 )     (23 )

Net income available to common stockholders

  $ 89     $ 375  
                 

Weighted average shares outstanding, basic

    881,861       870,694  
                 

Basic earnings per share

  $ 0.10     $ 0.43  
                 
Diluted earnings per share computation:                
Net income   $ 115     $ 401  

Preferred stock net accretion

    (3 )     (3 )

Cumulative preferred stock dividends

    (23 )     (23 )

Net income available to common stockholders

  $ 89     $ 375  
                 

Weighted average shares outstanding, before dilution

    881,861       870,694  

Dilutive potential shares

    2,814       6,806  

Weighted average shares outstanding, assuming dilution

    884,675       877,500  
                 

Diluted earnings per share

  $ 0.10     $ 0.43  

 

 

    For the six months ended  
   

6/30/14

   

6/30/13

 
   

(In Thousands, Except Share and Per Share Data)

 
Basic earnings per share computation:                
Net income   $ 193     $ 918  

Preferred stock net accretion

    (6 )     (6 )

Cumulative preferred stock dividends

    (45 )     (45 )

Net income available to common stockholders

  $ 142     $ 867  
                 

Weighted average shares outstanding, basic

    880,973       870,513  
                 

Basic earnings per share

  $ 0.16     $ 1.00  
                 
Diluted earnings per share computation:                
Net income   $ 193     $ 918  

Preferred stock net accretion

    (6 )     (6 )

Cumulative preferred stock dividends

    (45 )     (45 )

Net income available to common stockholders

  $ 142     $ 867  
                 

Weighted average shares outstanding, before dilution

    880,973       870,513  

Dilutive potential shares

    4,700       6,505  

Weighted average shares outstanding, assuming dilution

    885,673       877,018  
                 

Diluted earnings per share

  $ 0.16     $ 0.99  

 

 

 
-14-

 

 

NOTE 6 – INVESTMENT SECURITIES

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, were as follows:

 

   

Less than 12 Months

   

12 Months or Longer

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
   

(Dollars in thousands)

 
June 30, 2014:                                                
Debt securities issued by U.S. government corporations and agencies   $ 499     $ 1     $ 17,018     $ 183     $ 17,517     $ 184  

Obligations of states and municipalities

    -       -       1,741       73       1,741       73  

Mortgage-backed securities

    496       3       41,088       1,055       41,584       1,058  
Total temporarily impaired securities   $ 995     $ 4     $ 59,847     $ 1,311     $ 60,842     $ 1,315  
                                                 
                                                 

Other-than-temporarily impaired securities

                                               
Mortgage-backed securities     -       -       304       33       304       33  
Total temporarily impaired and other-than-temporarily impaired securities   $ 995     $ 4     $ 60,151     $ 1,344     $ 61,146     $ 1,348  
                                                 
                                                 
December 31, 2013:                                                
Debt securities issued by U.S. government corporations and agencies   $ 18,247     $ 520     $ -     $ -     $ 18,247     $ 520  

Obligations of states and municipalities

    3,340       198       -       -       3,340       198  

Mortgage-backed securities

    42,185       1,958       6,240       359       48,425       2,317  
Total temporarily impaired securities   $ 63,772     $ 2,676     $ 6,240     $ 359     $ 70,012     $ 3,035  
                                                 

Other-than-temporarily impaired securities

                                               
Mortgage-backed securities     -       -       331       40       331       40  
Total temporarily impaired and other-than-temporarily impaired securities   $ 63,772     $ 2,676     $ 6,571     $ 399     $ 70,343     $ 3,075  

 

The investments in the Company’s investment portfolio that were temporarily impaired as of June 30, 2014 consisted of debt issued by states and municipalities and U.S. government agencies and sponsored enterprises. The Company’s management anticipates that the fair value of securities that are currently impaired will recover to cost basis. As the Company has the ability and intent to hold securities for the foreseeable future, no declines are deemed to be other than temporary.

 

 
-15-

 

 

The following table summarizes the amounts and distribution of the Bank’s investment securities held as of June 30, 2014 and December 31, 2013:

 

    Investment Portfolio  
    (Dollars in thousands)  
                                         
   

June 30, 2014

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

         
   

Cost

   

Gains

   

Losses

   

Value

   

Yield

 

Available for sale securities:

                                       

U.S government and agency securities-

                                       

Due after one year through five years

  $ 13,561     $ 1     $ 95     $ 13,467       1.11 %

Due after five years through ten years

    5,205       -       89       5,116       1.66 %

Total U.S government and agency securities

    18,766       1       184       18,583       1.26 %
                                         

State and municipal securities-

                                       

Due within one year

    -       -       -       -       -  

Due after five years through ten years

    3,974       146       49       4,071       3.16 %

Due after ten years through fifteen years

    8,425       500       24       8,901       3.41 %

Total state and municipal securities

    12,399       646       73       12,972       3.33 %
                                         

Mortgage-backed securities-

                                       

Due within one year

    3       -       -       3       3.92 %

Due after one year through five years

    717       19       -       736       2.94 %

Due after five years through ten years

    2,161       44       1       2,204       2.30 %

Due after ten years through fifteen years

    30,850       36       536       30,350       1.79 %

Due beyond fifteen years

    19,397       182       554       19,025       2.41 %

Total mortgage-backed securities

    53,128       281       1,091       52,318       2.05 %
                                         

SBA loan pools

                                       

Due after ten years through fifteen years

    512       43       -       555       4.98 %

Total SBA loan pools

    512       43       -       555       4.98 %

Total available-for-sale securities

  $ 84,805     $ 971     $ 1,348     $ 84,428       2.32 %

 

 
-16-

 

 

   

Investment Portfolio

 
   

(Dollars in thousands)

 
                                         
   

December 31, 2013

 
   

Amortized

   

Gross Unrealized

   

Gross Unrealized

   

Fair

         
   

Cost

   

Gains

   

Losses

   

Value

   

Yield

 

Available for sale securities:

                                       

U.S government and agency securities-